As filed with the Securities and Exchange Commission on February 23, 1998.
File Nos.
2-12647
811-730
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post Effective Amendment No. 59
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 20
FRANKLIN ASSET ALLOCATION FUND
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (650) 312-2000
HARMON E. BURNS, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] on May 1, 1998 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on(date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered:
Shares of Beneficial Interest:
Franklin Asset Allocation Fund
FRANKLIN ASSET ALLOCATION FUND
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN PROSPECTUS
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial "Financial Highlights"; "How
Information Does the Fund Measure
Performance?"
4. General Description "How Is the Trust Organized?";
"How Does the Fund Inves Its
Assets?"; "What Are the Risks of
Investing in the Fund?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion Contained in Registrant's Annual
of Fund Performance Report to Shareholders
6. Capital Stock and "How Is the Trust Organized?";
Other Securities "Services to Help You Manage e
Your Account"; "What Distributions Might I
Receive From the Fund?"; "How Taxation
Affects the Fund and Its Shareholders";
"What If I Have Questions About My
Account?"
7. Purchase of Securities "How Do I Buy Shares?"; "May I Exchange
Being Offered Shares for Shares of Another Fund?";
"Transaction Procedures and Special
Requirements"; "Services to Help You Manage
Your Account"; "Useful Terms and
Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares of
Another Fund?"; "How Do I Sell Shares?";
"Transaction Procedures and Special
Requirements"; "Services to Help You Manage
Your Account"; "Useful Terms and
Definitions"
9. Pending Legal Proceedings Not Applicable
FRANKLIN ASSET ALLOCATION FUND
Part B: Information Required in
STATEMENT OF ADDITIONAL INFORMATION
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information Not Applicable
and History
13. Investment Objectives "How Does the Fund Invest Its
and Policies Assets?"; "Investment
Restrictions"
14. Management of the Fund "Officers and Trustees";
"Investment Management and Other
Services"
15. Control Persons and "Officers and Trustees";
Principal Holders of "Investment Management and Other
Securities Services"; "Miscellaneous
Information"
16. Investment Advisory and "Investment Management and Other
Other Services Services"; "The Fund's
Underwriter"
17. Brokerage Allocation and "How Does the Fund Buy
Other Practices Securities for Its Portfolio?"
18. Capital Stock and Other s See Prospectus "How Is the Trust
Securitie Organized?"
19. Purchase, Redemption and How Do I Buy, Sell and Exchange Shares?";
Pricing of Securities "How Are Fund Shares Valued?"; "Financial
Statements"
20. Tax Status "Additional Information On Distributions
and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance "How Does the Fund Measure Performance?"
Data
23. Financial Statements Financial Statements
PROSPECTUS & APPLICATION
FRANKLIN ASSET ALLOCATION FUND
MAY 1, 1998
INVESTMENT STRATEGY: GROWTH & INCOME
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 has a Statement of Additional Information ("SAI"), dated May 1, 1998,
which may be amended from time to time. It 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 free copy or a larger
print version of this prospectus, call 1-800/DIAL BEN.
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 FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE 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, JURISDICTION OR COUNTRY 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.
FRANKLIN ASSET ALLOCATION FUND
May 1, 1998
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary..........................................
Financial Highlights.....................................
How Does the Fund Invest Its Assets?.....................
What Are the Risks of Investing in the Fund?.............
Who Manages the Fund?....................................
How Does the Fund Measure Performance?...................
How Taxation Affects the Fund and Its Shareholders.......
How Is the Trust Organized?..............................
ABOUT YOUR ACCOUNT
How Do I Buy Shares?.....................................
May I Exchange Shares for Shares of Another Fund?........
How Do I Sell Shares?....................................
What Distributions Might I Receive From the Fund?........
Transaction Procedures and Special Requirements..........
Services to Help You Manage Your Account.................
What If I Have Questions About My Account?...............
GLOSSARY
Useful Terms and Definitions.............................
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
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, 1997. The Fund's 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 0.24%**
Other Expenses 0.25%
-----
Total Fund Operating Expenses 1.12%
=====
C. EXAMPLE
Assume the Fund's annual return is 5%, operating expenses are as
described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest
in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------------------------------
$56*** $79 $104 $175
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 to purchases of $1 million
or more if you sell the shares within one year. A Contingent Deferred Sales
Charge may also apply to purchases by certain retirement plans that qualify to
buy shares without a front-end sales charge. 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, 1997. 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,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $8.32 $7.25 $6.11 $6.22 $5.40 $4.88 $4.21 $5.19 $5.12 $4.95
------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .15 .14 .18 .14 .13 .15 .14 .16 .15 .15
Net realized and unrealized gains (losses)1.10 1.11 1.14 (.11) .86 .53 .78 (.60) .60 .71
-----------------------------------------------------------------------------------
Total from investment operations 1.25 1.25 1.32 .03 .99 .68 .92 (.44) .75 .86
===================================================================================
Less distributions from:
Net investment income (.15) (.15) (.18) (.14) (.17) (.16) (.14) (.16) (.16) (.16)
Net realized gains (.37) (.03) - - - - (.12) (.39) (.52) (.52)
Total distributions (.52) (.18) (.18) (.14) (.17) (.16) (.25) (.55) (.68) (.69)
------------------------------------------------------------------------------------
Net asset value, end of year $9.05 $8.32 $7.25 $6.11 $6.22 $5.40 $4.88 $4.21 $5.19 $5.12
======================================================================================
Total return* 15.24% 17.41% 21.79% .46% 18.38% 14.02% 22.06% (8.81)% 14.72% 17.68%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) $89,630 $56,867 $39,319 $25,631 $22,877 $22,077 $28,189 $32,878 $44,516 $45,010
Ratios to average net assets:
Expenses 1.12% 1.21% 1.17% 1.27% 1.00% .92% .93% .85% .81% .83%
Net investment income 1.73% 1.86% 2.86% 2.29% 2.15% 2.81% 2.95% 3.27% 2.81% 3.00%
Portfolio turnover rate 54.57% 60.11% 62.01% 45.18% 20.49% 23.17% 62.25% 73.12% 163.55% 79.73%
Average commission rate paid** $.0638 $0.0622 $0.0640 - - - - - - -
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were invested at the Offering Price. **Relates to purchases
and sales of equity securities. Prior to December 31, 1995 disclosure of average
commission rate was not required.
HOW DOES THE FUND INVEST ITS ASSETS?
WHAT IS THE FUND'S GOAL?
The Fund's investment objective is total return. This goal is fundamental which
means that it may not be changed without shareholder approval. 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 diversify its investments among different asset classes in order to
attempt to reduce risk over time.
WHAT KINDS OF SECURITIES DOES THE FUND PURCHASE?
The Fund invests in equity securities, investment grade corporate and U.S.
government bonds, short-term money market instruments, securities of foreign
issuers and real estate securities. The Fund's investment 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 to investing 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. Historically, different economic sectors
and industries have performed better than others during different stages of the
business cycle. Quantitative, technical, and fundamental analysis are used to
identify economic sectors, industries within those sectors, and companies within
those industries that Advisers believes offer the best opportunities for
achieving the Fund's objective. Using this approach the Fund seeks total return
by investing in the following types of securities.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. They include common stock, preferred stock,
securities convertible into common stock (such as convertible preferred stocks),
warrants and rights. The Fund will invest a majority of its portfolio in equity
securities and a majority of its equity securities will be listed in the S&P 500
Index or the S&P MidCap 400 Index. These indexes represent such sectors as basic
materials (which includes gold), capital spending, consumer cyclical, consumer
staples, financials, utilities, energy, transportation, health care,
conglomerates and technology. The Fund may also invest in smaller capitalized
issues that exhibit growth prospects.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of money
to it, and generally provide for the payment of interest. These include bonds,
notes, and debentures; commercial paper; and bankers' acceptances. The Fund will
generally invest 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 that are investment grade debt securities, that is, rated in one of
the four highest ratings of either S&P or Moody's, or in unrated securities that
are determined by Advisers to be comparable in quality. The four highest rating
categories are AAA, AA, A or BBB by S&P or Aaa, Aa, A or Baa by Moody's. The
Appendix to the SAI contains a description of each of these rating categories.
FOREIGN SECURITIES. The Fund will ordinarily buy foreign securities that are
traded in the U.S., as well as sponsored or unsponsored American Depositary
Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and European Depositary
Receipts ("EDRs"). ADRs are certificates typically issued by U.S. banks that
give their holders the right to receive securities of a foreign issuer deposited
with that bank or a correspondent bank. GDRs and EDRs are typically issued by
foreign banks or trust companies and evidence ownership of underlying securities
issued by either a foreign or a U.S. corporation. The Fund may also buy the
securities of foreign issuers directly in foreign markets. Foreign issuers may
be located in either developed or developing countries. The Fund presently has
no intention of investing more than 25% of its net assets in foreign securities.
REAL ESTATE SECURITIES. The Fund may buy securities of companies operating in
the real estate industry. These investments will consist primarily of equity and
debt securities of real estate investment trusts. The Fund may also invest in
equity securities issued by home builders and developers.
SHORT-TERM MONEY MARKET INSTRUMENTS. The Fund may invest cash being held for
liquidity purposes in short-term debt instruments, including high grade
commercial paper, repurchase agreements and other money market equivalents. The
Fund may also invest in these securities when investments are not available at
prices Advisers believes are attractive. When Advisers anticipates a general
decline in the market prices of the stocks in which the Fund invests or believes
adverse economic or other conditions are likely to cause the Fund to suffer
losses, it may invest the Fund's assets in a defensive manner. Under these
circumstances, the Fund may invest an unlimited amount of its assets in
short-term debt instruments, including high grade commercial paper, repurchase
agreements and other money market equivalents.
OPTIONS, FUTURES AND OPTIONS ON FUTURES. The Fund may write covered put and call
options and buy put and call options on securities and indexes that trade on
securities exchanges and in the over-the-counter market. The Fund may buy and
sell futures on securities, securities indexes, financial indexes and currencies
and options on such futures. The Fund will engage in options and futures
transactions only as a hedge against a decline in the value of its securities or
rise in the value of securities that it intends to buy. In addition, the Fund
will not enter into any futures contracts or buy or sell options on futures if
the amount of its initial deposits and premiums on open contracts and options
would exceed 5% of the Fund's total assets. The Fund will not engage in any
stock options or stock index options if the option premiums paid on its open
option positions would exceed 5% of the value of the Fund's total assets.
CONVERTIBLE SECURITIES, ENHANCED CONVERTIBLE SECURITIES AND SYNTHETIC
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities, including
enhanced convertible securities and synthetic convertible securities.
A CONVERTIBLE SECURITY generally is a preferred stock or debt security (such as
a bond) that may be converted within a specified period of time into a certain
amount of common stock of the same or a different issuer. A convertible security
often provides investors with the opportunity for higher income than may be
available from a company's common stock and the opportunity, through its
conversion feature, for greater capital appreciation than non-convertible bonds
may offer. As with a non-convertible debt security, a convertible security tends
to rise in value when interest rates decline and fall in value when interest
rates rise. The value of a convertible security also tends to rise as the market
value of the underlying stock rises and fall 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.
Convertible securities are generally senior to common stock, but subordinate to
other types of fixed-income securities issued by a company. When a convertible
security is "converted," the company often issues new stock to the holder of the
convertible security, but, in certain cases, the company may pay out cash
instead. A convertible security is usually issued either by an operating company
or by an investment bank. 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 financial condition of the issuer of a convertible security
is important in determining the security's true value 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.
ENHANCED CONVERTIBLE SECURITIES include convertible preferred stocks and
convertible bonds that offer enhanced yield features. These securities include
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. Enhanced convertible debt
securities may be identified by names such as ELKS (Equity Linked Securities) or
similar names. Typically they share most of the key features of an enhanced
convertible preferred stock, but are ranked as senior or subordinated debt in
the issuer's capital structure. A SYNTHETIC CONVERTIBLE SECURITY is created by
purchasing 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. Please see the SAI for more
information about enhanced and synthetic convertible securities.
The Fund may have difficulty disposing of convertible securities because there
may be a thin trading market for a particular security at any given time. In a
thinly traded market, a few trades can greatly affect market prices. Reduced
liquidity will likely make the prices of these securities more volatile and
adversely affect the Fund's ability to dispose of particular securities at
acceptable prices. Although the Fund intends to acquire liquid securities, there
can be no assurances that this will be achieved.
WHAT ARE SOME OF THE FUND'S OTHER INVESTMENT STRATEGIES AND PRACTICES?
REPURCHASE AGREEMENTS. The Fund will generally have a portion of its assets in
cash or cash equivalents. To earn income on this portion of its assets, the Fund
may enter into repurchase agreements with certain banks and broker-dealers.
Under a repurchase agreement, the Fund agrees to buy a U.S. government security
from one of these issuers and then to sell the security back to the issuer after
a short period of time (generally, less than seven days) at a higher price. The
bank or broker-dealer must transfer to the Fund's custodian securities with an
initial value of at least 102% of the dollar amount invested by the Fund in each
repurchase agreement. These securities are marked to the market daily and their
value must at least equal the repurchase price of the securities subject to the
repurchase agreement. If the bank or broker-dealer does not repurchase the
securities as agreed, the Fund may experience a loss or delay in selling the
securities. The Fund may also incur transaction costs if it must sell these
securities. The Fund, however, intends to enter into repurchase agreements only
with banks or broker-dealers that are considered creditworthy by Advisers.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 10% of its
net assets 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.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional investment
restrictions that govern its activities. Some of these restrictions may only be
changed with shareholder approval and some may be changed by the Board alone.
For a list of these restrictions and more information about the Fund's
investment policies, including those described above, and their associated
risks, please see "How Does the Fund Invest Its Assets?" and "Investment
Restrictions" in the SAI.
The policies and restrictions discussed in this prospectus and in the SAI are
applied at the time the Fund makes an investment. The Fund is generally not
required to sell a security because of a change in circumstances.
TAX CONSIDERATIONS. The Fund's investment in options, futures, foreign
securities and other complex securities are subject to special tax rules that
may affect the amount, timing or character of the income earned by the Fund and
distributed to you. The Fund may also be subject to withholding taxes on
earnings from certain of its foreign securities. These special tax rules are
discussed in the SAI under "Additional Information on Distribution and Taxes."
