PROSPECTUS & APPLICATION
Franklin
Asset
Allocation Fund
INVESTMENT STRATEGY
GROWTH & INCOME
MAY 1, 1996
AS AMENDED AUGUST 1, 1996
This prospectus describes the Franklin Asset Allocation Fund (the "Fund"). It
contains information you should know before investing in the Fund. Please keep
it for future reference.
The Fund's SAI, dated May 1, 1996, as amended August 1, 1996, and as may be
further amended from time to time, includes more information about the Fund's
procedures and policies. It has been filed with the SEC and is incorporated by
reference into this prospectus. For a freecopy or a larger print version of this
prospectus, call 1-800/DIAL BEN or write the Fund at the address shown.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Shares of the Fund involve investment risks, including the possible
loss of principal.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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 Distributors.
The Fund may invest in both domestic and foreign securities.
Franklin
Asset
Allocation Fund
May 1, 1996
as amended August 1, 1996
When reading this prospectus, you will see terms that are capitalized. This
means the term is explained in our glossary section.
Table of Contents
About the Fund
Expense Summary............................. 2
Financial Highlights........................ 3
How Does the Fund Invest Its Assets?........ 3
What Are the Fund's Potential Risks?........ 9
Who Manages the Fund?....................... 13
How Does the Fund Measure Performance?...... 15
How Is the Trust Organized?................. 15
How Taxation Affects You and the Fund....... 16
About Your Account
How Do I Buy Shares?........................ 17
May I Exchange Shares for
Shares of Another Fund?.................... 22
How Do I Sell Shares?....................... 24
What Distributions Might I
Receive From the Fund?..................... 27
Transaction Procedures and
Special Requirements....................... 28
Services to Help You Manage Your Account.... 32
Glossary
Useful Terms and Definitions................ 35
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
Franklin Asset Allocation Fund
About the Fund
Expense Summary
This table is designed to help you understand the costs of investing in the
Fund. It is based on the Fund's historical expenses for the fiscal year ended
December 31, 1995. Your actual expenses may vary.
A. Shareholder Transaction Expenses+
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price) .................. 4.50%
Deferred Sales Charge ................................. None++
Exchange Fee (per transaction) ........................ $5.00*
B. Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees ....................................... 0.63%
Rule 12b-1 Fees ....................................... 0.19%**
Other Expenses ........................................ 0.35%
Total Fund Operating Expenses ......................... 1.17%
C. Example
Assume the Fund's annual return is 5% and its operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$56*** $80 $106 $181
This is just an example. It does not represent past or future expenses or
returns. Actual expenses and returns may be more or less than those shown. The
Fund pays its operating expenses. The effects of these expenses are reflected in
its Net Asset Value or dividends and are not directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more. A
Contingent Deferred Sales Charge of 1% may apply, however, if you sell the
shares within one year. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**These fees may not exceed 0.25%. 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 charge permitted under the
NASD's rules.
***ASSUMES A CONTINGENT DEFERRED SALES CHARGE WILL NOT APPLY.
Financial Highlights
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements in the Trust's Annual Report to Shareholders for the fiscal
year ended December 31, 1995. The Annual Report to Shareholders also includes
more information about the Fund's performance. For a free copy, please call Fund
Information.
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
- --------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE*
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of year $6.11 $6.22 $5.40 $4.88 $4.21 $5.19 $5.12 $4.95 $5.93 $6.59
Net investment income 0.18 0.14 0.13 0.15 0.14 0.16 0.15 0.15 0.15 0.11
Net realized and unrealized
gains (losses) on securities 1.14 (0.110) 0.860 0.530 0.780 (0.595) 0.599 0.705 0.031 0.360
Total from investment
operations 1.32 0.030 0.990 0.680 0.920 (0.435) 0.749 0.855 0.181 0.470
Less Distributions:
Dividends from net
investment income (0.180) (0.140) (0.170) (0.160) (0.135) (0.155) (0.157) (0.162) (0.166) (0.125)
Distributions from realized
capital gains -- -- -- -- (0.115) (0.390) (0.522) (0.523) (0.995) (1.005)
Total distributions (0.180) (0.140) (0.170) (0.160) (0.250) (0.545) (0.679) (0.685) (1.161) (1.130)
Net asset value at end
of year $7.25 $6.11 $6.22 $5.40 $4.88 $4.21 $5.19 $5.12 $4.95 $5.93
Total Return** 21.79% 0.46% 18.38% 14.02% 22.06% (8.81)% 14.72% 17.68% 1.44% 7.53%
Ratios/Supplemental Data
Net assets at end
of year (in 000's) $39,319 $25,631 $22,877 $22,077 $28,189 $32,878 $44,516 $45,010 $39,790 $34,203
Ratio of expenses to
average net assets 1.17% 1.27% 1.00% 0.92% 0.93% 0.85% 0.81% 0.83% 0.84% 0.95%
Ratio of net investment
income to average net assets 2.86% 2.29% 2.15% 2.81% 2.95% 3.27% 2.81% 3.00% 2.65% 2.32%
Portfolio turnover rate 62.01% 45.18% 20.49% 23.17% 62.25% 73.12% 163.55% 79.73% 176.36% 105.00%
Average commission
rate*** $0.0640 -- -- -- -- -- -- -- -- --
</TABLE>
*Selected data for a share of capital stock outstanding throughout the year.
**Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum front-end sales charge and assumes
reinvestment of dividends and capital gains, if any, at net asset value.
***Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
How Does the Fund Invest Its Assets?
The Fund's Investment Objective
The Fund's investment objective is total return. The objective is a fundamental
policy of the Fund and may not be changed without shareholder approval. Of
course, there is no assurance that the Fund's objective will be achieved.
History has shown that diversification of asset classes results in reduced risk
over time. Accordingly, as a secondary emphasis, consistent with its objective,
the Fund attempts to reduce risk over time.
Types of Securities the Fund May Invest In
The Fund seeks to achieve its objective by investing in common stocks,
investment grade corporate and U.S. government bonds, short-term money market
instruments, securities of foreign issuers and real estate securities. The
percentage of assets invested in these types of securities will vary from time
to time, with equity securities representing a majority of the Fund's net
assets.
Advisers uses a top-down approach based on the current and future outlook for
the economy and the business cycle to determine the Fund's asset allocation mix
and sector weightings. Quantitative, technical, and fundamental analysis are all
used to identify sectors, the industries within those sectors, and the companies
within those industries. Depending on the stage of the business cycle, certain
sectors perform better than others. The same analytical tools are used to screen
for industries and companies. Using this approach the Fund seeks to obtain its
investment objective by investing in the following securities.
Common Stock. The Fund will invest a majority of its portfolio in equity
securities that are listed in the Standard & Poor's ("S&P") 500 or the S&P
Midcap 400. These indices represent such sectors as basic materials (includes
gold), capital spending, consumer cyclical, consumer staples, financials,
utilities, energy, transportation, health care, conglomerates and technology.
The Fund will also invest a small portion of its assets in equity securities not
listed in these indices and in smaller capitalized issues that exhibit growth
prospects.
Fixed-Income Securities. The Fund's investments in fixed-income securities will
generally be in debt obligations issued or guaranteed by the U.S. government or
its agencies or instrumentalities. The Fund may also invest in corporate debt
obligations such as bonds, notes and debentures. Investments in corporate debt
securities will be in investment grade securities, which are securities rated in
one of the four highest ratings of either S&P or Moody's Investors Service
("Moody's"). The four highest rating categories are AAA, AA, A or BBB by S&P or
Aaa, Aa, A or Baa by Moody's. Fixed-income securities rated BBB by S&P or Baa by
Moody's are regarded as having adequate capacity to pay principal and interest
but greater vulnerability to adverse economic conditions and some speculative
characteristics.
Convertible and Enhanced Convertible Securities and Synthetic Convertibles. A
portion of the Fund's assets may be invested in convertible securities, enhanced
convertible securities and synthetic convertible securities. A convertible
security generally is a fixed-income security (a bond or preferred stock) that
may be converted at a stated price within a specified period of time into a
certain amount of common stock of the same or a different issuer. An enhanced
convertible security is a convertible preferred stock that offers enhanced yield
features. A synthetic convertible is created by combining distinct securities
which together possess the two principal characteristics of a true convertible
security, i.e., fixed income and the right to acquire the underlying equity
security. This combination is achieved by investing in nonconvertible
fixed-income securities and in warrants, stock or stock index call options that
grant the holder the right to buy a specified quantity of securities within a
specified period of time at a specified price or to receive cash in the case of
stock index options.
Foreign Securities. The Fund will ordinarily buy foreign securities traded in
the U.S. or American Depository Receipts ("ADRs"), which are certificates issued
by U.S. banks representing the right to receive securities of a foreign issuer
deposited with that bank or a correspondent bank. The Fund may also buy the
securities of foreign issuers directly in foreign markets.
Real Estate Securities. Investments in real estate securities will primarily
consist of equity and debt securities of real estate investment trusts. The Fund
may also invest in equity securities issued by home builders and developers that
are a part of, but not limited to, the S&P 500 or MidCap 400 index.
Short-Term Money Market Instruments. The Fund may temporarily invest its cash,
including cash resulting from purchases and sales of Fund shares, in short-term
debt instruments, including high grade commercial paper, repurchase agreements
and other money market equivalents. These temporary investments will only be
made with cash held to maintain liquidity or pending investment. In addition,
for temporary defensive purposes in the event of, or when Advisers anticipates a
general decline in the market prices of stocks in which the Fund invests, the
Fund may invest an unlimited amount of its assets in short-term debt
instruments.
Options and Futures. The Fund may write covered put and call options and buy put
and call options on securities and indices that trade on securities exchanges
and in the over-the-counter market. The Fund may buy and sell futures and
options on futures with respect to securities, securities indices and
currencies. Additionally, the Fund may "close out" futures and options it has
entered into. The Fund will not engage in futures transactions for speculation
but only as a hedge against changes resulting from market conditions in the
value of its securities or securities that it intends to buy. In addition, the
Fund will not enter into any futures contract or related options (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial deposits and premiums on open contracts and options would exceed 5% of
the Fund's total assets (taken at current value). The Fund will not engage in
any stock options or stock index options if the option premiums paid regarding
its open option positions exceed 5% of the value of the Fund's total assets.