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
GENERAL RISK. There is no assurance that the Fund's investment goal will be met.
The Fund will seek to spread investment risk by diversifying its investments but
the possibility of losses remains. Generally, if the securities owned by the
Fund increase in value, the value of the shares of the Fund which you own will
increase. Similarly, if the securities owned by the Fund decrease in value, the
value of your shares will also decline. In this way, you participate in any
change in the value of the securities owned by the Fund.
FOREIGN SECURITIES RISK. Investments in securities of foreign issuers involve
significant risks, including possible losses that are not typically associated
with investments in securities of U.S. issuers. These risks include political,
social or economic instability in the country of the issuer, the difficulty of
predicting international trade patterns, the possibility of the imposition of
exchange controls or limits on the removal of currency or other assets,
expropriation, nationalization of assets, and foreign withholding, income and
other taxation, as well as risks associated with foreign trading practices
(including higher trading commissions, custodial charges and other transactional
costs and delayed settlements). Changes in government administrations and
economic or monetary policies in the U.S. or abroad, adverse diplomatic
developments in dealings between nations, and changes in currency convertibility
or exchange rates could also result in investment losses for the Fund. Other
risks include the possibility that public information may not be as readily
available for a foreign company as it is for a U.S.-domiciled company, that
foreign companies are generally not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to U.S. companies,
and that there is usually less government regulation of securities exchanges,
brokers and listed companies.
Foreign securities may be subject to greater fluctuations in price than U.S.
securities. The markets on which foreign securities trade may also have less
volume and liquidity.
You should carefully consider the substantial risks involved in investing in
securities of foreign issuers - risks that are often substantially greater for
investments in developing markets. For example, the small size, inexperience and
limited volume of trading on securities markets in certain developing countries
may make the Fund's investments in developing countries illiquid and more
volatile than investments in more developed countries, and the Fund may be
required to establish special custody or other arrangements before making
certain investments in these countries.
SMALL COMPANIES RISK. The Fund may invest in companies that have relatively
small revenues, limited product lines, and a small share of the market for their
products or services. Small companies may lack depth of management, the ability
to internally generate funds necessary for growth or potential development, or
the ability to generate funds through external financing on favorable terms.
They may also attempt to develop or market new products or services for which
markets are not yet established and may never become established. Due to these
and other factors, small companies may suffer significant losses, as well as
realize substantial growth.
Historically, small capitalization stocks have been more volatile in price than
larger capitalization stocks. Among the reasons for the greater price volatility
of these securities are the less certain growth prospects of smaller firms, the
lower degree of liquidity in the markets for these stocks, and the greater
sensitivity of small companies to changing economic conditions. Besides
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stocks rise, or rise in price as large company stocks
decline. You should therefore expect that the shares of a fund that invests a
substantial portion of its net assets in small company stocks to be more
volatile than the shares of a fund that invests solely in larger capitalization
stocks.
OPTIONS AND FUTURES RISK. The Fund's investments in options, futures and options
on futures involve risks. The effectiveness of an options or futures strategy
depends on the extent to which price movements of the options or futures
correlate with price movements in the relevant portion of the Fund's portfolio.
If the prices of the Fund's portfolio securities do not correlate well with its
options or futures positions, the Fund could suffer losses on its portfolio
securities or its options and futures contracts or both. Options and futures may
fail as hedging techniques in cases where the price movements of the securities
underlying the options and futures do not follow the price movements of the
portfolio securities subject to the hedge. While hedging can reduce or eliminate
portfolio losses, it can also reduce or eliminate gains that might otherwise
have been realized on the securities being hedged. Options and futures
investments may increase the volatility of the Fund's returns and share price
regardless of whether the intent of the transaction was to reduce risk or
increase return.
Successful use of options and futures depends on Advisers' ability to predict
correctly movements in the direction of the markets, particular market segments,
interest rates and other economic factors. Advisers' judgment in these respects
may not be correct, resulting in losses to the Fund.
Adverse market movements could cause the Fund to lose up to its full investment
in a call or put option contract and/or to experience losses on an investment in
a futures (or related option) contract that are substantially greater than the
amount of the Fund's original investment. 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 open options or futures positions.
There may not always be a liquid secondary market for an option or futures
contract at a time when the Fund seeks to close out its position. If the Fund is
unable to close out its position, the Fund may incur losses or may be forced to
forego other investment opportunities. If prices move adversely, the Fund would
have to continue to make daily cash payments to maintain its required margin and
if the Fund had insufficient cash to do so, it might have to sell portfolio
securities at a disadvantageous time. In addition, the Fund might be required to
deliver the stocks underlying the option or futures 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.
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.
Please see "How Does the Fund Invest Its Assets?" in the SAI for a more complete
discussion of the Fund's investments in options, futures, and options on
futures, including the risks associated with this activity.
MARKET, INTEREST RATE, AND CURRENCY RISK. General market movements in any
country where the Fund has investments are likely to affect the value of the
securities which the Fund owns in that country and the Fund's share price may
also be affected. The Fund's investments may be denominated in foreign
currencies so that changes in foreign currency exchange rates may also affect
the value of what the Fund owns, and thus the price of its shares. To the extent
the Fund invests in debt securities, changes in interest rates in any country
where the Fund is invested will affect the value of the Fund's portfolio and,
consequently, its share price. Rising interest rates, which often occur during
times of inflation or a growing economy, are likely to cause the value of the
Fund's debt securities to decrease, having a negative effect on the value of the
Fund's shares. Of course, individual and worldwide stock markets, interest rates
and currency valuations, have both increased and decreased, sometimes very
dramatically, in the past. These changes are likely to occur again in the future
at unpredictable times.
CREDIT AND ISSUER RISK. The Fund's investments in debt securities, including
convertible debt securities, involve credit risk. This is the risk that the
issuer of a debt security will be unable to make principal and interest or other
payments in a timely manner and the security will go into default. The Fund
limits its investments in corporate debt to investment grade securities (or
unrated debt that is determined by Advisers to be of comparable quality).
Securities rated BBB by S&P or Baa by Moody's, although regarded as having
adequate capacity to pay principal and interest, have greater vulnerability to
adverse economic conditions than more highly rated investment grade debt and
some speculative characteristics.
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 manages the Fund's assets and makes its investment
decisions. Advisers also performs similar services for other funds. 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. Together, Advisers and its
affiliates manage over $221 billion in assets. Please see "Investment Management
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 TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is: Lisa A. Costa since 1985, and R. Martin Wiskemann since
1972.
Lisa Costa
Vice President 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 the Franklin Templeton Group since
1983. Ms. Costa is a Chartered Market Technician and a member of several
securities industry-related committees and associations.
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 the Franklin Templeton Group since
1972. He is a member of several securities industry-related associations.
MANAGEMENT FEES. During the fiscal year ended December 31, 1997, 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
1.12%.
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, as well as shares of other funds in the Franklin Templeton Group
of Funds, when selecting a broker or dealer. Please see "How Does the Fund Buy
Securities for Its Portfolio?" in the SAI for more information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. Please see
"Investment Management and Other Services" in the SAI for more information.
THE RULE 12B-1 PLAN
The Fund has a distribution plan or "Rule 12b-1 Plan" under which it may
reimburse Distributors or others for the expenses of activities that are
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; a prorated portion of Distributors' overhead expenses; and the
expenses of printing prospectuses and reports used for sales purposes, and
preparing and distributing sales literature and advertisements.
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. During the first year after certain
purchases made without a sales charge, Securities Dealers may not be eligible to
receive the Rule 12b-1 fees associated with the purchase. 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. Commonly used measures
of performance include 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 guarantee 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 TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
ON AUGUST 5, 1997, PRESIDENT CLINTON SIGNED INTO LAW THE TAXPAYER RELIEF ACT OF
1997 (THE "1997 ACT"). THIS NEW LAW MAKES SWEEPING CHANGES IN THE CODE. BECAUSE
MANY OF THESE CHANGES ARE COMPLEX THEY ARE DISCUSSED IN THE SAI.
TAXATION OF THE FUND'S INVESTMENTS.
The Fund invests your money in the stocks, bonds and other securities that
are described in the section "How Does the The Fund Invest Its Assets?"
Special tax rules may apply in determining the income and gains that the Fund
earns on its on its investments. These rules may, in turn, affect the amount of
distributions that the Fund pays to you. These special tax rules are discussed
in the SAI.
HOW DOES THE FUND
EARN INCOME AND GAINS?
When the Fund sells a security for a price that is higher than it paid, it has a
gain. When the Fund sells a security for a price that is lower than it paid, it
has a loss. If the Fund has held the security for more than one year, the gain
or loss will be a long-term capital gain or loss. If the Fund has held the
security for one year or less, the gain or loss will be a short-term capital
gain or loss. The Fund's gains and losses are netted together, and, if the Fund
has a net gain (the Fund's "gains"), that gain will generally be distributed to
you.
TAXATION OF THE FUND. As a regulated investment company, the Fund generally pays
no federal income tax on the income and gains that it distributes to you.
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains from
the Fund's investments in foreign stocks and bonds. These taxes will reduce the
amount of the Fund's distributions to you. The Fund may also invest in the
securities of foreign companies that are "passive foreign investment companies"
("PFICs"). These investments in PFICs may cause the Fund to pay income taxes and
interest charges. If possible, the Fund will adopt strategies to avoid PFIC
taxes and interest charges.
TAXATION OF SHAREHOLDERS.
<TABLE>
<CAPTION>
<S> <C>
--------------------------------------------------------------
DISTRIBUTIONS. Distributions from the Fund, whether you WHAT IS A DISTRIBUTION?
receive them in cash or in additional shares, are generally As a shareholder, you will receive your share of the Fund's
subject to income tax. The Fund will send you a statement in income and gains on its investments in stocks, bonds and
January of the current year that reflects the amount of other securities. The Fund's income and short term capital
ordinary dividends, capital gain distributions and non-taxable gains are paid to you as ordinary dividends. The Fund's
distributions you received from the Fund in the prior year. long-term capital gains are paid to you as capital gain
This statement will include distributions declared in December distributions. If the Fund pays you an amount in excess of
and paid to you in January of the current year, but which are its income and gains, this excess will generally be treated
taxable as if paid on December 31 of the prior year. The IRS as a non-taxable distribution. These amounts, taken
requires you to report these amounts on your income tax return together, are what we call the Fund's distributions to you.
for the prior year. The Fund's statement for the prior year
will tell you how much of your capital gain distribution
represents 28% rate gain property. The remainder of the
capital gain distribution represents 20% rate gain.
--------------------------------------------------------------
</TABLE>
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your qualified
retirement plan, such as a section 401(k) plan or IRA, are generally
tax-deferred; this means that you are not required to report Fund distributions
on your income tax return when paid to your plan, but, rather, when your plan
makes payments to you. Be aware, however, that special rules apply to payouts
from Roth and education IRAs.
DIVIDENDS-RECEIVED DEDUCTION. Corporate investors may be entitled to a
dividends-received deduction on a portion of the ordinary dividends they receive
from the Fund.
<TABLE>
<CAPTION>
<S> <C>
--------------------------------------------------------------
REDEMPTIONS AND EXCHANGES. If you redeem your shares or if WHAT IS A REDEMPTION?
you exchange your shares in the Fund for shares in another A redemption is a sale by you to the Fund of some or all of
Franklin Templeton Fund, you will generally have a gain or your shares in the Fund. The price per share you receive
loss that the IRS requires you to report on your income tax when you redeem Fund shares may be more or less than the
return. If you exchange Fund shares held for 90 days or less price at which you purchased those shares. An exchange of
and pay no sales charge, or a reduced sales charge, for the shares in the Fund for shares of another Franklin Templeton
new shares, all or a portion of the sales charge you paid on Fund is treated as a redemption of Fund shares and then a
the purchase of the shares you exchanged is not included in purchase of shares of the other fund. When you redeem or
their cost for purposes of computing gain or loss on the exchange your shares, you will generally have a gain or
exchange. If you hold your shares for six months or less, any loss, depending upon whether the basis in your shares is
loss you have will be treated as a long-term capital loss to more or less than your cost or other basis in the shares.
the extent of any capital gain distributions received by you Call Fund Information for a free shareholder Tax Information
from the Fund. All or a portion of any loss on the redemption Handbook if you need more information in calculating the
or exchange of your shares will be disallowed by the IRS if gain or loss on the redemption or exchange of your shares.
you purchase other shares in the Fund within 30 days
before or after your redemption or exchange.
--------------------------------------------------------------
</TABLE>
U.S. GOVERNMENT INTEREST. Many states grant tax-free status to dividends paid
from interest earned on direct obligations of the U.S. Government, subject to
certain restrictions. The Fund will provide you with information after the end
of each calendar year on the amount of such dividends that may qualify for
exemption from reporting on your individual income tax returns.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income
tax withholding. Your home country may also tax ordinary dividends, capital gain
distributions and gains arising from redemptions or exchanges of your Fund
shares. Fund shares held by the estate of a non-U.S. investor may be subject to
U.S. estate tax. You may wish to contact your tax advisor to determine the U.S.
and non-U.S. tax consequences of your investment in the Fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive
from the Fund, and gains arising from redemptions or exchanges of your Fund
shares will generally be subject to state and local income tax. The holding of
Fund shares may also be subject to state and local intangibles taxes. You may
wish to contact your tax advisor to determine the state and local tax
consequences of your investment in the Fund.
<TABLE>
<CAPTION>
<S> <C>
--------------------------------------------------------------
BACKUP WITHHOLDING. When you open an account, IRS regulations WHAT IS A BACKUP WITHHOLDING?
require that you provide your taxpayer identification number Backup withholding occurs when the Fund is required to
("TIN"), certify that it is correct, and certify that you are withhold and pay over to the IRS 31% of your distributions
not subject to backup withholding under IRS rules. If you and redemption proceeds. You can avoid backup withholding
fail to provide a correct TIN or the proper tax by providing the Fund with your TIN, and by completing the
certifications, the Fund is required to withhold 31% of all tax certifications on your shareholder application that you
the distributions (including ordinary dividends and capital were asked to sign when you opened your account. However,
gain distributions), and redemption proceeds paid to you. The if the IRS instructs the Fund to begin backup withholding,
Fund is also required to begin backup withholding on your it is required to do so even if you provided the Fund with
account if the IRS instructs the Fund to do so. The Fund your TIN and these tax certifications, and backup
reserves the right not to open your account, or, withholding will remain in place until the Fund is
alternatively, to redeem your shares at the current Net Asset instructed by the IRS that it is no longer required.
Value, less any taxes withheld, if you fail to provide a
correct TIN, fail to provide the proper tax certifications, or
the IRS instructs the Fund to begin backup withholding on your
account.
--------------------------------------------------------------
</TABLE>
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND. A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS IS CONTAINED IN THE SECTION
ENTITLED "ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI. THE TAX
TREATMENT TO YOU OF DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS, FOREIGN TAXES PAID
AND INCOME TAXES WITHHELD IS ALSO DISCUSSED IN A FREE FRANKLIN TEMPLETON TAX
INFORMATION HANDBOOK, WHICH YOU MAY REQUEST BY CONTACTING FUND INFORMATION.
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 Trust 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 Trust was previously known as the Franklin
Premier Return Fund. The Trust is registered with the SEC. The Fund is currently
the only series of the Trust. Shares of any 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. Additional series and classes of shares may be offered in the future.
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. The Trust may
hold special meetings, however, for matters requiring shareholder approval. A
meeting may also be called by the Board in its discretion or by shareholders
holding at least 10% of the outstanding shares. In certain circumstances, we are
required to help you communicate with other shareholders about the removal of a
Board member.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, please follow the steps below. This will help avoid any
delays in processing your request.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The Fund's minimum investments
are:
o To open your account: $100*
o To add to your account: $25*
*We may waive these minimums for retirement plans. We also reserve the
right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to
send an additional application to add privileges later. It is important
that we receive a signed application since we will not be able to
process any redemptions from your account until we receive your signed
application.
4. Make your investment using the table below.
- -------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- -------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the Fund
with your check made payable to the
Fund.
For additional investments:
Send a check made payable to the
Fund. Please include your account
number on the check.
- -------------------------------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that number
is busy, call 1-650/312-2000 collect, to
receive a wire control number and wire
instructions. You need a new wire control
number every time you wire money into your
account. If you do not have a currently
effective wire control number, we will return
the money to the bank, and we will not
credit the purchase to your account.
2. For initial investments you must also return
your signed shareholder application to the
Fund.
IMPORTANT DEADLINES: If we receive your call before 1:00
p.m. Pacific time and the bank receives the wired funds and
reports the receipt of wired funds to the Fund by 3:00 p.m.
Pacific time, we will credit the purchase to your account
that day. If we receive your call after 1:00 p.m. or the
bank receives the wire after 3:00 p.m., we will credit the
purchase to your account the following business day.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
- 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 TO
AS A PERCENTAGE OF 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 existing shares in the 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 Franklin Templeton Fund sales and other 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.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions. 403(b) plans that only allow salary deferral
contributions and that purchased shares of the Fund at a reduced sales charge
under the group purchase privilege before February 1, 1998, however, may
continue to do so.
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies to
you or your purchase of Fund shares, you may buy shares of the Fund without a
front-end sales charge or a Contingent Deferred Sales Charge.
Certain distributions, payments or redemption proceeds that you receive may be
used to buy shares of the Fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the SAME CLASS
of shares. Certain exceptions apply, however, to Class II shareholders
of another Franklin Templeton Fund who chose to reinvest their
distributions in the Fund before November 17, 1997, and to Advisor
Class or Class Z shareholders of a Franklin Templeton Fund who may
reinvest their distributions in the Fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton
Fund if you originally paid a sales charge on the shares and you
reinvest the money in the SAME CLASS of shares. This waiver does not
apply to exchanges.
If you paid a Contingent Deferred Sales Charge when you redeemed your
shares from a Franklin Templeton Fund, a Contingent Deferred Sales
Charge will apply to your purchase of Fund shares and a new Contingency
Period will begin. We will, however, credit your Fund account with
additional shares based on the Contingent Deferred Sales Charge you
paid and the amount of redemption proceeds that you reinvest.
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.
3. Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by
Franklin Properties, Inc.
4. 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, the Templeton Variable Annuity
Fund, or the Templeton Variable Products Series Fund. You should
contact your tax advisor for information on any tax consequences that
may apply.
5. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds.
Various individuals and institutions also may buy shares of the Fund without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. 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.
2. 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.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
4. Registered Securities Dealers and their affiliates, for their investment
accounts only
5. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
6. 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
7. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
8. Accounts managed by the Franklin Templeton Group
9. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
10. Group annuity separate accounts offered to retirement plans
11. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with at
least 100 employees, or (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 may buy shares without a front-end sales charge. Retirement plans
that are not Qualified Retirement Plans, SIMPLEs or SEPs must also meet the
requirements described under "Group Purchases" above to be able to buy shares
without a front-end sales charge. We may enter into a special arrangement with a
Securities Dealer, based on criteria established by the Fund, to add together
certain small Qualified Retirement Plan accounts for the purpose of meeting
these requirements.
For retirement plan accounts opened on or after May 1, 1997, a Contingent
Deferred Sales Charge may apply if the retirement plan is transferred out of the
Franklin Templeton Funds or terminated within 365 days of the retirement plan
account's initial purchase in the Franklin Templeton Funds. Please see "How Do I
Sell Shares? - Contingent Deferred Sales Charge" for details.
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, call Retirement Plan Services.
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 described below may be made to Securities Dealers who initiate and
are responsible for certain purchases made without a sales charge. The payments
are subject to the sole discretion of Distributors, and are paid by Distributors
or one of its affiliates and not by the Fund or its shareholders.
1. Purchases of $1 million or more - up to 1% of the amount invested.
2. Purchases made without a front-end sales charge by certain retirement
plans described under "Sales Charge Reductions and Waivers - Retirement
Plans" above - up to 1% of the amount invested.
3. Purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of
clients participating in comprehensive fee programs - up to 0.25% of
the amount invested.
4. Purchases by Chilean retirement plans - up to 1% of the amount invested.
A Securities Dealer may receive only one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1 or 4 above or a payment of up to 1% for investments
described in paragraph 2 will be eligible to receive the Rule 12b-1 fee
associated with the purchase starting in the thirteenth calendar month after the
purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
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, its investment objective
and policies, 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 signed written instructions
2. Include any outstanding share certificates
for the shares you want to exchange
- ------------------------------- -----------------------------------------------
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, we will
first exchange any shares in your account that are not subject to the charge. If
there are not enough of these to meet your exchange request, we will exchange
shares subject to the charge 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, except as noted below.
o The accounts must be identically registered. You may, however, 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. 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 Retirement Plan Services for information on exchanges
within these plans.
The fund you are exchanging into must be eligible for sale in your state.
We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the Fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the Fund more than twice in a calendar
quarter, or (iii) exchanged 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 have exchanged 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, operations 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.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because the
Fund does not currently offer an Advisor Class, you may exchange Advisor Class
shares of any Franklin Templeton Fund for shares of the Fund at Net Asset Value.
If you do so and you later decide you would like to exchange into a fund that
offers an Advisor Class, you may exchange your Fund shares for Advisor Class
shares of that fund. Certain shareholders of Class Z shares of Franklin Mutual
Series Fund Inc. may also exchange their Class Z shares for shares of the Fund
at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
- ------------------------- ----------------------------------------------------
METHOD STEPS TO FOLLOW
- ------------------------- ----------------------------------------------------
BY MAIL 1. Send us signed written instructions. If you would
like your redemption proceeds wired to a bank account,
your instructions should include:
o The name, address and telephone number of the bank
where you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit
union, the name of the corresponding bank and the
account number
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 other requirements.
- ------------------------- ----------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired
to a bank account, other than an escrow
account, you must first sign up for the
wire feature. To sign up, send us written
instructions, with a signature guarantee.
To avoid any delay in processing, the
instructions should include the items
listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional
accounts may exceed $50,000 by 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 15 days
- If you do not want the ability to redeem
by phone to apply to your account, please
let us know.
- -------------------------------------- ----------------------------------------
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 would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently 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
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
If you did not pay a front-end sales charge because you invested $1 million or
more or agreed to invest $1 million or more under a Letter of Intent, a
Contingent Deferred Sales Charge may apply if you sell all or a part of your
investment within the Contingency Period. Once you have invested $1 million or
more, any additional investments you make without a sales charge may also be
subject to a Contingent Deferred Sales Charge if they are sold 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.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy shares without a front-end sales charge may also be subject to a
Contingent Deferred Sales Charge if the retirement plan is transferred out of
the Franklin Templeton Funds or terminated within 365 days of the account's
initial purchase in the Franklin Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will 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 Account fees
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997,
or (ii) the Securities Dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the Securities Dealer of
record has entered into a supplemental agreement with Distributors
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 on or after
February 1, 1995, at a rate of up to 1% a month of an account's Net Asset
Value. For example, if you maintain an annual balance of $1 million, you
can redeem up to $120,000 annually through a systematic withdrawal plan
free of charge.
o Distributions from IRAs 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 Redemptions by Trust Company employee benefit plans or employee benefit plans
serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income quarterly to
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 and you will then receive a portion of the price you paid back in
the form of a taxable 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. You
may change your distribution option at any time by notifying us by mail or
phone. Please allow at least seven days before the record date for us to process
the new option. For Trust Company retirement plans, special forms are required
to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value per
share, plus any applicable sales charges. When you sell shares, you receive the
Net Asset Value per share.
The Net Asset Value we use when you buy or sell shares is the one 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.
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the close of the NYSE, normally 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.
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 are 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.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of transactions
or account changes. These include transactions or account changes that you could
also make by phone, such as certain redemptions of $50,000 or less, exchanges
between identically registered accounts, and changes to the address of record.
For most other types of transactions or changes, written instructions must be
signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed by
all registered owners on the account.
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. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. 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 and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone. Please
refer to the sections of this prospectus that discuss the transaction you would
like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. 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 us written instructions,
as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we are
not reasonably satisfied that the instructions are genuine. If this occurs, we
will not be liable for any loss. We also will not be liable for any loss if we
follow instructions by phone that we reasonably believe are genuine or if you
are unable to execute a transaction by phone.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to 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 Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you 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, we cannot accept instructions to change owners on the account unless ALL
owners agree in writing, even if the law in your state says otherwise. 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. You should register your account as a trust only if you have a valid
written trust document. This avoids 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 cannot 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.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have told us that
you do not want telephone privileges to apply to your account.
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. Once your plan
is established, any distributions paid by the Fund will be automatically
reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, 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(R) 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 (within the same class) between identically registered
Franklin Templeton Class I and Class II accounts; and
o request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the Fund's code number to use TeleFACTS(R). The Fund's code number
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.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more 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 Plan Services 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
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
multiple classes of shares. The different 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 the Contingency Period.
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.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRA - Individual retirement account or annuity qualified under section 408 of
the Code
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - 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 or whose transactions include frequent or large
exchanges.
MOODY'S - Moody's Investors Service, Inc.
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
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the front-end sales charge. The maximum front-end sales
charge is 4.5%.
QUALIFIED RETIREMENT PLANS - 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.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
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
SIMPLE (Savings Incentive Match Plan for Employees) - An employer sponsored
salary deferral plan established under section 408(p) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
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 other wholly owned
subsidiaries of Resources.
FRANKLIN ASSET ALLOCATION FUND
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
How Does the Fund Invest Its Assets?.........................
Investment Restrictions......................................
Officers and Trustees........................................
Investment Management
and Other Services..........................................
How Does the Fund Buy
Securities for Its Portfolio?...............................
How Do I Buy, Sell and Exchange Shares?......................
How Are Fund Shares Valued?..................................
Additional Information on
Distributions and Taxes.....................................
The Fund's Underwriter.......................................
How Does the Fund Measure Performance?.......................
Miscellaneous Information....................................
Financial Statements.........................................
Useful Terms and Definitions.................................
Appendix ....................................................
Description of Ratings......................................
- -----------------------------------------------------------------------------
When reading this SAI, you will see certain terms beginning with 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 invests in
equity securities, 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, 1998, as may be 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.
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.
- --------------------------------------------------------------------------------
HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How does the Fund Invest its Assets?"
EQUITY SECURITIES. The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner of
an equity security may participate in a company's success through the receipt of
dividends which are distributions of earnings by the company to its owners.
Equity security owners may also participate in a company's success or lack of
success through increases or decreases in the value of the company's shares as
traded in the public trading market for such shares. Equity securities generally
take the form of common stock or preferred stock. Preferred stockholders
typically receive greater dividends but may realize less capital appreciation
than common stockholders who may have greater voting rights as well.
Distributions from preferred stock are dividends, rather than interest payments,
and are usually treated as such for corporate tax purposes. Equity securities
may also include convertible securities, warrants or rights. Convertible
securities typically are debt securities or preferred stocks which are
convertible into common stock after certain time periods or under certain
circumstances. Warrants or rights give the holder the right to purchase a common
stock within a given time for a specified price.
DEBT SECURITIES. A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the principal
amount of the loan at specified date in the future. A company typically meets
its payment obligations associated with its outstanding debt securities before
it declares and pays any dividends to holders of its equity securities. Bonds,
notes, debentures and commercial paper differ in the length of the issuer's
payment schedule, with bonds carrying the longest repayment schedule and
commercial paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of these
securities generally declines. These changes in market value will be reflected
in the Fund's Net Asset Value.
FOREIGN SECURITIES. As described in the Prospectus, the Fund will ordinarily buy
foreign securities that are traded in the U.S. or depositary receipts. The Fund
may also purchase securities of foreign issuers directly in foreign markets, 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 laws
of some foreign countries may limit the ability of the Fund to invest in
securities of certain issuers located in those countries.
DEPOSITARY RECEIPTS. Many securities of foreign issuers are represented by
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
and Global Depositary Receipts ("GDRs") (collectively "Depositary Receipts").