More Information About the Types of Securities the Fund May Invest In
Convertible Securities. A convertible security provides a fixed-income stream
and the opportunity, through its conversion feature, to participate in the
capital appreciation resulting from a market price advance in its underlying
common stock. As with a straight fixed-income security, a convertible security
tends to increase in market value when interest rates decline and decrease in
value when interest rates rise. Like a common stock, the value of a convertible
security also tends to increase as the market value of the underlying stock
rises, and it tends to decrease as the market value of the underlying stock
declines. Because its value can be influenced by both interest rate and market
movements, a convertible security is not as sensitive to interest rates as a
similar fixed-income security, nor is it as sensitive to changes in share price
as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
Enhanced Convertibles. The Fund may invest in convertible preferred stocks that
offer enhanced yield features, such as Preferred Equity Redemption Cumulative
Stocks ("PERCS"), which provide an investor, such as the Fund, with the
opportunity to earn higher dividend income than is available on a company's
common stock. A PERCS is a preferred stock which generally features a mandatory
conversion date, as well as a capital appreciation limit which is usually
expressed in terms of a stated price. Most PERCS expire three years from the
date of issue, at which time they are convertible into common stock of the
issuer (PERCS are generally not convertible into cash at maturity). Under a
typical arrangement, if after three years the issuer's common stock is trading
at a price below that set by the capital appreciation limit, each PERCS would
convert to one share of common stock. If, however, the issuer's common stock is
trading at a price above that set by the capital appreciation limit, the holder
of the PERCS would receive less than one full share of common stock. The amount
of that fractional share of common stock received by the PERCS holder is
determined by dividing the price set by the capital appreciation limit of the
PERCS by the market price of the issuer's common stock. PERCS can be called at
any time prior to maturity, and hence do not provide call protection. However if
called early the issuer must pay a call premium over the market price to the
investor. This call premium declines at a preset rate daily, up to the maturity
date of the PERCS.
The Fund may also invest in other classes of enhanced convertible securities.
These include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stocks), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities), and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all have the
following features: they are issued by the company, the common stock of which
will be received in the event the convertible preferred stock is converted;
unlike PERCS they do not have a capital appreciation limit; they seek to provide
the investor with high current income with some prospect of future capital
appreciation; they are typically issued with three or four-year maturities; they
typically have some built-in call protection for the first two to three years;
investors have the right to convert them into shares of common stock at a preset
conversion ratio or hold them until maturity; and, upon maturity, they will
necessarily convert into either cash or a specified number of shares of common
stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company whose common stock is to be acquired in the event the security
is converted, or issued by a different issuer, such as an investment bank. These
securities may be identified by names such as ELKS (Equity Linked Securities) or
similar names. Typically they share most of the salient characteristics of an
enhanced convertible preferred stock but will be ranked as senior or
subordinated debt in the issuer's corporate structure according to the terms of
the debt indenture. There may be additional types of convertible securities not
specifically referred to herein which may be similar to those described above in
which a Fund may invest, consistent with its objective and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the Fund. The Fund may have difficulty disposing of
these securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the Fund's ability to dispose of particular securities, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the credit worthiness of an issuer.
Reduced liquidity in the secondary market for certain securities may also make
it more difficult for the Fund to obtain market quotations based on actual
trades for purposes of valuing the Fund's portfolio. The Fund, however, intends
to acquire liquid securities, though there can be no assurances that this will
be achieved.
Synthetic Convertibles. Synthetic convertible securities differ from the true
convertible security in several respects. The value of a synthetic convertible
is the sum of the values of its fixed-income component and its convertibility
component. Thus, the values of a synthetic convertible and a true convertible
security will respond differently to market fluctuations. Further, although
Advisers expects normally to create synthetic convertibles whose two components
represent one issuer, the character of a synthetic convertible allows the Fund
to combine components representing distinct issuers, or to combine a
fixed-income security with a call option on a stock index when Advisers
determines that such a combination would better promote the Fund's investment
objective. In addition, the component parts of a synthetic convertible security
may be purchased simultaneously or separately; and the holder of a synthetic
convertible faces the risk that the price of the stock, or the level of the
market index underlying the convertibility component will decline.
Foreign Securities. Investments may be in securities of foreign issuers, whether
located in developed or developing countries, but investments will not be made
in any securities issued without stock certificates or comparable stock
documents. Securities that are acquired by the Fund outside the U.S. and that
are publicly traded in the U.S. or on a foreign securities exchange or in a
foreign securities market are not considered by the Fund to be an illiquid asset
so long as the Fund acquires and holds the security with the intention of
re-selling the security in the foreign trading market, the Fund reasonably
believes it can readily dispose of the security for cash in the U.S. or foreign
market and current market quotations are readily available. The Fund presently
has no intention of investing more than 25% of its net assets in foreign
securities.
Other Investment Policies 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 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
Advisers. 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 Board and will be
held pursuant to a written agreement.
Borrowing. The Fund does not borrow money or mortgage or pledge any of its
assets, except that borrowings for temporary or emergency purposes may be made
from banks in an amount up to 10% of total asset value. No new investments will
be made while any such borrowings are in excess of 5% of total assets.
Illiquid Investments. The Fund may not invest more than 10% of its net assets,
at the time of purchase, in illiquid securities. Illiquid securities are
generally securities that cannot be sold within seven days in the normal course
of business at approximately the amount at which the Fund has valued them.
Percentage Restrictions. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in value of portfolio securities or the amount of net
assets will not be considered a violation of any of the foregoing policies.
Other Policies and Restrictions. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How Does the Fund Invest Its Assets?" and "Investment Restrictions" in the
SAI.
What Are the Fund's Potential Risks?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
Foreign Securities. Investments in foreign securities where delivery takes place
outside the U.S. will involve risks that are different from investments in U.S.
securities. These risks may include future unfavorable political and economic
developments, possible withholding taxes, seizure of foreign deposits, currency
controls, higher transactional costs due to a lack of negotiated commissions, or
other governmental restrictions that might affect the amount and types of
foreign investments made or the payment of principal or interest on securities
the Fund holds. In addition, there may be less information available about these
securities and it may be more difficult to obtain or enforce a court judgment in
the event of a lawsuit. Fluctuations in currency convertibility or exchange
rates could result in investment losses for the Fund. Investment in foreign
securities may also subject the Fund to losses due to nationalization,
expropriation or differing accounting practices and treatments. These risks can
be significantly greater for investments in developing markets.
Options, Futures and Options on Futures. The Fund's options and futures
investments involve certain risks. These 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 that would result in a loss on both the securities and the option or
futures contracts or investment.
The Fund's ability to hedge effectively all or a portion of its securities
through transactions in options on stock indexes, stock index futures, financial
futures and related options depends on the degree to which price movements in
the underlying index or underlying securities correlate with price movements in
the relevant portion of the Fund's securities. Inasmuch as these securities will
not duplicate the components of any index or 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 the 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 Advisers' 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 securities.
During the option period the Fund, as the writer of covered calls, gives up the
potential for capital appreciation above the exercise price should the
underlying security rise in value, and retains the risk of loss, as the writer
of puts, should the underlying security decline in value. Substantial
appreciation in the value of the security underlying covered calls written by
the Fund would result in the security being "called away." Substantial
depreciation in the value of the security underlying puts written by the Fund
would result in the security being "put to" the writer. If a covered call option
written by the Fund expires unexercised, the Fund will realize a gain in the
amount of the premium received. If the Fund has to sell the security underlying
the covered call because of the exercise of a call option, it realizes a gain or
loss from the sale of the underlying security, with the proceeds being increased
by the amount of the premium. From time to time, under certain market
conditions, the Fund may receive little or no short-term capital gains from its
options transactions, which will reduce the Fund's return.
If a put option written by the Fund expires unexercised, the Fund will realize a
gain from the amount of the premium. If the Fund has to buy the underlying
security because of the exercise of the put option, it will incur an unrealized
loss to the extent that the current market value of the underlying security is
less than the exercise price of the put option. However, this may be offset in
whole or in part by gain from the premium received.
Positions in exchange traded options and futures may be closed out only on an
exchange that provides a secondary market. There may not always be a liquid
secondary market for a futures or option contract at a time when the Fund seeks
to close out its position. If the Fund were unable to close out a futures or
option position, and if prices moved adversely, the Fund would have to continue
to make daily cash payments to maintain its required margin. If the Fund had
insufficient cash, it might have to sell portfolio securities at a
disadvantageous time. In addition, the Fund might be required to deliver the
stocks underlying futures or options contracts it holds. The Fund will enter
into an option or futures position only if there appears to be a liquid
secondary market for the option or futures contract.
Over-the-counter options ("OTC" options) differ from exchange traded options in
certain material respects. OTC options are arranged directly with dealers and
not, as is the case with 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. OTC options, however, are available for a greater variety of securities
and in a wider range of expiration dates and exercise prices than exchange
traded options, and the writer of an OTC option is paid the premium in advance
by the dealer.
There can be no assurance that a continuous liquid secondary market will exist
for any particular OTC option at any specific time. Consequently, the Fund may
be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer that
issued it. Similarly, when the Fund writes an OTC option, it generally can close
out that option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it. If a covered
call option writer cannot effect a closing transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not be able to sell
an underlying security even though it might otherwise be advantageous to do so.
Likewise, a secured put writer of an OTC option may be unable to sell the
securities pledged to secure the put for other investment purposes while it is
obligated as a put writer. Similarly, a buyer of such put or call option might
also find it difficult to terminate its position on a timely basis in the
absence of a secondary market.
The Fund understands the current position of the staff of the SEC to be that
purchased OTC options are illiquid securities and that the assets used to cover
the sale of an OTC option are considered illiquid. The Fund and Advisers
disagree with this position. Nevertheless, pending a change in the staff's
position, the Fund will treat OTC options and "cover" assets as subject to the
Fund's limitation on illiquid securities.
Futures contracts entail risks. Although the Fund believes that the use of these
contracts will benefit the Fund, if Advisers' 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 that
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 that it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the Fund
has insufficient cash, it may have to sell securities from its portfolio to meet
daily variation margin requirements. These sales may be, but will not
necessarily be, at increased prices that reflect the rising market. The Fund may
have to sell securities at a time when it may be disadvantageous to do so.
The Fund's sale of futures contracts and purchase of put options on futures
contracts will be solely to protect its investments against declines in value.
The Fund expects that in the normal course of business it will buy securities
upon termination of long futures contracts and long call options on future
contracts, but under unusual market conditions it may terminate any of the
positions without a corresponding purchase of securities.
In addition, adverse market movements could cause the Fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss by
the Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a futures contract or option. Please see "How Does
the Fund Invest Its Assets?" in the SAI for a more complete discussion of the
Fund's investments in options and futures, including the risks associated with
this activity.
Options, futures, and options on futures are generally considered "derivative
securities." The Fund's investments in these derivative securities will be for
portfolio hedging purposes in an effort to stabilize principal fluctuations.
The Fund's option and futures investments may be limited by the requirements of
the Code for qualification as a regulated investment company and may reduce the
portion of the Fund's dividends that 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 you. For more information please see the tax section of this prospectus and
"Additional Information on Distributions and Taxes" in the SAI.
Interest Rate and Market Risk. To the extent the Fund invests in debt
securities, changes in interest rates will affect the value of the Fund's
portfolio and its share price. Rising interest rates, which often occur during
times of inflation or a growing economy, are likely to have a negative effect on
the value of the Fund's shares. To the extent the Fund invests in common stocks,
a general market decline, shown for example by a drop in the Dow Jones
Industrials or other equity based index, may also cause the Fund's share price
to decline. The value of worldwide stock markets and interest rates has
increased and decreased in the past. These changes are unpredictable and may
happen again in the future
Who Manages the Fund?
The Board. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations.
Investment Manager. Advisers is the investment manager of the Fund and other
funds with aggregate assets of over $81 billion. It is wholly owned by
Resources, a publicly owned company engaged in the financial services industry
through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the
principal shareholders of Resources.