ADRs evidence ownership of, and represent the right to receive, securities of
foreign issuers deposited in a domestic bank or trust company or a foreign
correspondent bank. EDRs and GDRs are typically issued by foreign banks or trust
companies, although they also may be issued by U.S. banks or trust companies,
and evidence ownership of underlying securities issued by either a foreign or a
U.S. corporation. Generally, Depositary Receipts in registered form are designed
for use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the U.S.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. While ADRs do not eliminate all the risk
associated with foreign investments, by investing in ADRs rather than directly
in the stock of foreign issuers, the Fund will avoid currency risks during the
settlement period for either purchases or sales. In general, there is a large,
liquid market in the U.S. for ADRs quoted on a national securities exchange or
on NASDAQ. The information available for ADRs is subject to the accounting,
auditing and financial reporting standards of the U.S. market or exchange on
which they are traded, which standards are more uniform and more exacting than
those to which many foreign issuers may be subject. EDRs and GDRs may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted.
Depositary Receipts may be issued under sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of Depositary Receipts. In unsponsored programs, the issuer
may not be directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs and there may not be a correlation
between this information and the market value of the Depositary Receipts.
CONVERTIBLE SECURITIES. As described in the Prospectus, the Fund may invest in
convertible debt securities and convertible preferred securities. The Fund uses
the same criteria to rate a convertible debt security that it uses to rate a
non-convertible debt security. A convertible preferred stock is treated like a
preferred stock for the Fund's financial reporting, credit rating, and
investment limitation purposes. Preferred stocks generally pay dividends at a
specified rate and have a preference over common stock in the payment of
dividends. An issuer's failure to make a preferred dividend payment, however, is
generally not an event of default entitling the preferred shareholder to take
action. Preferred stocks are subordinated to all debt obligations of the issuer
in the event of bankruptcy or insolvency. A convertible 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.
The Fund may invest in convertible securities, including enhanced convertible
securities and synthetic convertible securities. Preferred Equity Redemption
Cumulative Stocks (PERCS) provide an investor, such as the Fund, with the
opportunity to earn higher dividend income than is available on a company's
common stock. PERCS are preferred stocks that generally feature a mandatory
conversion date, as well as a capital appreciation limit which usually is
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, after three years PERCS convert into one share of the
issuer's common stock if the issuer's common stock is trading at a price below
that set by the capital appreciation limit, and into less than one full share if
the issuer's common stock is trading at a price above that set by the capital
appreciation limit. The amount of that fractional share of common stock is
determined by dividing the price set by the capital appreciation limit 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. If called early, however,
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.
The Fund may also invest in other enhanced convertible securities. These include
but are not limited to ACES (Automatically Convertible Equity Securities), PEPS
(Participating Equity Preferred Stock), 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 are issued by the company whose common
stock will be received in the event of conversion. Unlike PERCS, these
securities do not have a capital appreciation limit. These securities offer the
investor the opportunity to earn high current income with some prospect of
future capital appreciation. They typically are issued with three to four-year
maturities and 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 rate or may hold them until maturity when the
shares will automatically convert to either cash or a specified number of shares
of common stock. The Fund may also invest in enhanced convertible debt
obligations issued either by the operating company whose common stock is to be
acquired upon conversion or 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 are ranked as
senior or subordinated debt in the issuer's capital structure.
The Fund may also invest in synthetic convertible securities. A synthetic
convertible security is created by purchasing 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, for example, by investing in a non-convertible bond or
preferred stock and in warrants or stock options that give the holder the right
to buy the underlying security. Although Advisers typically expects to create
synthetic convertibles by combining components representing one issuer, the
character of a synthetic convertible security 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.
The value of a synthetic convertible is the sum of the values of its
fixed-income component and its convertible component. Thus, the value of a
synthetic convertible and a "true" convertible security may respond differently
to market fluctuations. This effect may be especially pronounced where the
components of the synthetic convertible are not from the same issuer. The holder
of a synthetic convertible also faces the risk that the price of the stock,
market index or other security underlying the convertible component may decline
in value and that the fixed-income component may also decline in value.
FUTURE DEVELOPMENTS. The Fund may invest in other convertible securities,
enhanced convertible securities or synthetic convertible securities that are not
presently contemplated for use by the Fund or that are not currently available
but that may be developed, so long as the opportunities are consistent with the
Fund's investment objective and policies.
OPTIONS, FUTURES AND OPTIONS ON FUTURES
CALL AND PUT OPTIONS. The Fund may write covered put and call options and buy
put and call options on securities and indexes that trade on securities
exchanges and in the over-the-counter market. Additionally, the Fund may "close
out" options it has entered into.
A call option gives the option holder the right to buy the underlying security
from the option writer at the option exercise price at any time prior to the
expiration of the option. A put option gives the option holder the right to sell
the underlying security to the option writer at the option exercise price at any
time prior to the expiration of the option. 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.
WRITING COVERED CALL AND PUT OPTIONS ON SECURITIES. The writer of covered calls
gives up the potential for capital appreciation above the exercise price of the
option should the underlying stock rise in value. If the value of the underlying
stock rises above the exercise price of the call option, the security may be
"called away" and the Fund required to sell shares of the stock at the exercise
price. The Fund will realize a gain or loss from the sale of the underlying
security depending on whether the exercise price is greater or less than the
purchase price of the stock. Any gain will be increased by the amount of the
premium received from the sale of the call; any loss will be decreased by the
amount of the premium received. If a covered call option expires unexercised,
the Fund will realize a gain in the amount of the premium received. If, however,
the stock price decreases, the hedging benefit of the covered call option is
limited to the amount of the premium received.
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 in
exercise prices 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 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, because the option writer may be assigned an exercise notice at any time
prior to the option's expiration. Whether or not an option expires unexercised,
the writer retains the amount of the premium received from the sale of the
option. This amount, of course, may not, in the case of a covered call option,
be sufficient to offset a decline in the market value of the underlying security
during the option period. If a call option is exercised, the writer realizes a
profit or loss from the sale of the underlying security. If a put option is
exercised, the writer must buy the underlying security at the exercise price,
which will usually exceed the 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, and, 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
proceeds from the sale of any securities subject to the option or deposited as
collateral 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 cost of the
transaction is less than the premium received from writing the option. The Fund
will realize a loss from a closing transaction if the cost of the transaction is
more than the premium received from writing 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 closing
transaction of a written call option is likely to be offset in whole or in part
by appreciation of the underlying security owned by the Fund.
The writer of covered puts retains the risk of loss should the underlying
security decline in value. If the value of the underlying stock declines below
the exercise price of the put option, the security may be "put to" the Fund and
the Fund required to buy the stock at the exercise price. The Fund 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, the loss
will be offset at least in part by the premium received from the sale of the
put. If a put option written by the Fund expires unexercised, the Fund will
realize a gain in the amount of the premium received. 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 equal the premium
received.
BUYING CALL AND PUT OPTIONS ON SECURITIES. 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 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 (including 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] [of] 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. Profit or loss from such a sale
will depend on whether the amount received is more or less than the premium paid
for the put option (including transaction costs). Any gain may be more than
wholly offset by the decline in value of the underlying security owned by the
Fund.
OVER-THE-COUNTER ("OTC") OPTIONS. The Fund may 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.
OTC options differ from exchange traded options in certain material respects.
OTC options transactions 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 notional amounts, 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. 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. The
Fund may suffer a loss if it is not able to exercise or sell its position on a
timely basis. 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 with which the Fund originally wrote the option. If
the Fund cannot effect a closing transaction for a covered call option position,
it cannot sell the underlying security until the option expires or is exercised.
Therefore, the Fund may not be able to sell the underlying security and reinvest
the proceeds from the sale in other investments when it might be advantageous to
do so. Likewise, the Fund may be unable to sell the securities pledged to secure
a put obligation and reinvest the proceeds from the sale in other investments if
it cannot effect a closing transaction.
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.
OPTIONS ON STOCK INDEXES. Call and put options on stock indexes 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 (or less, in the case of puts) than 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 the price
movements of the underlying index rather than the price movements of an
individual stock.
In order to hedge against the risk of market or industry-wide stock price
fluctuations, the Fund may buy call options on stock indexes. 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 AND OPTIONS ON FUTURES. The Fund may buy and sell futures on securities,
securities indexes, financial indexes and currencies and options on such
futures. Additionally, the Fund may "close out" futures and options it has
entered into. Although the Fund believes that the use of futures and related
options will benefit the Fund, if Advisers' judgment about the general direction
of stock prices, interest rates or other economic factors 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.
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
selling (or buying, 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 (or
make) 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 market or 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 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 instances involving the
purchase of futures contracts or related call options, cash, cash equivalents,
or liquid 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.
When 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.
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.
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 multiplied by 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 securities 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 portfolio and the sensitivity of its 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 BOND INDEX FUTURES. 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 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.
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 its total asset value. No new investments
will be made while any such borrowings are in excess of 5% of total assets.
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 the value or liquidity 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
Fund under the 1940 Act are indicated by an asterisk (*).
Frank H. Abbott, III (77)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); and director
or trustee, as the case may be, of 28 of the investment companies in the
Franklin Templeton Group of Funds.
S. Joseph Fortunato (65)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee, as
the case may be, of 54 of the investment companies in the Franklin Templeton
Group of Funds; and formerly, Director, General Host Corporation (nursery and
craft centers).
*Edward B. Jamieson (49)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
Senior Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer and trustee of five of the investment companies in the Franklin
Templeton Group of Funds.
*Charles B. Johnson (65)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc. and Franklin Templeton Services, Inc.; officer and/or director or trustee,
as the case may be, of most of the other subsidiaries of Franklin Resources,
Inc. and of 53 of the investment companies in the Franklin Templeton Group of
Funds; and formerly, Director, General Host Corporation (nursery and craft
centers).
Frank W.T. LaHaye (69)
20833 Stevens Creek Blvd., Suite 102
Cupertino, CA 95014
Trustee
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Corporation (software
firm); Director, Fischer Imaging Corporation (medical imaging systems) and
Digital Transmission Systems, Inc. (wireless communications); and director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds.
Hayato Tanaka (80)
277 Haihai Street
Hilo, HI 96720
Trustee
Retired, former owner of The Jewel Box Orchids; and trustee of two of the
investment companies in the Franklin Templeton Group of Funds.
*R. Martin Wiskemann (71)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Senior Vice President, Portfolio Manager and Director, Franklin Advisers, Inc.;
Senior Vice President, Franklin Management, Inc.; Vice President and Director,
ILA Financial Services, Inc.; and officer and/or director or trustee, as the
case may be, of 16 of the investment companies in the Franklin Templeton Group
of Funds.
Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc. and
Franklin Templeton Services, Inc.; Executive Vice President, Franklin Advisers,
Inc.; Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 56 of the investment companies in the Franklin
Templeton Group of Funds.
Martin L. Flanagan (37)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive Vice
President, Chief Operating Officer and Director, Templeton Investment Counsel,
Inc.; Senior Vice President and Treasurer, Franklin Advisers, Inc.; Treasurer,
Franklin Advisory Services, Inc.; Treasurer and Chief Financial Officer,
Franklin Investment Advisory Services, Inc.; President, Franklin Templeton
Services, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; and officer and/or director or trustee, as the case may be, of 56 of the
investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief Operating
Officer, Franklin Investment Advisory Services, Inc.; and officer of 56 of the
investment companies in the Franklin Templeton Group of Funds.
Rupert H. Johnson, Jr. (57)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Senior Vice President and Director, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case may
be, of most of the other subsidiaries of Franklin Resources, Inc. and of 56 of
the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 33 of
the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 29 of the investment companies in the
Franklin Templeton 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, the nonaffiliated Board members also
serve as directors or trustees 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.
NUMBER OF BOARDS IN
TOTAL FEES RECEIVED THE FRANKLIN
TOTAL FEES FROM THE FRANKLIN TEMPLETON GROUP OF
RECEIVED FROM TEMPLETON GROUP OF FUNDS ON WHICH EACH
NAME THE TRUST*** FUNDS**** SERVES*****
Frank Abbott, III........... $600 $165,937 28
S. Joseph Fortunato ........ 600 361,562 54
David W. Garbellano*........ 300 91,317 N/A
Frank W.T. LaHaye** ........ 100 141,433 27
Hayato Tanaka .............. 400 400 2
*Deceased, September 27, 1997.
**Elected to the Board, November 18, 1997.
***For the fiscal year ended December 31, 1997.
****For the calendar year ended December 31, 1997.
*****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 57 registered investment companies, with approximately 170 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 or trustee.
No officer or Board member received any other compensation, including pension or
retirement benefits, directly or indirectly 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 February 2, 1998, the officers and Board members, as a group, owned of
record and beneficially approximately 45,749 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 MANAGEMENT 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 and its officers, directors and employees are covered by
fidelity insurance for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. 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. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Fund's Code of Ethics. Please
see "Miscellaneous Information Summary of 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% for the first $100 million
of net assets of the Fund; 1/24 of 1% of net assets of the Fund in excess of
$100 million up to $250 million; and 9/240 of 1% 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.
For the fiscal years ended December 31, 1995, 1996 and 1997, management fees
totaling $198,598, $298,727, and $461,208, respectively, were paid to Advisers.
MANAGEMENT AGREEMENT. The management agreement is in effect until April 30,
1998. 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, on 60 days' written notice to Advisers, or by Advisors on 60 days'
written notice to the Fund, and will automatically terminate in the event of its
assignment, as defined in the 1940 Act.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. These include
preparing and maintaining books, records, and tax and financial reports, and
monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, Advisers pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
The fee is paid by Advisers. It is not a separate expense of the Fund.
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. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIAN. 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. The custodian does 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, 1997, 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, 1997.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
Advisers selects brokers and dealers to execute the Fund's portfolio
transactions 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. For portfolio transactions 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 are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on 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.
Advisers may pay certain brokers commissions that are higher than those another
broker may charge, if Advisers determines in good faith that the amount paid is
reasonable in relation to the value of the brokerage and research services it
receives. This may be viewed in terms of either the particular transaction or
Advisers' overall responsibilities to client accounts over which it exercises
investment discretion. The services that brokers may provide to Advisers
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and other
information that provides lawful and appropriate assistance to Advisers in
carrying out its investment advisory responsibilities. These services may not
always directly benefit the Fund. They must, however, be of value to Advisers in
carrying out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services Advisers receives 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 staffs 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, as well as shares of other funds in the Franklin Templeton Group of
Funds, 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 NASD, 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, 1995, 1996 and 1997, the Fund paid
brokerage commissions totaling $52,955, $70,969, and $107,813, respectively.
As of December 31, 1997, the Fund owned securities issued by Bank America
Corporation valued in the aggregate at $1,460,000. Except as noted, the Fund did
not own any securities issued by its regular broker-dealers as of the end of the
fiscal year.
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:
SIZE OF PURCHASE - U.S. DOLLARS SALES 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 may 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 without a front-end sales charge, 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 breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares, however, those who have shown an interest in the Franklin Templeton
Funds are more likely to be considered. To the extent permitted by their firm's
policies and procedures, a registered representative's expenses in attending
these meetings may be covered by Distributors.
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 acquired more than 90 days before the Letter is filed will be counted
towards completion of the Letter, but they 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 before 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
before 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. Payments under the plan will be made
from the redemption of an equivalent amount of shares in your account, generally
on the 25th day of the month in which a payment is scheduled. If the 25th falls
on a weekend or holiday, we will process the redemption on the next business
day.
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.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. The Fund is not responsible for tracking down uncashed checks, unless a
check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional 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. 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 close of the NYSE, normally
1:00 p.m. Pacific time, each day that the NYSE is open for trading. As of the
date of this SAI, the Fund is informed that the NYSE observes the following
holidays: New Year's Day, Martin Luther King Jr. 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 before 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 close of trading on the
NYSE, 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 foreign security is valued within the range of the most recent
quoted bid and ask prices. 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 close of the NYSE. 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 close of the NYSE 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
DISTRIBUTIONS OF NET INVESTMENT INCOME. The Fund receives income generally in
the form of dividends, interest, original issue, market and acquisition
discount, and other income derived from its investments. This income, less
expenses incurred in the operation of the Fund, constitute its net investment
income from which dividends may be paid to you. Any distributions by the Fund
from such income will be taxable to you as ordinary income, whether you take
them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS. The Fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income. Distributions
paid from long-term capital gains realized by the Fund will be taxable to you as
long-term capital gain, regardless of how long you have held your shares in the
Fund. Any net short-term or long-term capital gains realized by the Fund (net of
any capital loss carryovers) generally will be distributed once each year, and
may be distributed more frequently, if necessary, in order to reduce or
eliminate federal excise or income taxes on the Fund.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), the Fund is required to
report the capital gain distributions paid to you from gains realized on the
sale of portfolio securities using the following categories:
"28% RATE GAINS": gains resulting from securities sold by the Fund after July
28, 1997 that were held for more than one year but not more than 18 months, and
securities sold by the Fund before May 7, 1997 that were held for more than one
year. These gains will be taxable to individual investors at a maximum rate of
28%.
"20% RATE GAINS": gains resulting from securities sold by the Fund after July
28, 1997 that were held for more than 18 months, and under a transitional rule,
securities sold by the Fund between May 7 and July 28, 1997 (inclusive) that
were held for more than one year. These gains will be taxable to individual
investors at a maximum rate of 20% for individual investors in the 28% or higher
federal income tax brackets, and at a maximum rate of 10% for investors in the
15% federal income tax bracket.
The 1997 Act also provides for a new maximum rate of tax on capital gains of 18%
for individuals in the 28% or higher federal income tax brackets and 8% for
individuals in the 15% federal income tax bracket for "qualified 5-year gains."
For individuals in the 15% bracket, qualified 5-year gains are net gains on
securities held for more than 5 years which are sold after December 31, 2000.
For individuals who are subject to tax at higher rates, qualified 5-year gains
are net gains on securities which are purchased after December 31, 2000 and are
held for more than 5 years. Taxpayers subject to tax at the higher rates may
also make an election for shares held on January 1, 2001 to recognize gain on
their shares in order to qualify such shares as qualified 5-year property.
The Fund will advise you at the end of each calendar year of the amount of its
capital gain distributions paid during the calendar year that qualify for these
maximum federal tax rates. Additional information on reporting these
distributions on your personal income tax returns is available in Franklin
Templeton's Tax Information Handbook. This handbook has been revised to include
1997 Act tax law changes. Please call Fund Information to request a copy.
Questions concerning each investor's personal tax reporting should be addressed
to the investor's personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November or December and paid to you in January of the following year,
will be treated for tax purposes as if they had been received by you on December
31 of the year in which they were declared. The Fund will report this income to
you on your Form 1099-DIV for the year in which these distributions were
declared.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS. Most foreign exchange gains
realized on the sale of debt instruments are treated as ordinary income by the
Fund. Similarly, foreign exchange losses realized by the Fund on the sale of
debt instruments are generally treated as ordinary losses by the Fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the Fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the Fund's ordinary
income distributions to you, and may cause some or all of the Fund's previously
distributed income to be classified as a return of capital.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The Fund will inform you of
the amount and character of your distributions at the time they are paid, and
will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held Fund shares for a full year, you may have designated and distributed to you
as ordinary income or capital gain a percentage of income that is not equal to
the actual amount of such income earned during the period of your investment in
the Fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. The Fund has elected to
be treated as a regulated investment company under Subchapter M of the Code, has
qualified as such for its most recent fiscal year, and intends to so qualify
during the current fiscal year. The Board reserves the right not to maintain the
qualification of the Fund as a regulated investment company if it determines
such course of action to be beneficial to you. In such case, the Fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of the Fund's available earnings and profits.
In order to qualify as a regulated investment company for tax purposes, the Fund
must meet certain specific requirements, including:
o The Fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the Fund's total assets,
and, with respect to 50% of the Fund's total assets, no investment (other
than cash and cash items, U.S. government securities and securities of
other regulated investment companies) can exceed 5% of the Fund's total
assets;
o The Fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies; and
o The Fund must distribute to its shareholders at least 90% of its net
investment income and net tax-exempt income for each of its fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires the Fund to distribute
at least 98% of its taxable ordinary income earned during the calendar year and
98% of its capital gain net income earned during the twelve month period ending
October 31 (in addition to undistributed amounts from the prior year) to you by
December 31 of each year in order to avoid federal excise taxes. The Fund
intends to declare and pay sufficient dividends in December (or in January that
are treated by you as received in December) but does not guarantee and can give
no assurances that its distributions will be sufficient to eliminate all such
taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of Fund shares are taxable
transactions for federal and state income tax purposes. The tax law requires
that you recognize a gain or loss in an amount equal to the difference between
your tax basis and the amount you received in exchange for your shares, subject
to the rules described below. If you hold your shares as a capital asset, the
gain or loss that you realize will be capital gain or loss, and will be
long-term for federal income tax purposes if you have held your shares for more
than one year at the time of redemption or exchange. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gains
distributed to you by the Fund on those shares. The holding periods and
categories of capital gain that apply under the 1997 Act are described above in
the "DISTRIBUTIONS" section.
All or a portion of any loss that you realize upon the redemption of your Fund
shares will be disallowed to the extent that you purchase other shares in the
Fund (through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be added
to your tax basis in the new shares you purchase.
DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for your
shares in the Fund will be excluded from your tax basis in any of the shares
sold within 90 days of their purchase (for the purpose of determining gain or
loss upon the sale of such shares) if you reinvest the sales proceeds in the
Fund or in another of the Franklin Templeton Funds, and the sales charge that
would otherwise apply to your reinvestment is reduced or eliminated because of
your reinvestment in one of the Franklin Templeton Funds. The portion of the
sales charge excluded from your tax basis in the shares sold will equal the
amount that the sales charge is reduced on your reinvestment. Any portion of the
sales charge excluded from your tax basis in the shares sold will be added to
the tax basis of the shares you acquire from your reinvestment in one of the
Franklin Templeton Funds.
U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by
the Fund. Investments in GNMA/FNMA securities, bankers' acceptances, commercial
paper and repurchase agreements collateralized by U.S. government securities do
not generally qualify for tax-free treatment. At the end of each calendar year,
the Fund will provide you with the percentage of any dividends paid that may
qualify for tax-free treatment on your personal income tax return. You should
consult with your own tax advisor to determine the application of your state and
local laws to these distributions. Because the rules on exclusion of this income
are different for corporations, corporate shareholders should consult with their
corporate tax advisors about whether any of their distributions may be exempt
from corporate income or franchise taxes.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. As a corporate shareholder, you
should note that 19.89% of the dividends paid by the Fund for the most recent
fiscal year qualified for the dividends-received deduction. You will be
permitted in some circumstances to deduct these qualified dividends, thereby
reducing the tax that you would otherwise be required to pay on these dividends.
The dividends-received deduction will be available only with respect to
dividends designated by the Fund as eligible for such treatment. Dividends so
designated by the Fund must be attributable to dividends earned by the Fund from
U.S. corporations that were not debt-financed.
Under the 1997 Act, the amount that the Fund may designate as eligible for the
dividends-received deduction will be reduced or eliminated if the shares on
which the dividends were earned by the Fund were debt-financed or held by the
Fund for less than a 46 day period during a 90 day period beginning 45 days
before the ex-dividend date of the corporate stock. Similarly, if your Fund
shares are debt-financed or held by you for less than this same 46 day period,
then the dividends-received deduction may also be reduced or eliminated. Even if
designated as dividends eligible for the dividends-received deduction, all
dividends (including the deducted portion) must be included in your alternative
minimum taxable income calculation.
INVESTMENT IN COMPLEX SECURITIES. The Fund's investment in options, futures
contracts and forward contracts, including transactions involving actual or
deemed short sales or foreign exchange gains or losses are subject to many
complex and special tax rules. Over-the-counter options on debt securities and
equity options, including options on stock and on narrow-based stock indexes,
will be subject to tax under Section 1234 of the Code, generally producing a
long-term or short-term capital gain or loss upon exercise, lapse, or closing
out of the option or sale of the underlying stock or security. Certain other
options, futures and forward contracts entered into by the Fund are generally
governed by Section 1256 of the Code. These "Section 1256" positions generally
include listed options on debt securities, options on broad-based stock indexes,
options on securities indexes, options on futures contracts, regulated futures
contracts and certain foreign currency contracts and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held by
the Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year (and on other
dates as prescribed by the Code), and all gain or loss associated with fiscal
year transactions and mark-to-market positions at fiscal year end (except
certain 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. Under legislation pending in technical corrections to the 1997 Act, the
60% long-term capital gain portion will qualify as 20% rate gain and will be
subject to tax to individual investors at a maximum rate of 20% for investors in
the 28% or higher federal income tax brackets, or at a maximum rate of 10% for
investors in the 15% federal income tax bracket. While foreign currency is
marked-to-market at year end, gain or loss realized as a result will always be
ordinary. Even though marked-to-market, gains and losses realized on foreign
currency and foreign security investments will generally be treated as ordinary
income. 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 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, possibly resulting in deferral of losses,
adjustments in the holding periods and conversion of short-term capital losses
into long-term capital losses. The Fund may make certain tax elections 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.
The 1997 Act has also added new provisions for dealing with transactions that
are generally called "Constructive Sale Transactions." Under these rules, the
Fund must recognize gain (but not loss) on any constructive sale of an
appreciated financial position in stock, a partnership interest or certain debt
instruments. The Fund will generally be treated as making a constructive sale
when it: 1) enters into a short sale on the same property, 2) enters into an
offsetting notional principal contract, or 3) enters into a futures or forward
contract to deliver the same or substantially similar property. Other
transactions (including certain financial instruments called collars) will be
treated as constructive sales as provided in Treasury regulations to be
published. There are also certain exceptions that apply for transactions that
are closed before the end of the 30th day after the close of the taxable year.
Distributions paid to you by the Fund of ordinary income and short-term capital
gains arising from the Fund's investments, including investments in options,
forwards, and futures contracts, will be taxable to you as ordinary income. 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.
INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES. The Fund is authorized
to invest in foreign currency denominated securities. Such investments, if made,
will have the following additional tax consequences:
Under the Code, gains or losses attributable to fluctuations in foreign currency
exchange rates which occur between the time the Fund accrues income (including
dividends), or accrues expenses which are denominated in a foreign currency, and
the time the Fund actually collects such income or pays such expenses generally
are treated as ordinary income or loss. Similarly, on the disposition of debt
securities denominated in a foreign currency and on the disposition of certain
options, futures, forward contracts, gain or loss attributable to fluctuations
in the value of foreign currency between the date of acquisition of the security
or contract and the date of its disposition are also treated as ordinary gain or
loss. These gains or losses, referred to under the Code as "Section 988" gains
or losses, may increase or decrease the amount of the Fund's net investment
company taxable income, which, in turn, will affect the amount of income to be
distributed to you by the Fund.
If the Fund's Section 988 losses exceed the Fund's other net investment company
taxable income during a taxable year, the Fund generally will not be able to
make ordinary dividend distributions to you for that year, or distributions made
before the losses were realized will be recharacterized as return of capital
distributions for federal income tax purposes, rather than as an ordinary
dividend or capital gain distribution. If a distribution is treated as a return
of capital, your tax basis in your Fund shares will be reduced by a like amount
(to the extent of such basis), and any excess of the distribution over your tax
basis in your Fund shares will be treated as capital gain to you.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES. The Fund may invest
in shares of foreign corporation which may be classified under the Code as
passive foreign investment companies ("PFICs"). In general, a foreign
corporation is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income.
If the Fund receives an "excess distribution" with respect to PFIC stock, the
Fund itself may be subject to U.S. federal income tax on a portion of the
distribution, whether or not the corresponding income is distributed by the Fund
to you. In general, under the PFIC rules, an excess distribution is treated as
having been realized ratably over the period during which the Fund held the PFIC
shares. The Fund itself will be subject to tax on the portion, if any, of an
excess distribution that is so allocated to prior Fund taxable years, and an
interest factor will be added to the tax, as if the tax had been payable in such
prior taxable years. In this case, you would not be permitted to claim a credit
on your own tax return for the tax paid by the Fund. Certain distributions from
a PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain. This may have the effect of increasing
Fund distributions to you that are treated as ordinary dividends rather than
long-term capital gain dividends.
The Fund may be eligible to elect alternative tax treatment with respect to PFIC
shares. Under an election that currently is available in some circumstances, the
Fund generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether distributions are
received from the PFIC during such period. If this election were made, the
special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, the 1997 Act provides for another
election that would involve marking-to-market the Fund's PFIC shares at the end
of each taxable year (and on certain other dates as prescribed in the Code),
with the result that unrealized gains would be treated as though they were
realized. The Fund would also be allowed an ordinary deduction for the excess,
if any, of the adjusted basis of its investment in the PFIC stock over its fair
market value at the end of the taxable year. This deduction would be limited to
the amount of any net mark-to-market gains previously included with respect to
that particular PFIC security. If the Fund were to make this second PFIC
election, tax at the Fund level under the PFIC rules would generally be
eliminated.