Management Team. The team responsible for the day-to-day management of the
Fund's portfolio is: Lisa A. Costa since 1985, and Alok Chopra and Edward Perks
since 1994. Mr. Wiskemann has been generally involved with the investment
strategy of the Fund's portfolio since 1972.
Lisa A. Costa, CMT
Portfolio Manager of Advisers
Ms. Costa holds a Master of Business Administration degree from Golden Gate
University and a Bachelor of Science degree in finance from California State
University at Hayward. She has been with Advisers or an affiliate since 1980.
Ms. Costa is a Chartered Market Technician, President of the Technical
Securities Analysts Association of San Francisco, and a member of several
securities industry-related committees and associations.
Alok Chopra
Portfolio Manager of Advisers
Mr. Chopra holds a Master of Business Administration degree from The University
of Chicago, a Master of Science degree from Northeastern University and a
Bachelor of Science degree from Cornell University. Mr. Chopra joined Franklin
in August of 1994. He is a member of several industry-related associations and
is a Chartered Financial Analyst candidate.
Edward D. Perks
Portfolio Manager of Advisers
Mr. Perks holds a Bachelor of Arts degree from Yale University. Mr. Perks joined
Franklin in October of 1992. He is a Chartered Financial Analyst candidate.
R. Martin Wiskemann
Senior Vice President of Advisers
Mr. Wiskemann holds a degree in business administration from the Handelsschule
of the State of Zurich, Switzerland. He has been in the securities business for
more than 30 years, managing mutual fund equity and fixed-income portfolios, and
private investment accounts. He has been with Advisers or an affiliate since
1972. He is a member of several securities industry-related associations.
Services Provided by Advisers. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also provides certain administrative services and
facilities for the Fund and performs similar services for other funds. Please
see "Investment Advisory and Other Services" and "Miscellaneous Information" in
the SAI for information on securities transactions and a summary of the Fund's
Code of Ethics.
Management Fees. During the fiscal year ended December 31, 1995, management fees
totaling 0.63% of the average monthly net assets of the Fund were paid to
Advisers. Total expenses of the Fund, including fees paid to Advisers, were
1.17%.
Portfolio Transactions. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares when selecting a broker or dealer. Please see "How Does the Fund
Buy Securities For Its Portfolio?" in the SAI for more information.
The Fund's Rule 12b-1 Plan
The Fund has a distribution plan or "Rule 12b-1 Plan" under which it may
reimburse Distributors or others for activities primarily intended to sell
shares of the Fund. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates, printing prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and advertisements, and a prorated portion of Distributors' overhead expenses.
Payments by the Fund under the plan may not exceed 0.25% per year of the Fund's
average daily net assets. All distribution expenses over this amount will be
borne by those who have incurred them. For more information, please see "The
Fund's Underwriter" in the SAI.
How Does the Fund Measure Performance?
From time to time, the Fund advertises its performance. The more commonly used
measures of performance are total return, current yield and current distribution
rate. Performance figures are usually calculated using the maximum sales charge,
but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows the
income per share earned by the Fund. The current distribution rate shows the
dividends or distributions paid to shareholders by the Fund. This rate is
usually computed by annualizing the dividends paid per share during a certain
period and dividing that amount by the current Offering Price. Unlike current
yield, the current distribution rate may include income distributions from
sources other than dividends and interest received by the Fund.
The Fund's investment results will vary. Performance figures are always based on
past performance and do not indicate future results. For a more detailed
description of how the Fund calculates its performance figures, please see "How
Does the Fund Measure Performance?" in the SAI.
How Is the Trust Organized?
The Fund is a diversified series of the Franklin Asset Allocation Fund (the
"Trust"), an open-end management investment company, commonly called a "mutual
fund." The Fund was originally incorporated in Hawaii in 1951, reincorporated
under the laws of the state of California in 1983, and reorganized as a Delaware
business trust on August 1, 1996. The Fund was previously known as the Franklin
Premier Return Fund. The Trust is registered with the SEC under the 1940 Act.
The Fund is currently the only series of the Trust. Shares of each series of the
Trust have equal and exclusive rights to dividends and distributions declared by
that series and the net assets of the series in the event of liquidation or
dissolution. Shares of the Fund are considered Class I shares for redemption,
exchange and other purposes. In the future, additional series and classes of
shares may be offered.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
electing or removing members of the Board.
How Taxation Affects You and the Fund
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund intends to continue to qualify as a regulated investment company under
Subchapter M of the Code. By distributing all of its income and meeting certain
other requirements relating to the sources of its income and diversification of
its assets, the Fund will not be liable for federal income or excise taxes.
For federal income tax purposes, any income dividends that you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss (net capital gain) are treated as long-term capital gain
regardless of the length of time you have owned Fund shares and regardless of
whether such distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if received by
you on December 31 of the calendar year in which they are declared.
For the fiscal year ended December 31, 1995, 36.78% of the net income dividends
paid by the Fund qualified for the corporate dividends-received deduction,
subject to certain holding period, hedging and debt financing restrictions
imposed under the Code on the corporation claiming the deduction.
The Fund's transactions in options and futures contracts will give rise to
taxable income, gain or loss and will be subject to special tax treatment under
certain mark-to-market and straddle rules, the effect of which may be to
accelerate income to the Fund, defer Fund losses, cause adjustments in the
holding periods of Fund securities, convert capital gains and losses into
ordinary income and losses, convert long-term capital gains into short-term
capital gains, and convert short-term capital losses into long-term capital
losses. Certain elections may be available to the Fund to mitigate some of the
unfavorable consequences of the provisions described in this paragraph.
If you are not a U.S. person for purposes of federal income taxation, you should
consult with your financial or tax advisor regarding the applicability of U.S.
withholding or other taxes on distributions received by you from the Fund and
the application of foreign tax laws to these distributions.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
About Your Account
How Do I Buy Shares?
Opening Your Account
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check.
MINIMUM
INVESTMENTS*
- -----------------------------------------
To Open Your Account........... $100
To Add to Your Account......... $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares.
Sales Charge Reductions and Waivers
o If you qualify to buy shares under one of the sales charge reduction or
waiver categories described below, please include a written statement with
each purchase order explaining which privilege applies. If you don't
include this statement, we cannot guarantee that you will receive the sales
charge reduction or waiver.
Quantity Discounts. The sales charge you pay depends on the dollar amount you
invest, as shown in the table below.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- --------------------------------------------------------------------------------
Under $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 None
*If you invest $1 million or more, a Contingent Deferred Sales Charge may be
imposed on an early redemption. Please see "How Do I Sell Shares? - Contingent
Deferred Sales Charge." Please also see "Other Payments to Securities Dealers"
below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases.
Cumulative Quantity Discounts. To determine if you may pay a reduced sales
charge, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your Class I and Class II shares in other
Franklin Templeton Funds, as well as those of your spouse, children under the
age of 21 and grandchildren under the age of 21. If you are the sole owner of a
company, you may also add any company accounts, including retirement plan
accounts. Companies with one or more retirement plans may add together the total
plan assets invested in the Franklin Templeton Funds to determine the sales
charge that applies.
Letter of Intent. You may buy shares at a reduced sales charge by completing the
Letter of Intent section of the shareholder application. A Letter of Intent is a
commitment by you to invest a specified dollar amount during a 13 month period.
The amount you agree to invest determines the sales charge you pay.
By completing the Letter of Intent section of the shareholder application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Fund shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
Group Purchases. If you are a member of a qualified group, you may buy Fund
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
Sales Charge Waivers. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying shares with money from
the following sources:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, Templeton Variable Annuity Fund, the
Templeton Variable Products Series Fund, or the Franklin Government
Securities Trust. You should contact your tax advisor for information on
any tax consequences that may apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares reinvested were subject
to a Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front- end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts 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 the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more, or (iii) agree to
invest at least $500,000 in the Franklin Templeton Funds over a 13 month
period. Retirement plans that are not Qualified Retirement Plans or SEPS,
such as 403(b) or 457 plans, must also meet the requirements described
under "Group Purchases" above.
9. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by the
Fund on arbitrage rebate calculations.
10. Broker-dealers who have entered into a supplemental agreement with
Distributors for clients who are participating in comprehensive fee
programs. These programs, sometimes known as wrap fee programs, are
sponsored by the broker-dealer and either advised by the broker-dealer or
by another registered investment advisor affiliated with that broker.
11. Registered Securities Dealers and their affiliates, for their investment
accounts only
12. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
13. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
How Do I Buy Shares in Connection with Retirement Plans?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
Other Payments to Securities Dealers
The payments below apply to Securities Dealers who initiate and are responsible
for certain purchases made without a sales charge. A Securities Dealer may only
receive one of the following payments for each qualifying purchase. The payments
described below are paid by Distributors or one of its affiliates, at its own
expense, and not by the Fund or its shareholders.
1. Securities Dealers will receive up to 1% of the purchase price for
purchases of $1 million or more.
2. Securities Dealers may, in the sole discretion of Distributors, receive up
to 1% of the purchase price for purchases made under waiver category 8
above.
3. Securities Dealers may receive up to 0.25% of the purchase price for
purchases made under waiver categories 6 and 9 above.
Please see "How Do I Buy, Sell and Exchange Shares - Other Payments to
Securities Dealers" in the SAI for any breakpoints that may apply.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. Securities Dealers may not use sales of the Fund's shares to qualify for
this compensation if prohibited by the laws of any state or self-regulatory
agency, such as the NASD.
May I Exchange Shares for Shares of Another Fund?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
By Mail 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you're exchanging
By Phone Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to exchange by phone to
apply to your account, please let us know.
Through Your Dealer Call your investment representative
- --------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
Will Sales Charges Apply to My Exchange?
You generally will not pay a front-end sales charge on exchanges.
If you have held your shares less than six months, however, you will pay the
percentage difference between the sales charge you previously paid and the
applicable sales charge of the new fund. If you have never paid a sales charge
on your shares because, for example, they have always been held in a money fund,
you will pay the Fund's applicable sales charge no matter how long you have held
your shares. These charges may not apply if you qualify to buy shares without a
sales charge.
Contingent Deferred Sales Charge. We will not impose a Contingent Deferred Sales
Charge when you exchange shares. Any shares subject to a Contingent Deferred
Sales Charge at the time of exchange, however, will remain so in the new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, shares
are exchanged into the new fund in the order they were purchased. If you
exchange shares into one of our money funds, the time your shares are held in
that fund will not count towards the completion of any Contingency Period. For
more information about the Contingent Deferred Sales Charge, please see that
section under "How Do I Sell Shares?"
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class.
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all
transactions. Please notify us in writing if you do not want this option to
be available on your account(s). Additional procedures may apply. Please
see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you: (i) request an exchange
out of the Fund within two weeks of an earlier exchange request, (ii)
exchange shares out of the Fund more than twice in a calendar quarter, or
(iii) exchange shares equal to at least $5 million, or more than 1% of the
Fund's net assets. Shares under common ownership or control are combined
for these limits. If you exchange shares as described in this paragraph,
you will be considered a Market Timer. Each exchange by a Market Timer, if
accepted, will be charged $5.00. Some of our funds do not allow investments
by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
How Do I Sell Shares?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
By Mail 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need
to send additional documents. Accounts
under court jurisdiction may have additional
requirements.
- --------------------------------------------------------------------------------
By Phone Call Shareholder Services
- --------------------------------------------------------------------------------
(Only available if you have Telephone requests will be accepted:
completed and sent to us
the telephone redemption o If the request is $50,000 or less.
agreement included with Institutional accounts may exceed $50,000 by
this prospectus) completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for
the shares you want to sell or you have
already returned them to the Fund
o Unless you are selling shares in a Trust
Company retirement plan account
o Unless the address on your account was
changed by phone within the last 30 days
- --------------------------------------------------------------------------------
Through Your Dealer Call your investment representative.
- --------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Trust Company Retirement Plan Accounts
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
591/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
Contingent Deferred Sales Charge
If you did not pay a front-end sales charge because you invested $1 million or
more, a Contingent Deferred Sales Charge may apply if you sell all or a part of
your investment within the Contingency Period. The charge is 1% of the value of
the shares sold or the Net Asset Value at the time of purchase, whichever is
less. Distributors keeps the charge to recover payments made to Securities
Dealers.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on shares
held less than the Contingency Period,
2) Shares purchased with reinvested dividends and capital gain distributions,
and
3) Shares held longer than the Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated dollar amount, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated number of shares, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
Waivers. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up after February 1,
1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual
balance of $1 million, you can withdraw up to $120,000 annually through a
systematic withdrawal plan free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to
termination or plan transfer
What Distributions Might I Receive From the Fund?
The Fund declares dividends from its net investment income quarterly for
shareholders of record on the last business day of March, June and September,
and pays them on or about the 15th day of the next month. The Fund's December
dividend will generally be declared and paid during that month.
Capital gains, if any, may be distributed twice a year, usually once in December
and once after the end of the Fund's fiscal year.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge) by
reinvesting capital gain distributions, or both dividend and capital gain
distributions. This is a convenient way to accumulate additional shares and
maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge).
Many shareholders find this a convenient way to diversify their investments.
3. Receive distributions in cash - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
To select one of these options, please complete sections 6 and 7 of the
shareholder application included with this prospectus or tell your investment
representative which option you prefer. If you do not select an option, we will
automatically reinvest dividend and capital gain distributions in the Fund. For
Trust Company retirement plans, special forms are required to receive
distributions in cash. You may change your distribution option at any time by
notifying us by mail or phone. Please allow at least seven days prior to the
record date for us to process the new option.
Transaction Procedures and Special Requirements
How and When Shares Are Priced
The Fund is open for business each day the Exchange is open. We determine the
Net Asset Value per share as of the scheduled close of the Exchange, generally
1:00 p.m. Pacific time. You can find the prior day's closing Net Asset Value and
Offering Price of the Fund in many newspapers.
To calculate Net Asset Value per share, the Fund's assets are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares outstanding. The Fund's assets are valued as
described under "How Are Fund Shares Valued?" in the SAI.
The Price We Use When You Buy or Sell Shares
You buy shares at the Offering Price, unless you qualify to buy shares at a
reduced sales charge or with no sales charge. The Offering Price is based on the
Net Asset Value per share and includes the maximum sales charge. We calculate it
to two decimal places using standard rounding criteria. You sell shares at Net
Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
Proper Form
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. You should
verify that the institution is an eligible guarantor prior to signing. A
notarized signature is not sufficient.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
We may only be liable for losses resulting from unauthorized telephone
transactions if we do not follow reasonable procedures designed to verify the
identity of the caller. When you call, we will request personal or other
identifying information, and will also record calls. For your protection, we may
delay a transaction or not implement one if we are not reasonably satisfied that
telephone instructions are genuine. If this occurs, we will not be liable for
any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
Trust Company Retirement Plan Accounts. You may not sell shares or change
distribution options on Trust Company retirement plans by phone. While you may
exchange shares of Trust Company IRA and 403(b) retirement accounts by phone,
certain restrictions may be imposed on other retirement plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
Account Registrations and Required Documents
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------------------------------------------------------------
Corporation Corporate Resolution
- --------------------------------------------------------------------------------
Partnership 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
Trust 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
Electronic Instructions. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II' System.
Tax Identification Number
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
Services to Help You Manage Your Account
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
Automatic Payroll Deduction
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below.
You will generally receive your payment by the fifth business day of the month
in which a payment is scheduled. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
Because of the Fund's front-end sales charge, you may not want to set up a
systematic withdrawal plan if you plan to buy shares on a regular basis. Shares
sold under the plan may also be subject to a Contingent Deferred Sales Charge.
Please see "Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
Electronic Fund Transfers
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TeleFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips.
You will need the Fund's code number to use TeleFACTS. The Fund's code is 102.
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. Please
verify the accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household
and send only one copy of a report. Call Fund Information if you would like
an additional free copy of the Fund's financial reports or an interim
quarterly report.
Institutional Accounts
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
What If I Have Questions About My Account?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- --------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
Glossary
Useful Terms and Definitions
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Trustees of the Trust
CD - Certificate of deposit
Class I and Class II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans. Because the Fund's sales charge structure and Rule 12b-1 plan are similar
to those of Class I shares, shares of the Fund are considered Class I shares for
redemption, exchange and other purposes.
Code - Internal Revenue Code of 1986, as amended
Contingency Period - The 12 month period during which a Contingent Deferred
Sales Charge may apply. Regardless of when during the month you purchased
shares, they will age one month on the last day of that month and each following
month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply if
you sell your shares within one year.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
Eligible Governmental Authority - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
Exchange - New York Stock Exchange
Franklin Funds - The mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust
Franklin Templeton Funds - The Franklin Funds and the Templeton Funds
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
Market Timer(s) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
Offering Price - The public offering price is based on the Net Asset Value per
share and includes the 4.5% sales charge.
Qualified Retirement Plan(s) - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TeleFACTS(R) - Franklin Templeton's automated customer servicing system
Templeton Funds - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
Trust Company - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or another wholly owned
subsidiary of Resources.
This page intentionally left blank.
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.
<TABLE>
<CAPTION>
What SSN/TIN to Give. Please refer to the following guidelines:
ACCOUNT TYPE GIVE SSN OF ACCOUNT TYPE GIVE EMPLOYER ID # OF
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
o Individual Individual o Trust, Estate, or Trust, Estate, or
Pension Plan Trust Pension Plan Trust
o Joint Individual Owner who will be o Corporation, Partnership, Corporation,
paying tax or first- or other organization Partnership, or
named individual other organization
o Unif. Gift/ Minor o Broker nominee Broker nominee
Transfer to Minor
o Sole Proprietor Owner of business
o 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 financial institution
An organization exempt from tax
under section 501(a), or an individual retirement plan
A registered dealer in securities or commodities registered in the U.S.
or a U.S. possession
A real estate investment trust
A common trust fund operated by
a bank under section 584(a)
An exempt charitable remainder trust
or a non-exempt trust described in section 4947(a)(1)
An entity registered at all times under
the Investment Company Act 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. 20.21/150 (07/96)
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.
20.21/150 (07/96)
Franklin Funds
Automatic Investment Plan
777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777
- --------------------------------------------------------------------------------
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.
20.24/101 A (07/96)
Automatic Investment Plan Application:
Name(s) ______________________________________________________________________
(Please print as shown on Franklin account registration.)
Address ______________________________________________________________________
Telephone ____________________________________________________________________
Bank's Name __________________________________________________________________
Branch Address ________________________________________________________________
Name(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 n or 20th n
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.
20.24/101 A (07/96)
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. ("Investor 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 Investor 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
Investor 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 Investor 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 Investor
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 Investor Services to honor
telephone redemption requests given by ANY ONE of the signers or our investment
representative of record, if any, ACTING ALONE.
20.21/140 (07/96)
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
Investor 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
Investor Services by registered mail, return receipt requested, or by a Fund or
Investor Services upon receipt of any information that causes a Fund or Investor
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 Investor 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 Investor 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
Investor 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 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
20.21/140 (07/96)
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Franklin/Templeton Group of Funds
Literature Request Call 1-800/DIAL BEN (1-800/342-5236) today for a free
descriptive brochure and prospectus on any of the funds listed below. The
prospectus contains more complete information, including fees, charges and
expenses, and should be read carefully before investing or sending money.
Global Growth
Franklin Global Health Care Fund
Franklin International Equity Fund
Franklin Templeton Japan Fund
Templeton Developing
Markets Trust
Templeton Foreign Fund
Templeton Global
Infrastructure Fund
Templeton Global
Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller
Companies Fund
Templeton Greater European Fund
Templeton Growth Fund
Templeton Latin America Fund
Templeton Pacific Growth Fund
Templeton World Fund
Global Growth and Income
Franklin Global Utilities Fund
Franklin Templeton German
Government Bond Fund
Franklin Templeton
Global Currency Fund
Templeton Global Bond Fund
Templeton Growth and Income Fund
Global Income
Franklin Global Government
Income Fund
Franklin Templeton Hard
Currency Fund
Franklin Templeton High
Income Currency Fund
Templeton Americas
Government Securities Fund
Growth
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin DynaTech Fund
Franklin Equity Fund
Franklin Gold Fund
Franklin Growth Fund
Franklin MidCap Growth Fund
Franklin Small Cap Growth Fund
Growth and Income
Franklin Asset Allocation Fund
Franklin Balance Sheet
Investment Fund
Franklin Convertible
Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Franklin MicroCap Value Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Rising Dividends Fund
Franklin Strategic Income Fund
Franklin Utilities Fund
Franklin Value Fund
Templeton American Trust, Inc.
Income
Franklin Adjustable Rate
Securities Fund
Franklin Adjustable U.S.
Government Securities Fund
Franklin's AGE High Income Fund
Franklin Investment
Grade Income Fund
Franklin Short-Intermediate U.S.
Government Securities Fund
Franklin U.S. Government
Securities Fund
Franklin Money Fund
Franklin Federal Money Fund
For Non-U.S. Investors:
Franklin Tax-Advantaged
High Yield Securities Fund
Franklin Tax-Advantaged
International Bond Fund
Franklin Tax-Advantaged U.S.
Government Securities Fund
For Corporations:
Franklin Corporate Qualified
Dividend Fund
Franklin Funds Seeking
Tax-Free Income
Federal Intermediate-Term
Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund
Puerto Rico Tax-Free Income Fund
Tax-Exempt Money Fund
Franklin State-Specific Funds Seeking Tax-Free Income
Alabama
Arizona*
Arkansas**
California*
Colorado
Connecticut
Florida*
Georgia
Hawaii**
Indiana
Kentucky
Louisiana
Maryland
Massachusetts***
Michigan*
Minnesota***
Missouri
New Jersey
New York*
North Carolina
Ohio***
Oregon
Pennsylvania
Tennessee**
Texas
Virginia
Washington**
Variable Annuities
Franklin ValuemarkSM
Franklin Templeton
Valuemark Income Plus
(an immediate annuity)
*Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured municipal securities, and/or a high yield
portfolio (CA) and a money market portfolio (CA and NY).