The application of the PFIC rules may affect, among other things, the amount of
tax payable by the Fund (if any), the amounts distributable to you by the Fund,
the time at which these distributions must be made, and whether these
distributions will be classified as ordinary income or capital gain
distributions to you.
You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is a
PFIC, and that there is always a possibility that a foreign corporation will
become a PFIC after the Fund acquires shares in that corporation. While the Fund
will generally seek to avoid investing in PFIC shares to avoid the tax
consequences detailed above, there are no guarantees that it will do so and it
reserves the right to make such investments as a matter of its fundamental
investment policy.
CONVERSION TRANSACTIONS. Gains realized by a Fund from transactions that are
deemed to be "conversion transactions" under the Code, and that would otherwise
produce capital gain may be recharacterized as ordinary income to the extent
that such gain does not exceed an amount defined 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 the provisions of Section 263(g) of
the Code dealing with capitalized carrying costs.
STRIPPED PREFERRED STOCK. Occasionally, the Fund may purchase "stripped
preferred stock" that is subject to special tax treatment. Stripped preferred
stock is defined as certain preferred stock issues where ownership of the stock
has been separated from the right to receive dividends that have not yet become
payable. The stock must have a fixed redemption price, must not participate
substantially in the growth of the issuer, and must be limited and preferred as
to dividends. The difference between the redemption price and purchase price is
taken into Fund income over the term of the instrument as if it were original
issue discount. The amount that must be included in each period generally
depends on the original yield to maturity, adjusted for any prepayments of
principal.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) BONDS. The
Fund's investments in zero coupon bonds, bonds issued or acquired at a discount,
delayed interest bonds, or bonds that provide for payment of interest-in-kind
(PIK) may cause the Fund to recognize income and make distributions to you prior
to its receipt of cash payments. Zero coupon and delayed interest bonds are
normally issued at a discount and are therefore generally subject to tax
reporting as OID obligations. The Fund is required to accrue as income a portion
of the discount at which these securities were issued, and to distribute such
income each year (as ordinary dividends) in order to maintain its qualification
as a regulated investment company and to avoid income reporting and excise taxes
at the Fund level. PIK bonds are subject to similar tax rules concerning the
amount, character and timing of income required to be accrued by the Fund. Bonds
acquired in the secondary market for a price less than their stated redemption
price, or revised issue price in the case of a bond having OID, are said to have
been acquired with market discount. For these bonds, the Fund may elect to
accrue market discount on a current basis, in which case the Fund will be
required to distribute any such accrued discount. If the Fund does not elect to
accrue market discount into income currently, gain recognized on sale will be
recharacterized as ordinary income instead of capital gain to the extent of any
accumulated market discount on the obligation.
DEFAULTED OBLIGATIONS. The Fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy these distribution requirements, the Fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the Fund's shares. 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.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal years ended December 31, 1995, 1996 and 1997 were
$137,840, $241,223 and $389,845, respectively. After allowances to dealers,
Distributors retained $15,494, $27,416, and $44,287 in net underwriting
discounts and commissions and received no fees in connection with redemptions or
repurchases of shares for the respective years. Distributors may be entitled to
reimbursement under the Rule 12b-1 plan, as discussed below. Except as noted,
Distributors received no other compensation from the Fund for acting as
underwriter.
THE 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 under the rules of the NASD.
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 Fund and who have no
direct or indirect financial interest in the operation of the plan, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such 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 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, 1997, Distributors had eligible
expenditures of $267,432 for advertising, printing, and payments to underwriters
and broker-dealers pursuant to the plan, of which the Fund paid Distributors
$161,343.
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.
Average annual total return and current yield 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 does not guarantee future results, and 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 the periods indicated below 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 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, 1997, was 10.08%, 13.40%, and 12.45%, respectively.
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return 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. Cumulative total return, however, is based on the
actual return for a specified period rather than on the average return over the
periods indicated above. The Fund's cumulative total return for the one-, five-
and ten-year periods ended December 31, 1997, was 10.08%, 87.55%, and 223.26%,
respectively.
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, 1997, was 1.85%.
This figure was obtained using the following SEC formula:
6
Yield = 2 [(a-b + 1) - 1]
---
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum Offering Price per share on the last day of the period
CURRENT DISTRIBUTION RATE
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.
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. The Fund's current distribution rate for the 30-day period ended
December 31, 1997, was 1.57%.
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
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising 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
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin 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(R) 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(R) 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 NYSE.
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 mutual funds.
h) Financial publications: The Wall Street Journal, and Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
l) Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
m) Standard & Poor's(R) 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.
n) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk-adjusted performance of a fund over specified
time periods relative to other funds within its category.
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, if any, 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 49 years and
now services more than 2.9 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, a pioneer in international
investing. The Mutual Series team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
Together, the Franklin Templeton Group has over $221 billion in assets under
management for more than 6 million U.S. based mutual fund shareholder and other
accounts. The Franklin Templeton Group of Funds offers 120 U.S. based open-end
investment companies to the public. The Fund may identify itself by its NASDAQ
symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment objectives, no two are exactly alike.
As noted in the Prospectus, shares of the Fund are generally sold through
Securities Dealers. Investment representatives of such Securities Dealers are
experienced professionals who can offer advice on the type of investment
suitable to your unique goals and needs, as well as the types of risks
associated with such investment.
As of February 2, 1998, the principal shareholders of the Fund, beneficial or of
record, were as follows:
SHARE
NAME AND ADDRESS AMOUNT PERCENTAGE
Texas Commerce Bank-Avesta
Asset Trading Unit
P.O. Box 2558
Houston, TX 77252-2558 1,037,094.347 10.01%
FTTC TTEE For ValuSelect
CACI International Inc.
Attn: Trading
P.O. Box 2438
Rancho Cordova, CA 95741-2438 610,559.783 5.89%
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.
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, before 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.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group 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 by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations must be sent to a compliance
officer; (iii) all brokerage accounts must be disclosed on an annual basis; and
(iv) access persons involved in preparing and making investment decisions must,
in addition to (i), (ii) and (iii) 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.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended December 31, 1997, 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 Trustees of the Trust
CD - Certificate of deposit
CLASS I - Certain funds in the Franklin Templeton Funds offer multiple classes
of shares. The different 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
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
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.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the front-end sales charge. The maximum front-end sales
charge is 4.50%.
PROSPECTUS - The prospectus for the Fund dated May 1, 1998, as may be amended
from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
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.
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 other wholly-owned
subsidiaries 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 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 that 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 that 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. These
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 principal 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.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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.
Franklin Asset Allocation Fund
File Nos. 2-12647
811-730
FORM N-1A
PART C
OTHER INFORMATION
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
a) Financial Statements
Audited Financial Statements incorporated herein by reference to the
Registrant's Annual Report to Shareholders dated December 31, 1997, as filed
with the SEC electronically on Form Type N-30D on February 17, 1998.
(i) Report of Independent Accountants
(ii) Financial Highlights
(iii) Statement of Investments, December 31, 1997
(iv) Statement of Assets and Liabilities, December 31, 1997
(v) Statement of Operations for the year ended December 31, 1997
(vi) Statement of Changes in Net Assets for the years ended December 31,
1997 and 1996
(vii) Notes to Financial Statements
b) Exhibits
The following exhibits, are incorporated herein by reference, except
exhibits 6(ii), 8(ii), 8(iii), 11(i), 15(i) and 27(i), which are
attached.
(1) copies of the charter as now in effect;
(i) Agreement and Declaration of Trust for the Franklin Asset Allocation
Fund dated March 21, 1996 Filing: Post-effective Amendment No. 56 to
Registration Statement on Form N-1A File No. 2-12647 Filing Date: May
17, 1996
(ii) Certificate of Trust for the Franklin Asset Allocation Fund dated
March 21, 1996 Filing: Post-effective Amendment No. 56 to Registration
Statement on Form N-1A File No. 2-12647 Filing Date: May 17, 1996
(2) copies of the existing By-Laws or instruments corresponding thereto;
(i) By-Laws
Filing: Post-effective Amendment No. 56 to Registration Statement on
Form N-1A
File No. 2-12647
Filing Date: May 17, 1996
(3) copies of any voting trust agreement with respect to more than five
percent of any class of equity securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the rights
of the holders of such securities, and copies of each security being
registered;
Not Applicable
(5) copies of all investment advisory contracts relating to the managemen
of the assets of the Registrant;
(i) Management Agreement between Registrant and Franklin
Advisers, Inc. dated March 21, 1996
Filing: Post-Effective Amendment No. 58 to Registration
Statement on Form N-1A
File No. 2-21647
Filing Date: April 29, 1997
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies of all
agreements between principal underwriters and dealers;
(i) Forms of Dealer Agreements effective December 1, 1994, between
Franklin/Templeton Distributors, Inc. and Securities Dealers
Registrant: Franklin Tax-Free Trust Filing: Post-effective Amendment
No. 22 to Registration Statement on Form N-1A File No. 2-94222 Filing
Date: March 14, 1996
(ii) Amended and Restated Distribution Agreement between the Registrant
and Franklin/Templeton Distributors, Inc. dated July 26, 1996
(7) copies of all bonus, profit sharing, pension or other similar contracts
or arrangement wholly or partly for the benefit of directors or
officers of the Registrant in their capacity as such; any such plan
that is not set forth in a formal document, furnish a reasonably
detailed description thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the 1940 Act, with respect to securities and similar
investments of the Registrant, including the schedule of remuneration;
(i) Master Custodian Agreement between Registrant and Bank of New York
dated February 16, 1996
Filing: Post-effective Amendment No. 55 to Registration Statement on
Form N-1A
File No. 2-12647
Filing Date: March 1, 1996
(ii) Amendment dated May 7, 1997 to Master Custody Agreement
Between Registrant and Bank of New York dated February 16, 1996
(iii) Amendment dated October 15, 1997 to Master Custody Agreement
between Registrant and Bank of New York dated February 16, 1996
(iv) Terminal Link Agreement between Registrant and Bank of New York dated
February 16, 1996 Filing: Post-effective Amendment No. 55 to
Registration Statement on Form N-1A File No. 2-12647 Filing Date:
March 1, 1996
(9) copies of all other material contracts not made in the ordinary course
of business which are to be performed in whole or in part at or after
the date of filing the Registration Statement;
Not Applicable
(10) An opinion and consent of counsel as to the legality of the securities
being registered, indicating whether they will when sold be legally
issued, fully paid and nonassessable;
Not Applicable
(11) copies of any other opinions, appraisals or rulings and consents to the
use thereof relied on in the preparation of this registration statement
and required by Section 7 of the 1933 Act;
(i) Consent of Independent Accountants
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the
underwriter, advisor, promoter or initial stockholders and written
assurances from promoters or initial stockholders that their purchases
were made for investment purposes without any present intention of
redeeming or reselling;
Not Applicable
(14) copies of the model plan used in the establishment of any retirement
plan in conjunction with which Registrant offers its securities, any
instructions thereto and any other documents making up the model plan.
Such form(s) should disclose the costs and fees charged in connection
therewith;
(i) Copy of Model Retirement Plan
Registrant: Franklin High Income Trust
Filing: Post-effective Amendment No. 26 to Registration Statement
on Form N-1A
File No. 2-30203
Filing Date: August 1, 1989
(15) copies of any plan entered into by Registrant pursuant to Rule 12b-1
under the 1940 Act, which describes all material aspects of the
financing of distribution of Registrant's shares, and any agreements
with any person relating to implementation of such plan.
(i) Distribution Plan pursuant to Rule 12b-1 between the Registrant
and Franklin/Templeton Distributors, Inc. dated August 1, 1996
(16) schedule for computation of each performance quotation provided in the
registration statement in response to Item 22 (which need not be
audited).
(i) Schedule for Computation of Performance Quotation
Filing: Post-effective Amendment No. 55 to Registration Statement
on Form N-1A
File No. 2-12647
Filing Date: March 1, 1996
(17) Power of Attorney
(i) Power of Attorney dated March 21, 1996
Filing: Post-effective Amendment No. 56 to Registration Statement
on Form N-1A
File No. 2-12647
Filing Date: May 17, 1996
(ii) Certificate of Secretary dated March 21, 1996
Filing: Post-effective Amendment No. 56 to Registration Statement
on Form N-1A
File No. 2-12647
Filing Date: May 17, 1996
(27) Financial Data Schedule
(i) Financial Data Schedule
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
As of December 31, 1997 the number of record holders of the only class of
securities of the Registrant was as follows:
Number of
TITLE OF CLASS RECORD HOLDERS
Shares of Beneficial Interest 5,924
ITEM 27 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Please see the Declaration of Trust, By-Laws, Management Agreement and
Distribution Agreements previously filed as exhibits and incorporated herein by
reference.
ITEM 28 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
The officers and directors of the Registrant's manager also serve as officers
and/or directors for (1) Franklin Advisers, Inc.'s ("Advisers") corporate
parent, Franklin Resources, Inc., and/or (2) other investment companies in the
Franklin Templeton Group of Funds. In addition, Mr. Charles B. Johnson was
formerly a director of General Host Corporation. For additional information
please see Part B and Schedules A and D of Form ADV of Advisers (SEC File
801-26292), incorporated herein by reference, which sets forth the officers and
directors of Advisers and information as to any business, profession, vocation
or employment of a substantial nature engaged in by those officers and directors
during the past two years.
ITEM 29 PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund, Inc.
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
Franklin Templeton Japan Fund
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
(b) The information required by this Item 29 with respect to each director and
officer of Distributors is incorporated by reference to Schedule A of Form BD
filed by Distributors with the Securities and Exchange Commission pursuant to
the Securities Act of 1934 (SEC File No. 8-5889).
(c) Not Applicable. Registrant's principal underwriter is an affiliated person
of an affiliated person of the Registrant.
ITEM 30 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 are kept by the Registrant or its
shareholder services agent, Franklin/Templeton Investor Services, Inc., both of
whose address is 777 Mariners Island Blvd., San Mateo, CA. 94404-1585.