**The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.
***Portfolio of insured municipal securities.
FGF08/96
102 P 08/96
FRANKLIN ASSET
ALLOCATION FUND
STATEMENT OF
ADDITIONAL INFORMATION
MAY 1, 1996
as amended August 1, 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
- --------------------------------------------------------------------------------
CONTENTS PAGE
How Does the Fund Invest Its Assets?..... 2
Investment Restrictions.................. 5
Officers and Trustees.................... 6
Investment Advisory and Other Services... 9
How Does the Fund Buy
Securities For Its Portfolio?........... 10
How Do I Buy, Sell and
Exchange Shares?........................ 11
How Are Fund Shares Valued?.............. 14
Additional Information on
Distributions and Taxes................. 15
The Fund's Underwriter................... 17
How Does the Fund
Measure Performance?.................... 19
Miscellaneous Information................ 21
Financial Statements..................... 22
Useful Terms and Definitions............. 22
Appendix................................. 23
When reading this SAI, you will see certain terms in capital letters. This means
the term is explained under "Useful Terms and Definitions."
The Franklin Asset Allocation Fund (the "Fund") is a diversified series of
Franklin Asset Allocation Fund (the "Trust"), an open-end management investment
company. The Fund's investment objective is total return. The Fund seeks to
achieve its objective by investing in common stocks, investment grade corporate
and U.S. government bonds, short-term money market instruments, securities of
foreign issuers and real estate securities.
The Prospectus, dated May 1, 1996, as amended August 1, 1996, and as may be
further amended from time to time, contains the basic information you should
know before investing in the Fund. For a free copy, call 1-800/DIAL BEN or write
the Fund at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
102 SAI 08/96
HOW DOES THE FUND INVEST ITS ASSETS?
TRANSACTIONS IN OPTIONS, FUTURES
AND OPTIONS ON FINANCIAL FUTURES
Call and Put Options on Securities. The Fund intends to write covered put and
call options and buy put and call options on securities and indices that trade
on securities exchanges and in the over-the-counter market.
Writing Call and Put Options. A call option gives the option holder the right to
buy the underlying security from the option writer at a stated exercise price. A
put option gives the option holder the right to sell the underlying security at
the option exercise price at any time during the option period.
A call option written by the Fund is "covered" if the Fund owns the underlying
security that 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 bank) 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 bank. A put option written by the Fund is "covered"
if the Fund maintains cash and high grade debt securities with a value equal to
the exercise price in a segregated account with its custodian bank, or holds a
put on the same security and in the same principal amount as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written. The premium paid by the buyer of an option
will reflect, among other things, the relationship of the exercise price to the
market price and the volatility of the underlying security, the remaining term
of the option, supply and demand and interest rates.
The writer of an option may have no control over when the underlying securities
must be sold, in the case of a call option, or purchased, in the case of a put
option, since, with regard to certain options, the writer may be assigned an
exercise notice at any time prior to the termination of the obligation. Whether
or not an option expires unexercised, the writer retains the amount of the
premium. This amount, of course, may, in the case of a covered call option, be
offset by a decline in the market value of the underlying security during the
option period. If a call option is exercised, the writer experiences a profit or
loss from the sale of the underlying security. If a put option is exercised, the
writer must fulfill the obligation to buy the underlying security at the
exercise price, which will usually exceed the then current market value of the
underlying security. The writer of an option who wishes to terminate its
obligation may effect a "closing purchase transaction." This is done by buying
an option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is done by selling an option of the same series as the option
previously purchased. There is no guarantee that either a closing purchase or a
closing sale transaction will be available at the time desired by the Fund.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price, expiration date or both, or in the case of a written
put option will permit the Fund to write another put option to the extent that
the exercise price thereof is secured by deposited cash or short-term
securities. Also, effecting a closing transaction will permit the cash or
proceeds from the concurrent sale of any securities subject to the option to be
used for other Fund investments. If the Fund desires to sell a particular
security from its portfolio on which it has written a call option, it will
effect a closing transaction prior to or at the same time as 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 buy 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 buy the
option. Because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option is likely to be offset in whole
or in part by appreciation of the underlying security owned by the Fund.
The writing of covered put options involves certain risks. For example, if the
market price of the underlying security rises or otherwise is above the exercise
price, the put option will expire worthless and the Fund's gain will be limited
to the premium received. If the market price of the underlying security declines
or otherwise is below the exercise price, the Fund may elect to close the
position or take delivery of the security at the exercise price and the Fund's
return will be the premium received from the put options minus the amount by
which the market price of the security is below the exercise price.
Buying Call and Put Options. The Fund may buy call options on securities that it
intends to buy in order to limit the risk of a substantial increase in the
market price of the security before the purchase is effected. The Fund may also
buy call options on securities held in its portfolio and on which it has written
call options. Prior to its expiration, a call option may be sold in a closing
sale transaction. Profit or loss from such a sale will depend on whether the
amount received is more or less than the premium paid for the call option plus
the related transaction costs.
The Fund may buy put options on particular securities in order to protect
against a decline in the market value of the underlying security below the
exercise price less the premium paid for the option. The ability to buy put
options will allow the Fund to protect the unrealized gain in an appreciated
security in its portfolio without actually selling the security. In addition,
the Fund will continue to receive interest or dividend income on the security.
The Fund may sell a put option that it has previously purchased prior to the
sale of the securities underlying the option. These sales will result in a net
gain or loss depending on whether the amount received on the sale is more or
less than the premium and other transaction costs paid for the put option that
is sold. The gain or loss may be wholly or partially offset by a change in the
value of the underlying security which the Fund owns or has the right to
acquire.
Over-the-Counter ("OTC") Options. The Fund intends to write covered put and call
options and buy put and call options that trade in the over-the-counter market
to the same extent that it will engage in exchange traded options. Just as with
exchange traded options, OTC call options give the option holder the right to
buy an underlying security from an option writer at a stated exercise price. OTC
put options give the holder the right to sell an underlying security to an
option writer at a stated exercise price.
Options on Stock Indices. Call and put options on stock indices are similar to
options on securities except that, rather than the right to buy 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.
In order to hedge against the risk of market or industry-wide stock price
fluctuations, the Fund may buy call options on stock indices. 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 bank
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.
Possible Limitations. The exchanges on which options are traded have established
limitations governing the maximum number of options in each class which may be
written by a single investor or group of investors acting in concert (regardless
of whether the options are written on the same or different exchanges or are
held or written in one or more accounts or through one or more brokers). It is
possible that the Fund and other clients of Advisers may be considered to be
such a group. An exchange may order the liquidation of positions found to be in
violation of these limits, and it may impose certain other sanctions. These
position limits may restrict the number of options which the Fund will be able
to write on a particular security.
Futures Contracts. The Fund may enter into contracts for the purchase or sale
for future delivery of securities and contracts based upon financial indices
("financial futures"). Financial futures contracts are commodity contracts that
obligate the long or short holder to take or make delivery of a specified
quantity of a financial instrument, such as a security, or the cash value of a
securities index during a specified future period at a specified price. A "sale"
of a futures contract means the acquisition of a contractual obligation to
deliver the securities called for by the contract at a specified price on a
specified date. A "purchase" of a futures contract means the acquisition of a
contractual obligation to acquire the securities called for by the contract at a
specified price on a specified date. Futures contracts have been designed by
exchanges that have been designated "contracts markets" by the Commodities
Futures Trading Commission and must be executed through a futures commission
merchant, or brokerage firm, that is a member of the relevant contract market.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. This transaction, which is
effected through a member of an exchange, cancels the obligation to take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearinghouse associated with the exchange
on which the contracts are traded, the Fund will incur brokerage fees when it
buys or sells futures contracts.
The Commodities Futures Trading Commission and the various exchanges have
established limits referred to as "speculative position limits" on the maximum
net long or net short position which any person may hold or control in a
particular futures contract. Trading limits are imposed on the maximum number of
contracts which any person may trade on a particular trading day. An exchange
may order the sale 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 Advisers may still not
result in a successful transaction.
The Fund will not engage in transactions in futures contracts or related options
for speculation but only as a hedge against changes resulting from market
conditions in the values of its securities or securities that it intends to buy.
The Fund will not enter into any stock index or financial futures contract or
related option if, immediately thereafter, more than one-third of the Fund's net
assets would be represented by futures contracts or related options. In
addition, the Fund may not buy or sell futures contracts or buy or sell related
options if, immediately thereafter, the sum of the amount of margin deposits on
its existing futures and related options positions, and premiums paid for
related options, would exceed 5% of the market value of the Fund's total assets.
In instances involving the purchase of futures contracts or related call
options, cash, cash equivalents, or high quality debt securities at least equal
to the market value of the futures contract or related options on futures will
be deposited in a segregated account with the custodian to collateralize such
long positions.
The purpose of the acquisition or sale of a futures contract is to attempt to
protect the Fund from fluctuations in price of portfolio securities without
actually buying or selling the underlying security.
To the extent the Fund enters into a futures contract, it will deposit in a
segregated account with its custodian cash or U.S. Treasury obligations equal to
a specified percentage of the value of the futures contract (the "initial
margin"), as required by the relevant contract market and futures commission
merchant. The futures contract will be marked-to-market daily. Should the value
of the futures contract decline relative to the Fund's position, the Fund will
be required to pay to the futures commission merchant an amount equal to such
change in value.
STOCK INDEX FUTURES AND OPTIONS
ON STOCK INDEX FUTURES
The Fund may buy 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 buyer to take) an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made.
The Fund may sell stock index futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of its equity
securities that might otherwise result. When the Fund is not fully invested in
stocks and it anticipates a significant market advance, it may buy stock index
futures in order to gain rapid market exposure that may in part or entirely
offset increases in the cost of stocks that it intends to buy.
Options on Stock Index Futures. The Fund may buy and sell call and put options
on stock index futures to hedge against risks of market-side price movements.
The need to hedge against such risks will depend on the extent of
diversification of the Fund's common stock portfolio and the sensitivity of such
investments to factors influencing the stock market as a whole.
Call and put options on stock index futures are similar to options on securities
except that, rather than the right to buy stock at a specified price, options on
stock index futures give the holder the right to receive cash. Upon exercise of
the option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account which represents the amount by
which the market price of the futures contract, at exercise, exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract. If an option is exercised on the last trading
day prior to the expiration date of the option, the settlement will be made
entirely in cash equal to the difference between the exercise price of the
option and the closing price of the futures contract on the expiration date.
Bond Index Futures and Options on Such Contracts. The Fund may buy 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 that 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 buy and write put and call options on such index futures and
enter into closing transactions with respect to such options.
Future Developments. The Fund may take advantage of opportunities in the area of
options and futures contracts and options on futures contracts and any other
derivative investments that are not presently contemplated for use by the Fund
or which are not currently available but that 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.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. The Fund may not:
1. Purchase the securities of any one issuer (except securities issued by the
United States of America or any instrumentality thereof) if, immediately after
and as a result of such purchase, the market value of the holdings of the Fund
in the securities of such issuer would exceed 5% of the market value of the
Fund's total net assets.
2. Purchase the securities of any issuer if such purchase would cause more than
10% of the outstanding voting securities of such issuer, or more than 10% of the
outstanding voting securities of any one class of such issuer, to be held in the
Fund's portfolio.
3. Concentrate investments in any particular industry; therefore, the Fund will
not purchase a security if, as a result of such purchase, more than 25% of its
assets will be invested in a particular industry.
4. Purchase any securities on margin or sell securities short.
5. Purchase or retain the securities of any regulated investment company;
except to the extent the Fund invests its uninvested daily cash balances in
shares of Franklin Money Fund and other money market funds in the Franklin Group
of Funds provided (i) its purchases and redemptions of such money market fund
shares may not be subject to any purchase or redemption fees, (ii) its
investments may not be subject to duplication of management fees, nor to any
charge related to the expense of distributing the Fund's shares (as determined
under Rule 12b-1, as amended under the federal securities laws) and (iii)
provided aggregate investments by the Fund in any such money market fund do not
exceed (A) the greater of (i) 5% of the Fund's total net assets or (ii) $2.5
million, or (B) more than 3% of the outstanding shares of any such money market
fund.
6. Invest more than 15% of the Fund's total assets in the securities of all
issuers in the aggregate, the respective businesses of which have been in
continuous operation for less than three years. As a non-fundamental policy, the
Fund has determined to limit such investments to 5% of its total assets.
7. Purchase or retain investments in securities of any issuer in which trustees
or officers of the Fund have a substantial financial interest. The Fund, as a
non-fundamental policy, will not purchase the securities of any issuer if any
officer, trustee or employee of the Fund is an officer, director or security
holder of such issuer and owns beneficially more than 1/2 of 1% of the
securities of such issuer, and if all of such persons owning more than 1/2 of 1%
own more than 5% of the outstanding securities of such issuer.
8. Borrow money, except as a temporary measure for extraordinary purposes, and
then not in excess of 10% of the total assets of the Fund taken at cost or
value, whichever is less, and provided that immediately after any such borrowing
there is an asset coverage (meaning the ratio which the value of the total
assets of the Fund, less all liabilities and indebtedness of the Fund not
represented by such borrowing, bears to the aggregate amount of such borrowing)
of at least 300% for all borrowings of the Fund.
9. Lend any money or assets of the Fund, except through the purchase of a
portion of an issue of debt securities distributed privately by federal, state
or municipal government agencies, and then not in excess of 10% of the total
assets of the Fund taken at cost or value, whichever is less, or to the extent
the entry into a repurchase agreement may be deemed a loan. For the purpose of
this policy, the purchase by the Fund of a portion of an issue of publicly
distributed corporate or governmental bonds, debentures or other debt securities
shall not be deemed to be the lending of money by the Fund.
10. Mortgage or pledge any of the Fund's assets. The escrow arrangements
involved in the Fund's option writing activities are not deemed to be a mortgage
or pledge of its assets.
11. Act as a securities underwriter or investor in real estate or commodities,
other than the Fund's investments in derivative securities, including financial
futures and options on financial futures.
12. Purchase or sell any securities other than shares of the Fund from or to the
manager or any officer or director of the manager of the Fund.
13. Invest in the securities of companies for the purpose of exercising control.
14. Issue securities senior to the Fund's presently authorized common stock.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in value of portfolio securities
or the amount of assets will not be considered a violation of any of the
foregoing restrictions.
In addition to these fundamental policies, it is the Fund's present policy
(which may be changed without shareholder approval) not to: invest in oil, gas
or other mineral exploration or development programs; engage in joint or joint
and several trading accounts in securities, except that it may participate in
joint repurchase arrangements and may combine orders to buy or sell securities
with other orders to obtain lower brokerage commissions; invest in any security
that would be restricted from sale to the public without registration under the
Securities Act of 1933 if, as a result of such purchase, more than 5% of the
Fund's total assets would be invested in such securities; or invest more than
10% of its assets in securities, including restricted securities, which are not
readily marketable. The Fund's investments in warrants, if any, other than those
acquired by the Fund as a part of a unit, valued at the lower of cost or market,
will not exceed 5% of the value of the Fund's net assets, including not more
than 2% which are not listed on the New York or American Stock Exchange.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Trust who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Trust under the 1940 Act are indicated by an asterisk (*).
Positions and Offices Principal Occupations During
Name, Age and Address with the Fund Past Five Years
Frank H. Abbott, III (75) Trustee
1045 Sansome St.
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 31 of the
investment companies in the Franklin Group of Funds.
S. Joseph Fortunato (64) Trustee
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (81) Trustee
111 New Montgomery St., #402
San Francisco, CA 94105
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, trustee or managing
general partner, as the case may be, of 30 of the investment companies in the
Franklin Group of Funds.
* Edward B. Jamieson (48) President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Senior Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer and/or director or trustee of five of the investment companies in the
Franklin Group of Funds.
* Charles B. Johnson (63) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404 and Trustee
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general partner,
as the case may be, of most other subsidiaries of Franklin Resources, Inc. and
of 57 of the investment companies in the Franklin Templeton Group of Funds.
Hayato Tanaka (79) Trustee
277 Haihai Street
Hilo, HI 96720
Retired, former owner of The Jewel Box Orchids; and director or trustee, as the
case may be, of two of the investment companies in the Franklin Group of Funds.
* R. Martin Wiskemann (69) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Senior Vice President, Portfolio Manager and Director, Franklin Advisers, Inc.;
Senior Vice President, Franklin Management, Inc.; Vice President, Treasurer and
Director, ILA Financial Services, Inc. and Arizona Life Insurance Company of
America; and officer and/or director, as the case may be, of 21 of the
investment companies in the Franklin Group of Funds.
Harmon E. Burns (51) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 61 of the investment companies in the Franklin Templeton Group of Funds.
Kenneth V. Domingues (63) Vice President -
777 Mariners Island Blvd. Financial Reporting
San Mateo, CA 94404 and Accounting Standards
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and
Franklin Templeton Distributors, Inc.; officer and/or director, as the case may
be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 37 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan (36) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer, director and/or trustee of 61 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (47) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; Vice President, Franklin
Advisers, Inc. and officer of 61 of the investment companies in the Franklin
Templeton Group of Funds.
Rupert H. Johnson, Jr. (55) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 61 of the investment companies
in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (57) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (59) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently paid
$100 per meeting attended. As shown above, some of the nonaffiliated Board
members also serve as directors, trustees or managing general partners of other
investment companies in the Franklin Templeton Group of Funds. They may receive
fees from these funds for their services. The following table provides the total
fees paid to nonaffiliated Board members by the Trust and by other funds in the
Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
Number of Boards
Total Fees in the Franklin
Total Fees Received from the Templeton Group
Received Franklin Templeton of Funds on Which
Name from Trust* Group of Funds** Each Serves***
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Frank Abbott, III............................. $500 $162,420 31
S. Joseph Fortunato........................... 500 344,745 58
David Garbellano.............................. 500 146,100 30
Hayato Tanaka................................. 500 500 2
</TABLE>
*For the fiscal year ended December 31, 1995.
**For the calendar year ended December 31, 1995.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 60 registered investment companies, with approximately 166 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director, trustee or
managing general partner. No officer or Board member received any other
compensation, including pension or retirement benefits, directly from the Fund
or other funds in the Franklin Templeton Group of Funds. Certain officers or
Board members who are shareholders of Resources may be deemed to receive
indirect remuneration by virtue of their participation, if any, in the fees paid
to its subsidiaries.
As of May 7, 1996, the officers and Board members, as a group, owned of record
and beneficially approximately 56,206 shares, or less than 1% of the Fund's
total outstanding shares. Many of the Board members also own shares in other
funds in the Franklin Templeton Group of Funds. Charles B.
Johnson and Rupert H. Johnson, Jr. are brothers.
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Manager and Services Provided. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. Advisers' activities are subject to the review and supervision of
the Board to whom Advisers renders periodic reports of the Fund's investment
activities.
Advisers provides office space and furnishings, facilities and equipment
required for managing the business affairs of the Fund. Advisers also maintains
all internal bookkeeping, clerical, secretarial and administrative personnel and
services and provides certain telephone and other mechanical services. Advisers
is covered by fidelity insurance on its officers, directors and employees for
the protection of the Fund.
Advisers acts as investment manager or administrator to 36 U.S. registered
investment companies with 124 separate series. Advisers may give advice and take
action with respect to any of the other funds it manages, or for its own
account, that may differ from action taken by Advisers on behalf of the Fund.
Similarly, with respect to the Fund, Advisers is not obligated to recommend, buy
or sell, or to refrain from recommending, buying or selling any security that
Advisers and access persons, as defined by the 1940 Act, may buy or sell for its
or their own account or for the accounts of any other fund. Advisers is not
obligated to refrain from investing in securities held by the Fund or other
funds that it manages or administers. Of course, any transactions for the
accounts of Advisers and other access persons will be made in compliance with
the Trust's Code of Ethics.
Management Fees. Under its management agreement, the Fund pays Advisers a
management fee equal to a monthly rate of 5/96 of 1% (approximately 5/8 of 1%
per year) for the first $100 million of net assets of the Fund; 1/24 of 1%
(approximately 1/2 of 1% per year) of net assets of the Fund in excess of $100
million up to $250 million; and 9/240 of 1% (approximately 45/100 of 1% per
year) of net assets of the Fund in excess of $250 million. The fee is computed
at the close of business on the last business day of each month.
The management fee will be reduced as necessary to comply with the most
stringent limits on Fund expenses of any state where the Fund offers its shares.
Currently, the most restrictive limitation on a fund's allowable expenses for
each fiscal year, as a percentage of its average net assets, is 2.5% of the
first $30 million in assets, 2% of the next $70 million, and 1.5% of assets over
$100 million. Expense reductions have not been necessary based on state
requirements.
For the fiscal years ended December 31, 1993, 1994 and 1995, management fees
totaling $139,233, $155,985, and $198,598 were paid to Advisers.
Management Agreement. The management agreement is in effect until April 30,
1997. It may continue in effect for successive annual periods if its continuance
is specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not parties to the
management agreement or interested persons of any such party (other than as
members of the Board), cast in person at a meeting called for that purpose. The
management agreement may be terminated without penalty at any time by the Board
or by a vote of the holders of a majority of the Fund's outstanding voting
securities, or by Advisers on 30 days' written notice, and will automatically
terminate in the event of its assignment, as defined in the 1940 Act.
Shareholder Servicing Agent. Investor Services, a wholly-owned subsidiary of
Resources, is the Fund's shareholder servicing agent 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.
Custodians. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York, 10286, acts as custodian of the securities and other assets of
the Fund. Bank of America NT & SA, 555 California Street, 4th Floor, San
Francisco, California 94104, acts as custodian for cash received in connection
with the purchase of Fund shares. 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.
Auditors. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Fund's independent auditors. During the fiscal year ended
December 31, 1995, their auditing services consisted of rendering an opinion on
the financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended December 31, 1995.
How Does the Fund Buy
Securities For Its Portfolio?