ITEM 31 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32 UNDERTAKINGS
The Registrant hereby undertakes to comply with the information requirement in
Item 5A of the Form N-1A by including the required information in the Fund's
annual report and to furnish each person to whom a prospectus is delivered a
copy of the annual report upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of San Mateo and the State of California, on the 20th
day of February 1998.
FRANKLIN ASSET ALLOCATION FUND
By: EDWARD B. JAMIESON*
Edward B. Jamieson
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
EDWARD B. JAMIESON* Principal Executive Officer
(Edward B. Jamieson) and Trustee
Dated: February 20, 1998
MARTIN L. FLANAGAN* Principal
(Martin L. Flanagan) Financial Officer
Dated: February 20, 1998
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated February 20, 1998
FRANK H. ABBOTT, III* Trustee
(Frank H. Abbott, III) Dated: February 20, 1998
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: February 20, 1998
CHARLES B. JOHNSON* Trustee and Chairman
(Charles B. Johnson) of the Board
Dated: February 20, 1998
HAYATO TANAKA* Trustee
(Hayato Tanaka) Dated: February 20, 1998
R. MARTIN WISKEMANN* Trustee
(R. Martin Wiskemann) Dated: February 20, 1998
*By /s/Larry L. Greene
Attorney-in-Fact
(Pursuant to Power of Attorney previously filed)
FRANKLIN ASSET ALLOCATION FUND
REGISTRATION STATEMENT
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.B1(i) Agreement and Declaration of Trust
dated March 21, 1996 *
EX-99.B1(ii) Certificate of Trust dated March 21,
1996 *
EX-99.B2(i) By-Laws *
EX-99.B5(i) Management Agreement between *
Registrant and Franklin Advisers,
Inc. dated March 21, 1996
EX-99.B6(i) Forms of Dealer Agreement between *
Franklin/Templeton Distributors, Inc.
("Distributors") and dealers dated
December 1, 1994
EX-99.B6(ii) Amended and Restated Distribution
Agreement between the Registrant and Attached
Franklin/Templeton Distributors, Inc.
dated July 26, 1996
EX-99.B8(i) Master Custodian Agreement between *
Registrant and Bank of New
York dated February 16, 1996
EX-99.B8(ii) Amendment dated May 7, 1997 to Master Attached
Custody Agreement Between
Registrant and Bank of New York
EX-99.B8(iii) Amendment dated October 15, 1997 to Attached
Master Custody Agreement
between Registrant and Bank of New York
EX-99.B8(iv) Terminal Link Agreement between Registrant *
and Bank of New York, dated February 16, 1996
EX-99.B11(i) Consent of Independent Accountants Attached
EX-99.B14(i) Model Retirement Plan *
EX-99.B15(i) 12b-1 plan between Registrant and Attached
Franklin/Templeton Distributors, Inc.
dated August 1, 1996
EX-99.B16(i) Schedule for Computation of *
Performance Quotation
EX-99.B17(i) Power of Attorney dated March 21, 1996 *
EX-99.B17(ii) Certificate of Secretary dated *
March 21, 1996
EX-27.B1 Financial Data Schedule Attached
*Incorporated by reference
FRANKLIN ASSET ALLOCATION FUND
777 Mariners Island Blvd.
San Mateo, California 94404
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404
Re: Amended and Restated Distribution Agreement
Gentlemen:
We (the "Fund") are a corporation or business trust operating as an open-end
management investment company or "mutual fund", which is registered under the
Investment Company Act of 1940 (the "1940 Act") and whose shares are registered
under the Securities Act of 1933 (the "1933 Act"). We desire to issue one or
more series or classes of our authorized but unissued shares of capital stock or
beneficial interest (the "Shares") to authorized persons in accordance with
applicable Federal and State securities laws. The Fund's Shares may be made
available in one or more separate series, each of which may have one or more
classes.
You have informed us that your company is registered as a broker-dealer under
the provisions of the Securities Exchange Act of 1934 and that your company is a
member of the National Association of Securities Dealers, Inc. You have
indicated your desire to act as the exclusive selling agent and distributor for
the Shares. We have been authorized to execute and deliver this Distribution
Agreement ("Agreement") to you by a resolution of our Board of Directors or
Trustees ("Board") passed at a meeting at which a majority of Board members,
including a majority who are not otherwise interested persons of the Fund and
who are not interested persons of our investment adviser, its related
organizations or with you or your related organizations, were present and voted
in favor of the said resolution approving this Agreement.
1. APPOINTMENT OF UNDERWRITER. Upon the execution of this Agreement and
in consideration of the agreements on your part herein expressed and upon the
terms and conditions set forth herein, we hereby appoint you as the exclusive
sales agent for our Shares and agree that we will deliver such Shares as you may
sell. You agree to use your best efforts to promote the sale of Shares, but are
not obligated to sell any specific number of Shares.
However, the Fund and each series retain the right to make direct sales
of its Shares without sales charges consistent with the terms of the then
current prospectus and statement of additional information (hereinafter,
collectively, "prospectus") and applicable law, and to engage in other legally
authorized transactions in its Shares which do not involve the sale of Shares to
the general public. Such other transactions may include, without limitation,
transactions between the Fund or any series or class and its shareholders only,
transactions involving the reorganization of the Fund or any series, and
transactions involving the merger or combination of the Fund or any series with
another corporation or trust.
2. INDEPENDENT CONTRACTOR. You will undertake and discharge your
obligations hereunder as an independent contractor and shall have no authority
or power to obligate or bind us by your actions, conduct or contracts except
that you are authorized to promote the sale of Shares. You may appoint
sub-agents or distribute through dealers or otherwise as you may determine from
time to time, but this Agreement shall not be construed as authorizing any
dealer or other person to accept orders for sale or repurchase on our behalf or
otherwise act as our agent for any purpose.
3. OFFERING PRICE. Shares shall be offered for sale at a price
equivalent to the net asset value per share of that series and class plus any
applicable percentage of the public offering price as sales commission or as
otherwise set forth in our then current prospectus. On each business day on
which the New York Stock Exchange is open for business, we will furnish you with
the net asset value of the Shares of each available series and class which shall
be determined in accordance with our then effective prospectus. All Shares will
be sold in the manner set forth in our then effective prospectus and statement
of additional information, and in compliance with applicable law.
4. COMPENSATION.
A. SALES COMMISSION. You shall be entitled to charge a sales
commission on the sale or redemption, as appropriate, of each series and class
of each Fund's Shares in the amount of any initial, deferred or contingent
deferred sales charge as set forth in our then effective prospectus. You may
allow any sub-agents or dealers such commissions or discounts from and not
exceeding the total sales commission as you shall deem advisable, so long as any
such commissions or discounts are set forth in our current prospectus to the
extent required by the applicable Federal and State securities laws. You may
also make payments to sub-agents or dealers from your own resources, subject to
the following conditions: (a) any such payments shall not create any obligation
for or recourse against the Fund or any series or class, and (b) the terms and
conditions of any such payments are consistent with our prospectus and
applicable federal and state securities laws and are disclosed in our prospectus
or statement of additional information to the extent such laws may require.
B. DISTRIBUTION PLANS. You shall also be entitled to
compensation for your services as provided in any Distribution Plan adopted as
to any series and class of any Fund's Shares pursuant to Rule 12b-1 under the
1940 Act.
5. TERMS AND CONDITIONS OF SALES. Shares shall be offered for sale
only on those jurisdictions where they have been properly registered or are
exempt from registration, and only to those groups of people which the Board may
from time to time determine to be eligible to purchase such shares.
6. ORDERS AND PAYMENT FOR SHARES. Orders for Shares shall be directed
to the Fund's shareholder services agent, for acceptance on behalf of the Fund.
At or prior to the time of delivery of any of our Shares you will pay or cause
to be paid to the custodian of the Fund's assets, for our account, an amount in
cash equal to the net asset value of such Shares. Sales of Shares shall be
deemed to be made when and where accepted by the Fund's shareholder services
agent. The Fund's custodian and shareholder services agent shall be identified
in its prospectus.
7. PURCHASES FOR YOUR OWN ACCOUNT. You shall not purchase our Shares
for your own account for purposes of resale to the public, but you may purchase
Shares for your own investment account upon your written assurance that the
purchase is for investment purposes and that the Shares will not be resold
except through redemption by us.
8. SALE OF SHARES TO AFFILIATES. You may sell our Shares at net asset
value to certain of your and our affiliated persons pursuant to the applicable
provisions of the federal securities statutes and rules or regulations
thereunder (the "Rules and Regulations"), including Rule 22d-1 under the 1940
Act, as amended from time to time.
9. ALLOCATION OF EXPENSES. We will pay the expenses:
(a) Of the preparation of the audited and certified
financial statements of our company to be included in
any Post-Effective Amendments ("Amendments") to our
Registration Statement under the 1933 Act or 1940
Act, including the prospectus, or in reports to
existing shareholders;
(b) Of the preparation, including legal fees, and
printing of all Amendments or supplements filed with
the Securities and Exchange Commission, including the
copies of the prospectuses included in the Amendments
and the first 10 copies of the definitive
prospectuses or supplements thereto, other than those
necessitated by your (including your "Parent's")
activities or Rules and Regulations related to your
activities where such Amendments or supplements
result in expenses which we would not otherwise have
incurred;
(c) Of the preparation, printing and distribution of
any reports or communications which we send to our
existing shareholders; and
(d) Of filing and other fees to Federal and State
securities regulatory authorities necessary to
continue offering our Shares.
You will pay the expenses:
(a) Of printing the copies of the prospectuses and any
supplements thereto which are necessary to continue
to offer our Shares;
(b) Of the preparation, excluding legal fees, and
printing of all Amendments and supplements to our
prospectuses if the Amendment or supplement arises
from your (including your "Parent's") activities or
Rules and Regulations related to your activities and
those expenses would not otherwise have been incurred
by us;
(c) Of printing additional copies, for use by you as
sales literature, of reports or other
communications which we have prepared for
distribution to our existing shareholders; and
(d) Incurred by you in advertising, promoting and selling
our Shares.
10. FURNISHING OF INFORMATION. We will furnish to you such information
with respect to each series and class of Shares, in such form and signed by such
of our officers as you may reasonably request, and we warrant that the
statements therein contained, when so signed, will be true and correct. We will
also furnish you with such information and will take such action as you may
reasonably request in order to qualify our Shares for sale to the public under
the Blue Sky Laws of jurisdictions in which you may wish to offer them. We will
furnish you with annual audited financial statements of our books and accounts
certified by independent public accountants, with semi-annual financial
statements prepared by us, with registration statements and, from time to time,
with such additional information regarding our financial condition as you may
reasonably request.
11. CONDUCT OF BUSINESS. Other than our currently effective prospectus,
you will not issue any sales material or statements except literature or
advertising which conforms to the requirements of Federal and State securities
laws and regulations and which have been filed, where necessary, with the
appropriate regulatory authorities. You will furnish us with copies of all such
materials prior to their use and no such material shall be published if we shall
reasonably and promptly object.
You shall comply with the applicable Federal and State laws
and regulations where our Shares are offered for sale and conduct your affairs
with us and with dealers, brokers or investors in accordance with the Rules of
Fair Practice of the National Association of Securities Dealers, Inc.
12. REDEMPTION OR REPURCHASE WITHIN SEVEN DAYS. If Shares are tendered
to us for redemption or repurchase by us within seven business days after your
acceptance of the original purchase order for such Shares, you will immediately
refund to us the full sales commission (net of allowances to dealers or brokers)
allowed to you on the original sale, and will promptly, upon receipt thereof,
pay to us any refunds from dealers or brokers of the balance of sales
commissions reallowed by you. We shall notify you of such tender for redemption
within 10 days of the day on which notice of such tender for redemption is
received by us.
13. OTHER ACTIVITIES. Your services pursuant to this Agreement
shall not be deemed to be exclusive, and you may render similar services and
act as an underwriter, distributor or dealer for other investment companies in
the offering of their shares.
14. TERM OF AGREEMENT. This Agreement shall become effective on the
date of its execution, and shall remain in effect for a period of two (2) years.
The Agreement is renewable annually thereafter, with respect to the Fund or, if
the Fund has more than one series, with respect to each series, for successive
periods not to exceed one year (i) by a vote of (a) a majority of the
outstanding voting securities of the Fund or, if the Fund has more than one
series, of each series, or (b) by a vote of the Board, AND (ii) by a vote of a
majority of the members of the Board who are not parties to the Agreement or
interested persons of any parties to the Agreement (other than as members of the
Board), cast in person at a meeting called for the purpose of voting on the
Agreement.
This Agreement may at any time be terminated by the Fund or by
any series without the payment of any penalty, (i) either by vote of the Board
or by vote of a majority of the outstanding voting securities of the Fund or any
series on 90 days' written notice to you; or (ii) by you on 90 days' written
notice to the Fund; and shall immediately terminate with respect to the Fund and
each series in the event of its assignment.
15. SUSPENSION OF SALES. We reserve the right at all times to
suspend or limit the public offering of Shares upon two days' written notice to
you.
16. MISCELLANEOUS. This Agreement shall be subject to the laws of the
State of California and shall be interpreted and construed to further promote
the operation of the Fund as an open-end investment company but shall not
supersede or revise any Distribution Plan between the parties adopted pursuant
to Rule 12b-1 under the 1940 Act. This Agreement shall supersede all
Distribution Agreements and Amendments previously in effect between the parties.
As used herein, the terms "Net Asset Value," "Offering Price," "Investment
Company," "Open-End Investment Company," "Assignment," "Principal Underwriter,"
"Interested Person," "Parent," "Affiliated Person," and "Majority of the
Outstanding Voting Securities" shall have the meanings set forth in the 1933 Act
or the 1940 Act and the Rules and Regulations thereunder.
Nothing herein shall be deemed to protect you against any liability to us or to
our securities holders to which you would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of your
duties hereunder, or by reason of your reckless disregard of your obligations
and duties hereunder.
If the foregoing meets with your approval, please acknowledge your acceptance by
signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
FRANKLIN ASSET ALLOCATION FUND
By: /s/D.R. GATZEK
Deborah R. Gatzek
Vice President & Secretary
Accepted:
Franklin/Templeton Distributors, Inc.
By: /s/H.E. BURNS
Harmon E. Burns
Executive Vice President
DATED: July 26, 1996
AMENDMENT, dated May 7, 1997, to the Master Custody Agreement ("Agreement")
between each Investment Company listed on Exhibit A to the Agreement and The
Bank of New York dated February 16, 1996.