The selection of brokers and dealers to execute transactions in the Fund's
portfolio is made by Advisers in accordance with criteria set forth in the
management agreement and any directions that the Board may give.
When placing a portfolio transaction, Advisers seeks to obtain prompt execution
of orders at the most favorable net price. When portfolio transactions are done
on a securities exchange, the amount of commission paid by the Fund is
negotiated between Advisers and the broker executing the transaction. 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 the transactions. These opinions are based on, among others, the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. Advisers will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of Advisers, 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 amount of commission is not the only factor Advisers considers in the
selection of a broker to execute a trade. If Advisers believes it is in the
Fund's best interest, Advisers may place portfolio transactions with brokers who
provide the types of services described below, even if it means the Fund will
pay a higher commission than if no weight were given to the broker's furnishing
of these services. This will be done only if, in the opinion of Advisers, 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 Advisers 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 services may also be useful to Advisers in advising other clients.
When Advisers believes several brokers are equally able to provide the best net
price and execution, it may decide to execute transactions through brokers who
provide quotations and other services to the Fund, in an amount of total
brokerage as may reasonably be required in light of these services.
Specifically, these services may include providing the quotations necessary to
determine the Fund's Net Asset Value, as well as research, statistical and other
data.
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, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, the sale of Fund
shares may also be considered a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
Because Distributors is a member of the National Association of Securities
Dealers, it may sometimes receive 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 will be reduced by the
amount of any fees received by Distributors in cash, less any costs and expenses
incurred in connection with the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisers are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the fiscal years ended December 31, 1993, 1994 and 1995, the Fund paid
brokerage commissions totaling $26,048, $26,798, and $52,955.
As of December 31, 1995, the Fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Quantity
Discounts" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates 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
advisory firms known locally as Securities Investment Consulting Enterprises. In
conformity with local business practices in Taiwan, shares may be offered with
the following schedule of sales charges:
Sales
Size of Purchase - U.S. dollars Charge
- -----------------------------------------------
Under $30,000......................... 3.0%
$30,000 but less than $50,000......... 2.5%
$50,000 but less than $100,000........ 2.0%
$100,000 but less than $200,000....... 1.5%
$200,000 but less than $400,000....... 1.0%
$400,000 or more...................... 0%
Other Payments to Securities Dealers. Distributors will pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of $1 million or more: 1% on sales of $1 million
to $2 million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on
sales over $3 million to $50 million, plus 0.25% on sales over $50 million to
$100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases by certain retirement plans pursuant to a sales charge waiver, as
discussed in the Prospectus: 1% on sales of $500,000 to $2 million, plus 0.80%
on sales over $2 million to $3 million, plus 0.50% on sales over $3 million to
$50 million, plus 0.25% on sales over $50 million to $100 million, plus 0.15% on
sales over $100 million. Distributors may make these payments in the form of
contingent advance payments, which may be recovered from the Securities Dealer
or set off against other payments due to the dealer if shares are sold within 12
months of the calendar month of purchase. Other conditions may apply. All terms
and conditions may be imposed by an agreement between Distributors, or one of
its affiliates, and the Securities Dealer.
These payment breakpoints are reset every 12 months for purposes of additional
purchases.
Letter of Intent. You may qualify for a reduced sales charge when you buy Fund
shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds, including Class II shares, acquired more than 90 days before the Letter
is filed, will be counted towards completion of the Letter but will not be
entitled to a retroactive downward adjustment in the sales charge. Any
redemptions you make during the 13-month period, except in the case of certain
retirement plans, will be subtracted from the amount of the purchases for
purposes of determining whether the terms of the Letter have been completed. If
the Letter is not completed within the 13-month period, there will be an upward
adjustment of the sales charge, depending on the amount actually purchased (less
redemptions) during the period. The upward adjustment does not apply to certain
retirement plans. If you execute a Letter prior to a change in the sales charge
structure of the Fund, you may complete the Letter at the lower of the new sales
charge structure or the sales charge structure in effect at the time the Letter
was filed.
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 your name
until you fulfill the Letter. This policy of reserving shares does not apply to
certain retirement plans. If total purchases, less redemptions, equal the amount
specified under the Letter, the reserved shares will be deposited to an account
in your name or delivered to you or as you direct. If total purchases, less
redemptions, exceed the amount specified under the Letter and is an amount that
would qualify for a further quantity discount, a retroactive price adjustment
will be made by Distributors and the Securities Dealer through whom purchases
were made pursuant to the Letter (to reflect such further quantity discount) on
purchases made within 90 days before and on those made after filing the Letter.
The resulting difference in Offering Price will be applied to the purchase of
additional shares at the Offering Price applicable to a single purchase or the
dollar amount of the total purchases. If the total purchases, less redemptions,
are less than the amount specified under the Letter, you 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 that would have applied to
the aggregate purchases if the total of the purchases had been made at a single
time. Upon remittance, the reserved shares held for your account will be
deposited to an account in your name or delivered to you or as you direct. If
within 20 days after written request the difference in sales charge is not paid,
the redemption of an appropriate number of reserved shares to realize the
difference will be made. In the event of a total redemption of the account prior
to fulfillment of the Letter, the additional sales charge due will be deducted
from the proceeds of the redemption, and the balance will be forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These 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 these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
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 the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell 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 occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
Systematic Withdrawal Plan. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the first business day of the month in
which a payment is scheduled.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
Through Your Securities Dealer. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
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 the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, 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 these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
Special Services. The Franklin Templeton Institutional Services Department
provides specialized services, including recordkeeping, for institutional
investors. The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee that the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the scheduled close of the
Exchange, generally 1:00 p.m. Pacific time, each day that the Exchange is open
for trading. As of the date of this SAI, the Fund is informed that the Exchange
observes the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of 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 are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that 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 Advisers.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange prior to the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled close of trading
on the Exchange, if that is earlier. The value is then converted into its U.S.
dollar equivalent at the foreign exchange rate in effect at noon, New York time,
on the day the value of the foreign security is determined. If no sale is
reported at that time, the mean between the current bid and ask prices is used.
Occasionally events that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and the
close of the exchange and will, therefore, not be reflected in the computation
of the Fund's Net Asset Value. If events materially affecting the values of
these foreign securities occur during this period, the securities will be valued
in accordance with procedures established by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the Exchange. The value of these securities used in
computing the Net Asset Value of the Fund's shares is determined as of such
times. Occasionally, events affecting the values of these securities may occur
between the times at which they are determined and the scheduled close of the
Exchange that will not be reflected in the computation of the Fund's Net Asset
Value. If events materially affecting the values of these securities occur
during this period, the securities will be valued at their fair value as
determined in good faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This income,
less the expenses incurred in the Fund's operations, is its net investment
income from which income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made twice each year. One distribution may be made in December to reflect any
net short-term and net long-term capital gains realized by the Fund as of
October 31 of that year. Any net short-term and net long-term capital gains
realized by the Fund during the remainder of the fiscal year may be distributed
following the end of the fiscal year. The Fund may make one distribution derived
from net short-term and net long-term capital gains in any year or adjust the
timing of its distributions for operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected to be treated as a regulated
investment company under Subchapter M of the Code. The Board reserves the right
not to maintain the qualification of the Fund as a regulated investment company
if it determines this course of action to be beneficial to shareholders. In that
case, the Fund will be subject to federal and possibly state corporate taxes on
its taxable income and gains, and distributions to shareholders will be taxable
to the extent of the Fund's available earnings and profits.
Subject to the limitations discussed below, all or a portion of the income
distributions paid by the Fund may be treated by corporate shareholders as
qualifying dividends for purposes of the dividends-received deduction under
federal income tax law. If the aggregate qualifying dividends received by the
Fund (generally, dividends from U.S. domestic corporations, the stock in which
is not debt-financed by the Fund and is held for at least a minimum holding
period) is less than 100% of its distributable income, then the amount of the
Fund's dividends paid to corporate shareholders which may be designated as
eligible for such deduction will not exceed the aggregate qualifying dividends
received by the Fund for the taxable year. The amount or percentage of income
qualifying for the corporate dividends-received deduction will be declared by
the Fund annually in a notice to you 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 to the extent interest paid or
accrued by a corporate shareholder is directly attributable to its investment in
Fund shares. The entire dividend, including the portion which is treated as a
deduction, is includable in the tax base on which the alternative minimum tax is
computed and may also result in a reduction in your tax basis in your Fund
shares, under certain circumstances, if the shares have been held for less than
two years. Corporate shareholders whose investment in the Fund is "debt
financed" for these tax purposes should consult with their tax advisors
concerning the availability of the dividends-received deduction.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve-month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. The Fund intends as a matter of policy
to declare such dividends, if any, in December and to pay these dividends in
December or January to avoid the imposition of this tax, but does not guarantee
that its distributions will be sufficient to avoid any or all federal excise
taxes.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to such shares.
All or a portion of the sales charge incurred in buying 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 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. You should
consult with your tax advisor concerning the tax rules applicable to the sale or
exchange of Fund shares.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.
The Fund's investment in options and futures contracts are subject to many
complex and special tax rules. For example, OTC options on debt securities and
equity options, including options on stock and on narrow-based stock indexes,
will be subject to tax under Section 1234 of the Code, generally producing a
long-term or short-term capital gain or loss upon exercise, lapse, or closing
out of the option or sale of the underlying stock or security. The Fund's
treatment of certain other options and futures entered into by the Fund is
generally governed by Section 1256 of the Code. These "Section 1256" positions
generally include listed options on debt securities, options on broad-based
stock indexes, options on securities indexes, options on futures contracts,
regulated futures contracts and certain foreign currency contracts and options
thereon.
Absent a tax election to the contrary, each Section 1256 position held by the
Fund will be marked-to-market (i.e., treated as if it were sold for fair market
value) on the last business day of the Fund's fiscal year, and all gain or loss
associated with fiscal year transactions and mark-to-market positions at fiscal
year end (except certain foreign currency gain or loss covered by Section 988 of
the Code) will generally be treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. The effect of Section 1256 mark-to-market
rules may be to accelerate income or to convert what otherwise would have been
long-term capital gains into short-term capital gains or short-term capital
losses into long-term capital losses within the Fund. The acceleration of income
on Section 1256 positions may require the Fund to accrue taxable income without
the corresponding receipt of cash. In order to generate cash to satisfy the
distribution requirements of the Code, the Fund may be required to dispose of
portfolio securities that it otherwise would have continued to hold or to use
cash flows from other sources such as the sale of Fund shares. In these ways,
any or all of these rules may affect both the amount, character and timing of
income distributed to you by the Fund.
When the Fund holds an option or contract which substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might occur
in some hedging transactions), this combination of positions could be treated as
a "straddle" for tax purposes, resulting in possible deferral of losses,
adjustments in the holding periods of Fund securities and conversion of
short-term capital losses into long-term capital losses. Certain tax elections
exist for mixed straddles i.e., straddles comprised of at least one Section 1256
position and at least one non-Section 1256 position which may reduce or
eliminate the operation of these straddle rules.
As discussed in the Prospectus, the Fund may invest in "synthetic convertible
securities," i.e., two or more financial instruments that will produce an
economic effect that is similar to holding a convertible security. Generally,
each instrument included in a synthetic position is treated as a separate
property for tax purposes. Thus, the conversion of a "synthetic" convertible
position may result in one or more taxable transactions with respect to the
separate properties, in contrast to the conversion of a true convertible
instrument, which may be tax-free. Gains or losses recognized may affect the
amount, timing and character of the Fund's distributions.
As a regulated investment company, the Fund is also subject to the requirement
that less than 30% of its annual gross income be derived from the sale or other
disposition of securities and certain other investments held for less than three
months ("short-short income"). This requirement may limit the Fund's ability to
engage in options, hedging transactions and futures contracts because these
transactions are often consummated in less than three months, may require the
sale of portfolio securities held less than three months and may, as in the case
of short sales of portfolio securities reduce the holding periods of certain
securities within the Fund, resulting in additional short-short income for the
Fund. The Fund will monitor its transactions in such options and contracts and
may make certain other tax elections in order to mitigate the effect of the
above rules and to prevent disqualification of the Fund as a regulated
investment company under Subchapter M of the Code.
Gains realized by the Fund from any transactions entered into after April 30,
1993 that are deemed to be "conversion transactions" under the Code and which
would otherwise produce capital gain may be recharacterized as ordinary income
to the extent that such gain does not exceed an amount defined by the Code as
the "applicable imputed income amount." A conversion transaction is any
transaction in which substantially all of the Fund's expected return is
attributable to the time value of the Fund's net investment in such transaction
and any one of the following criteria are met: 1) there is an acquisition of
property with a substantially contemporaneous agreement to sell the same or
substantially identical property in the future; 2) the transaction is an
applicable straddle; 3) the transaction was marketed or sold to the Fund on the
basis that it would have the economic characteristics of a loan but would be
taxed as capital gain; or 4) the transaction is specified in Treasury
regulations to be promulgated in the future. The applicable imputed income
amount, which represents the deemed return on the conversion transaction based
upon the time value of money, is computed using a yield equal to 120 percent of
the applicable federal rate, reduced by any prior recharacterizations under this
provision or Section 263(g) of the Code concerning capitalized carrying costs.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement in effect until April 30, 1997,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Fund. The underwriting agreement will continue in effect for
successive annual periods if its continuance is specifically approved at least
annually by a vote of the Board or by a vote of the holders of a majority of the
Fund's outstanding voting securities, and in either event by a majority vote of
the Board members who are not parties to the underwriting agreement or
interested persons of any such party (other than as members of the Board), cast
in person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated by
either party on 90 days' written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Until April 30, 1994, income dividends were reinvested at the Offering Price and
Distributors allowed 50% of the entire commission to the Securities Dealer of
record, if any, on an account. Starting with any income dividends paid after
April 30, 1994, this reinvestment is at Net Asset Value.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal years ended December 31, 1993, 1994 and 1995 were
$54,031, $93,593, and 137,840. After allowances to dealers, Distributors
retained $7,353, $6,627, and $15,494 in net underwriting discounts and
commissions for the respective years. Distributors may be entitled to
reimbursement under the Fund's Rule 12b-1 plan, as discussed below. Except as
noted, Distributors received no other compensation from the Fund for acting as
underwriter.
THE FUND'S RULE 12B-1 PLAN
The Fund has adopted a distribution plan or "Rule 12b-1 plan" pursuant to Rule
12b-1 of the 1940 Act. Under the plan, the Fund may pay up to a maximum of 0.25%
per year of its average daily net assets, payable quarterly, for expenses
incurred in the promotion and distribution of its shares.
In implementing the plan, the Board has determined that the annual fees payable
under the plan will be equal to the sum of: (i) the amount obtained by
multiplying 0.25% by the average daily net assets represented by shares of the
Fund that were acquired by investors on or after May 1, 1994, the effective date
of the plan ("New Assets"), and (ii) the amount obtained by multiplying 0.15% by
the average daily net assets represented by shares of the Fund that were
acquired before May 1, 1994 ("Old Assets"). These fees will be paid to the
current Securities Dealer of record on the account. In addition, until such time
as the maximum payment of 0.25% is reached on a yearly basis, up to an
additional 0.05% will be paid to Distributors under the plan. The payments 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. This means that all shareholders, regardless of when
they purchased their shares, will bear Rule 12b-1 expenses at the same rate. The
initial rate will be at least 0.20% (0.15% plus 0.05%) of the average daily net
assets and, as Fund shares are sold on or after May 1, 1994, will increase over
time. Thus, as the proportion of Fund shares purchased on or after May 1, 1994,
increases in relation to outstanding Fund shares, 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 calculation for fees
payable under the plan, the plan permits the Board to allow the Fund to pay a
full 0.25% on all assets at any time. The approval of the Board would be
required to change the calculation of the payments to be made under the plan.
In addition to the payments that Distributors or others are entitled to under
the plan, the plan also provides that to the extent the Fund, Advisers or
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be 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
later 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. These banking institutions, however, are permitted to receive fees under
the plan for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
The plan has been approved in accordance with the provisions of Rule 12b-1. The
plan is renewable annually by a vote of the Board, including a majority vote of
the Board members who are not interested persons of the Trust 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 Board members be done by the non-interested
members of the Board. The plan and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members 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 Advisers or the underwriting agreement with
Distributors, or by vote of a majority of the Fund's outstanding shares.
Distributors or any dealer or other firm may also terminate their respective
distribution or service agreement at any time upon written notice.
The plan and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the Fund's outstanding shares, and all material amendments to the plan or any
related agreements shall be approved by a vote of the non-interested members of
the Board, cast in person at a meeting called for the purpose of voting on any
such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plan and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plan should be continued.
For the fiscal year ended December 31, 1995, the total amount paid by the Fund
pursuant to the plan was $59,813, which was used for the following purposes:
Dollar
Amount
- -----------------------------------------------
Advertising......................... $ 5,127
Printing and mailing of prospectuses
other than to current shareholders. $ 4,994
Payments to underwriters............ $ 4,425
Payments to broker-dealers.......... $45,267
HOW DOES THE FUND
MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. 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 total return quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance follows. 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.
TOTAL RETURN
Average Annual Total Return. Average annual total return is determined by
finding the average annual rates of return over one-, five- and ten-year periods
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum front-end sales charge is
deducted from the initial $1,000 purchase, and income dividends and capital gain
distributions are reinvested at Net Asset Value. The quotation assumes the
account was completely redeemed at the end of each one-, five- and ten-year
period and the deduction of all applicable charges and fees. If a change is made
to the sales charge structure, historical performance information will be
restated to reflect the maximum front-end sales charge currently in effect.
The Fund's average annual total return for the one, five- and ten-year periods
ended December 31, 1995, was 16.28%, 14.07% and 10.07%.
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the one-,
five- or ten-year periods
Cumulative Total Return. The Fund may also quote its cumulative total return, in
addition to its average annual total return. These quotations are computed the
same way, except the cumulative total return will be based on the Fund's actual
Freturn for a specified period rather than on its average return over one-,
five- and ten-year periods. The Fund's cumulative total return for the one-,
five- and ten-year periods ended December 31, 1995, was 16.28%, 93.15% and
160.95%.
YIELD
Current Yield. Current yield shows the income per share earned by the Fund. It
is calculated 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 Fund's yield
for the 30-day period ended December 31, 1995, was 2.04%.
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 (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum Offering Price per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the SEC,
is not indicative of the amounts which were or will be paid to shareholders of
the Fund. Amounts paid to shareholders are reflected in the quoted current
distribution rate. The current distribution rate is usually computed by
annualizing the dividends paid per share during a certain period and dividing
that amount by the current maximum Offering Price. The current distribution rate
differs from the current yield computation because it may include distributions
to shareholders from sources other than dividends and interest, such as premium
income from option writing and short-term capital gains and is calculated over a
different period of time.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. 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 idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
For investors who are permitted to buy shares of the Fund without a sales
charge, sales literature about the Fund may quote a current distribution rate,
yield, cumulative total return, average annual total return and other measures
of performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Templeton Group of Funds. Resources is the parent company of the advisors and
underwriter of both the Franklin Group of Funds and Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain 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. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - an unmanaged
index 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 and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for equity funds.
h) Financial publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
m) Standard & Poor's 100 Stock Index - an unmanaged index based on the prices of
100 blue-chip stocks, including 92 industrials, one utility, two transportation
companies, and 5 financial institutions. The S&P 100 Stock Index is a smaller
more flexible index for options trading.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the Fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, as well as the value of its shares that are based upon
the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the 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 its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 48 years and
now services more than 2.5 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Together, the Franklin Templeton Group has over $145
billion in assets under management for more than 4.1 million U.S. based mutual
fund shareholder and other accounts. The Franklin Templeton Group of Funds
offers 115 U.S.-based mutual funds to the public. The Fund may identify itself
by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past eight years.
As of May 7, 1996, the principal shareholder of the Fund, beneficial or of
record, was as follows:
Share
Name and Address Amount Percentage
- -----------------------------------------------------
FTTC TTEE for Valueselect
CACI International Inc.
Attn: Pam Kaopua
PO Box 2438
Rancho Cordova,
CA 95741-2438 409,547.945 7.16%
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.
Employees of Resources or its subsidiaries who are access persons under the 1940
Act are permitted to engage in personal securities transactions subject to the
following general restrictions and procedures: (i) the trade must receive
advance clearance from a compliance officer and must be completed within 24
hours after clearance; (ii) copies of all brokerage confirmations must be sent
to a compliance officer and, within 10 days after the end of each calendar
quarter, a report of all securities transactions must be provided to the
compliance officer; and (iii) access persons involved in preparing and making
investment decisions must, in addition to (i) and (ii) above, file annual
reports of their securities holdings each January and inform the compliance
officer (or other designated personnel) if they own a security that is being
considered for a fund or other client transaction or if they are recommending a
security in which they have an ownership interest for purchase or sale by a fund
or other client.
In the event of disputes involving multiple claims of ownership or authority to
control your 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 IRS in response to a Notice of Levy.
Financial Statements
The audited financial statements contained in the Annual Report to Shareholders
of the Trust for the fiscal year ended December 31, 1995, including the
auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Directors of the Fund
CD - Certificate of deposit
Class I and Class II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans. Because the Fund's sales charge structure and Rule 12b-1 plan are similar
to those of Class I shares, shares of the Fund are considered Class I shares for
redemption, exchange and other purposes.
Code - Internal Revenue Code of 1986, as amended
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
Exchange - New York Stock Exchange
Franklin Funds - The mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust
Franklin Templeton Funds - The Franklin Funds and the Templeton Funds
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered mutual funds in the
Franklin Group of Funds(R) and the Templeton Group of Funds
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
Offering Price - The public offering price is based on the Net Asset Value per
share and includes the 4.50% sales charge.
Prospectus - The prospectus for the Fund dated May 1, 1996, as amended August 1,
1996, and as may be further amended from time to time
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution which, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
Templeton Funds - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
U.S. - United States
We/Our/Us - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or another
wholly-owned subsidiary of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to prinicipal or interest.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