It is hereby agreed as follows:
A. Unless otherwise provided herein, all terms and conditions of the
Agreement are expressly incorporated herein by reference and, except as modified
hereby, the Agreement is confirmed in all respects. Capitalized terms used
herein without definition shall have the meanings ascribed to them in the
Agreement.
B. The Agreement shall be amended to add a new Section 4. 1 0 as
follows:
4.10 ADDITIONAL DUTIES WITH RESPECT TO RUSSIAN SECURITIES.
(a) Upon 3 business days prior written notice from a Fund that
it will invest in any security issued by a Russian issuer ("Russian Security"),
the Custodian shall to the extent required and in accordance with the terms of
the Subcustodian Agreement between the Custodian and Credit Suisse ("Foreign
Custodian") dated as of August 8, 1996 (the "Subcustodian Agreement") direct the
Foreign Custodian to enter into a contract ("Registrar Contract") with the
entity providing share registration services to the Russian issuer ("Registrar")
containing substantially the following protective provisions:
(1) REGULAR SHARE CONFIRMATIONS. Each Registrar Contract
must establish the Foreign Custodian's right to conduct regular share
confirmations on behalf of the Foreign Custodian's customers.
(2) PROMPT RE-REGISTRATIONS. Registrars must be obligated
to effect re-registrations within 72 hours (or such other specified time as the
United States Securities and Exchange Commission (the "SEC") may deem
appropriate by rule, regulation, order or "no-action" letter) of receiving the
necessary documentation.
(3) USE OF NOMINEE NAME. The Registrar Contract must
establish the Foreign Custodian's right to hold shares not held directly in the
beneficial owner's name in the name of the Foreign Custodian's nominee.
(4) AUDITOR VERIFICATION. The Registrar Contract must allow
the independent auditors of the Custodian and the Custodian's clients to obtain
direct access to the share register for the independent auditors of each of the
Foreign Custodian's clients.
(5) SPECIFICATION OF REGISTRAR'S RESPONSIBILITIES AND
LIABILITIES. The contract must set forth: (1) the Registrar's responsibilities
with regard to corporate actions and other distributions; (ii) the Registrar's
liabilities as established under the regulations applicable to the Russian share
registration -system and (iii) the procedures for making a claim against and
receiving compensation from the registrar in the event a loss is incurred.
(b) The Custodian shall, in accordance with the Subcustodian
Agreement, direct the Foreign Custodian to conduct regular share confirmations,
which shall require the Foreign Custodian to (1) request either a duplicate
share extract or some other sufficient evidence of verification and (2)
determine if the Foreign Custodian's records correlate with those of the
Registrar. For at least the first two years following the Foreign Custodian's
first use of a Registrar in connection with a Fund investment, and subject to
the cooperation of the Registrar, the Foreign Custodian will conduct these share
confirmations on at least a quarterly basis, although thereafter they may be
conducted on a less frequent basis, but no less frequently than annually, if the
Fund's Board of Directors, in consultation with the Custodian, determine it
appropriate.
(c) The Custodian shall, pursuant to the Subcustodian
Agreement, direct the Subcustodian to maintain custody of the Fund's share
register extracts or other evidence of verification obtained pursuant to
paragraph (b) above.
(d) The Custodian shall, pursuant to the Subcustodian
Agreement, direct the Foreign Custodian to comply with the rules, regulations,
orders and "no-action" letters of the SEC with respect to
(1) the receipt, holding, maintenance, release and delivery
of Securities; and
(2) providing notice to the Fund and its Board of Directors
of events specified in such rules, regulations, orders and letters.
(e) The Custodian shall have no liability for the action or
inaction of any Registrar or securities depository utilized in connection with
Russian Securities except to the extent that any such action or inaction was the
result of the Custodian's negligence. With respect to any costs, expenses,
damages, liabilities or claims, including attorneys' and accountants' fees
(collectively, "Losses") incurred by a Fund as a result of the acts or the
failure to act by any Foreign Custodian or its subsidiary in Russia
("Subsidiary"), the Custodian shall take appropriate action to recover such
Losses from the Foreign Custodian or Subsidiary. The Custodian's sole
responsibility and liability to a Fund with respect to any Losses shall be
limited to amounts so received from the Foreign Custodian or Subsidiary
(exclusive of costs and expenses incurred by the Custodian) except to the extent
that such losses were the result of the Custodian's negligence.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
THE BANK OF NEW YORK
By:/s/ Stephen E. Grunston
Name: STEPHEN E. GRUNSTON
Title: Vice President
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A TO THE AGREEMENT
By:/s/ Deborah R. Gatzek
Name: Deborah R. Gatzek
Title: Vice President
By:/s/ Karen L. Skidmore
Name: Karen L. Skidmore
Title: Assistant Vice President
Amendment to Master Custody Agreement
The Bank of New York and each of the Investment Companies listed on Exhibit A,
for itself and on behalf of its specified series, hereby amend the Master
Custody Agreement dated as of February 16, 1996, by replacing Exhibit A with the
attached.
Dated as of: October 15, 1997
INVESTMENT COMPANIES
By: /S/ DEBORAH R. GATZEK
Deborah R. Gatzek
Title: Vice President & Secretary
THE BANK OF NEW YORK
By: /S/ STEPHEN E. GRUNSTON
Stephen E. Grunston
Title: Vice President
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series
for which the Custodian shall serve under the Master Custody Agreement dated as
of February 16, 1996.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ---------------------------------------------------------------------------------------------------------------------
Adjustable Rate Securities Portfolios Delaware Business Trust U.S. Government Adjustable Rate Mortgage
Portfolio
Adjustable Rate Securities Portfolio
Franklin Asset Allocation Fund Delaware Business Trust
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Trust Franklin California Insured Tax-Free Income Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income California Corporation
Fund
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ---------------------------------------------------------------------------------------------------------------------
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business Trust
Franklin High Income Trust Delaware Business Trust AGE High Income Fund
Franklin Investors Securities Trust Massachusetts Business Trust Franklin Global Government Income Fund
Franklin Short-Intermediate U.S. Gov't
Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities
Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
Franklin Managed Trust Massachusetts Business Trust Franklin Corporate Qualified Dividend Fund
Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Institutional Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Income Delaware Business Trust
Fund
- ---------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin New York Tax-Free Trust Massachusetts Business Franklin New York Tax-Exempt Money Fund
Trust Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
Franklin Real Estate Securities Delaware Business Trust Franklin Real Estate Securities Fund
Trust
Franklin Strategic Mortgage Delaware Business Trust
Portfolio
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin Biotechnology Discovery Fund
Franklin Tax-Exempt Money Fund California Corporation
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
Franklin Tax-Free Trust Massachusetts Business Franklin Massachusetts Insured Tax-Free Income Trust Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
Franklin Michigan Tax-Free Income Fund
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Templeton Fund Allocator Delaware Business Trust Franklin Templeton Conservative Target Fund
Series Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Global Trust Delaware Business Trust Franklin Templeton German Government Bond Fund
Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton International Delaware Business Trust Templeton Pacific Growth Fund
Trust Templeton Foreign Smaller Companies Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Franklin Balance Sheet Investment Fund
Trust Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Valuemark Funds Massachusetts Business Money Market Fund
Trust Growth and Income Fund
Natural Resources Securities Fund
Real Estate Securities Fund
Utility Equity Fund
High Income Fund
Templeton Global Income Securities Fund
Income Securities Fund
U.S. Government Securities Fund
Zero Coupon Fund - 2000
Zero Coupon Fund - 2005
Zero Coupon Fund - 2010
Rising Dividends Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Valuemark Funds Massachusetts Business Templeton Pacific Growth Fund
Trust Templeton International Equity Fund
Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton Global Asset Allocation Fund
Small Cap Fund
Capital Growth Fund
Templeton International Smaller Companies Fund
- -------------------------------------------------------------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Business Money Market Portfolio
Trust Franklin U.S. Government Securities Money Market Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S.
Government Securities Fund
Franklin Institutional Adjustable Rate
Securities Fund
Franklin U.S. Government Agency Money Market Fund
Franklin Cash Reserves Fund
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market Portfolio
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business
Trust
Franklin Principal Maturity Trust Massachusetts Business
Trust
Franklin Universal Trust Massachusetts Business
Trust
Franklin Floating Rate Trust Delaware Business Trust
- -------------------------------------------------------------------------------------------------------------
</TABLE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Post-Effective Amendment No. 59
to the Registration Statement of Franklin Asset Allocation Fund on Form N-1A
(File No. 2-12647) of our report dated February 3, 1998 on our audit of the
financial statements and financial highlights of Franklin Asset Allocation Fund,
which report is included in the Annual Report to Shareholders for the year ended
December 31, 1997, which is incorporated by reference in the Registration
Statement.
/s/COOPERS & LYBRAND L.L.P.
San Francisco, California
February 19, 1998
FRANKLIN ASSET ALLOCATION FUND
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been adopted pursuant
to Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by FRANKLIN
ASSET ALLOCATION FUND (the "Trust"), which Plan shall take effect on the day the
shares are first offered (the "Effective Date of the Plan"). The Plan has been
approved by a majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not interested persons
of the Trust and who have no direct or indirect financial interest in the
operation of the Plan (the "non-interested trustees"), cast in person at a
meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the schedule
and nature of payments and terms of the Management Agreement between the Trust
and Franklin Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust and Franklin/Templeton Distributors, Inc.
("Distributors"). The Board of Trustees concluded that the compensation of
Advisers, under the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the Board of
Trustees also recognized that uncertainty may exist from time to time with
respect to whether payments to be made by the Trust to Advisers, Distributors,
or others or by Advisers or Distributors to others may be deemed to constitute
distribution expenses of the Trust. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and that adoption of
the Plan would be prudent and in the best interest of the Trust and its
shareholders. Such approval included a determination that in the exercise of
their reasonable business judgment and in light of their fiduciary duties, there
is a reasonable likelihood that the Plan will benefit the Trust and its
shareholders.
DISTRIBUTION PLAN
1. The Trust shall reimburse Distributors or others for all expenses incurred by
Distributors or others in the promotion and distribution of the shares of the
Trust, including but not limited to, the printing of prospectuses and reports
used for sales purposes, expenses of preparing and distributing sales literature
and related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of Distributors' overhead expenses attributable to
the distribution of Trust shares, as well as any distribution or service fees
paid to securities dealers or their firms or others who have executed a
servicing agreement with the Trust, Distributors or its affiliates, which form
of agreement has been approved from time to time by the trustees, including the
non-interested trustees.
2. The maximum amount which may be reimbursed by the Trust to Distributors or
others pursuant to Paragraph 1 herein shall be 0.25% per annum of the average
daily net assets of the Trust. Said reimbursement shall be made quarterly by the
Trust to Distributors or others.
3. In addition to the payments which the Trust is authorized to make pursuant to
paragraphs 1 and 2 hereof, to the extent that the Trust, Advisers, Distributors
or other parties on behalf of the Trust, Advisers or Distributors make payments
that are deemed to be payments by the Trust for the financing of any activity
primarily intended to result in the sale of shares issued by the Trust within
the context of Rule 12b-1 under the 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 specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, 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. Distributors shall furnish to the Board of Trustees, for their review, on a
quarterly basis, a written report of the monies reimbursed to it and to others
under the Plan, and shall furnish the Board of Trustees with such other
information as the Board of Trustees may reasonably request in connection with
the payments made under the Plan in order to enable the Board of Trustees to
make an informed determination of whether the Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year only so
long as such continuance is specifically approved at least annually by a vote of
the Board of Trustees, including the non-interested Trustees, cast in person at
a meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Trust or by vote of a majority of the
non-interested Trustees, on not more than sixty (60) days' written notice, or by
Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Trust and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be
amended to increase materially the amount to be spent for distribution pursuant
to Paragraph 2 hereof without approval by a majority of the Trust's outstanding
voting securities.
8. All material amendments to the Plan, or any agreements entered into pursuant
to this Plan, shall be approved by a vote of the non-interested trustees cast in
person at a meeting called for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and nomination of the Trust's
non-interested trustees shall be committed to the discretion of such
non-interested trustees.
This Plan and the terms and provisions thereof are hereby accepted and agreed to
by the Trust and Distributors as evidenced by their execution hereof.
FRANKLIN ASSET ALLOCATION FUND
By /s/D.R. GATEK
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: /s/H.E. BURNS
Harmon E. Burns
Executive Vice President
Dated: AUGUST 1, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN ASSET ALLOCATION FUND DECEMBER 31, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 59,514,384
<INVESTMENTS-AT-VALUE> 71,706,204
<RECEIVABLES> 19,216,516
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 90,922,720
<PAYABLE-FOR-SECURITIES> 573,400
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 719,136
<TOTAL-LIABILITIES> 1,292,536
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 79,868,550
<SHARES-COMMON-STOCK> 9,902,204
<SHARES-COMMON-PRIOR> 6,833,908
<ACCUMULATED-NII-CURRENT> 79,306
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 439,059
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 12,243,269
<NET-ASSETS> 89,630,184
<DIVIDEND-INCOME> 762,891
<INTEREST-INCOME> 1,345,609
<OTHER-INCOME> 0
<EXPENSES-NET> (829,215)
<NET-INVESTMENT-INCOME> 1,279,285
<REALIZED-GAINS-CURRENT> 3,485,295
<APPREC-INCREASE-CURRENT> 4,935,333
<NET-CHANGE-FROM-OPS> 9,699,913
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,226,791)
<DISTRIBUTIONS-OF-GAINS> (3,456,153)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,999,853
<NUMBER-OF-SHARES-REDEEMED> (1,392,075)
<SHARES-REINVESTED> 460,518
<NET-CHANGE-IN-ASSETS> 27,745,965
<ACCUMULATED-NII-PRIOR> 29,261
<ACCUMULATED-GAINS-PRIOR> 405,174
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 298,727
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 569,955
<AVERAGE-NET-ASSETS> 73,829,036
<PER-SHARE-NAV-BEGIN> 8.320
<PER-SHARE-NII> .150
<PER-SHARE-GAIN-APPREC> 1.100
<PER-SHARE-DIVIDEND> (.150)
<PER-SHARE-DISTRIBUTIONS> (.370)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 9.050
<EXPENSE-RATIO> 1.120
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
