o 133 P-1
SUPPLEMENT DATED JANUARY 1, 2000
TO THE PROSPECTUS OF
FRANKLIN ASSET ALLOCATION FUND
DATED MAY 1, 1999
The prospectus is amended as follows:
I. The following sentence is added after the minimum investments table on page
20:
Please note that you may only buy shares of a fund eligible for sale in your
state or jurisdiction.
II. In the Selling Shares table on page 26 the section "By Wire" is replaced
with the following:
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[Insert graphic of You can call or write to have redemption proceeds sent
three lightning bolts] to a bank account. See the policies above for selling
BY ELECTRONIC FUNDS shares by mail or phone.
TRANSFER (ACH)
Before requesting to have redemption proceeds sent to a
bank account, please make sure we have your bank
account information on file. If we do not have this
information, you will need to send written instructions
with your bank's name and address, a voided check or
savings account deposit slip, and a signature guarantee
if the ownership of the bank and fund accounts is
different.
If we receive your request in proper form by 1:00 p.m.
Pacific time, proceeds sent by ACH generally will be
available within two to three business days.
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III. The sections "Waivers for investments from certain payments," "Waivers for
certain investors," "CDSC waivers" and "Retirement plans," on pages 17 through
19, are replaced with the following:
SALES CHARGE WAIVERS Class A shares may be purchased without an initial sales
charge or CDSC by various individuals, institutions and retirement plans or by
investors who reinvest certain distributions and proceeds within 365 days.
Certain investors also may buy Class C shares without an initial sales charge.
The CDSC for each class may be waived for certain redemptions and distributions.
If you would like information about available sales charge waivers, call your
investment representative or call Shareholder Services at 1-800/632-2301. For
information about retirement plans, you may call Retirement Plan Services at
1-800/527-2020. A list of available sales charge waivers also may be found in
the Statement of Additional Information (SAI).
IV. The section "Dealer compensation" on page 29 is replaced with the following:
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive sales
commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and service
(12b-1) fees and its other resources.
CLASS A CLASS C
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COMMISSION (%) ................................. - 2.00
Investment under $50,000 ....................... 5.00 -
$50,000 but under $100,000 ..................... 3.75 -
$100,000 but under $250,000 .................... 2.80 -
$250,000 but under $500,000 .................... 2.00 -
$500,000 but under $1 million .................. 1.60 -
$1 million or more ............................. up to 1.00 1 -
12B-1 FEE TO DEALER ............................ 0.25 1.00 2
A dealer commission of up to 1% may be paid on Class A NAV purchases by certain
retirement plans1 and on Class C NAV purchases. A dealer commission of up to
0.25% may be paid on Class A NAV purchases by certain trust companies and bank
trust departments, eligible governmental authorities, and broker-dealers or
others on behalf of clients participating in comprehensive fee programs.
1. During the first year after purchase, dealers may not be eligible to receive
the 12b-1 fee.
2. Dealers may be eligible to receive up to 0.25% during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the 13th
month.
V. The section "Statements and reports" on page 27 is replaced with the
following:
STATEMENTS AND REPORTS You will receive quarterly account statements that show
all your account transactions during the quarter. You also will receive written
notification after each transaction affecting your account (except for
distributions and transactions made through automatic investment or withdrawal
programs, which will be reported on your quarterly statement). You also will
receive the fund's financial reports every six months. To reduce fund expenses,
we try to identify related shareholders in a household and send only one copy of
the financial reports. If you need additional copies, please call 1-800/DIAL
BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive copies of all notifications and statements
and other information about your account directly from the fund.
Please keep this supplement for future reference.
FRANKLIN ASSET
ALLOCATION FUND
CLASS A & C
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999, AS AMENDED JANUARY 1, 2000
P.O. BOX 997151
SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the fund's prospectus. The fund's
prospectus, dated May 1, 1999, which we may amend from time to time, contains
the basic information you should know before investing in the fund. You should
read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended December 31, 1998, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goal and Strategies .................................................. 2
Risks ................................................................ 10
Officers and Trustees ................................................ 12
Management and Other Services ........................................ 14
Portfolio Transactions ............................................... 15
Distributions and Taxes .............................................. 16
Organization, Voting Rights
and Principal Holders ............................................... 17
Buying and Selling Shares ............................................ 18
Pricing Shares ....................................................... 24
The Underwriter ...................................................... 25
Performance .......................................................... 27
Miscellaneous Information ............................................ 29
Description of Ratings ............................................... 29
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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.
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GOAL AND STRATEGIES
The fund's investment goal is total return. This goal is fundamental, which
means it may not be changed without shareholder approval.
The fund may invest in any industry, although it will not concentrate (invest
more than 25% of its assets) in any one industry.
The following is a description of the various types of securities the fund may
buy.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. 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 also may 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. Equity securities also may 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 lender's
money over a certain period of time. 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 per share.
RATINGS. Various investment services publish ratings of some of the debt
securities in which the fund may invest. The fund limits its investments in
corporate debt to investment grade securities and unrated debt which it
determines 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. These
ratings represent the opinions of the rating services with respect to the
issuer's ability to pay interest and repay principal. They do not purport to
reflect the risk of fluctuations in market value and are not absolute standards
of quality. Please see "Description of Ratings" for a discussion of the ratings.
If the rating on an issue held in the fund's portfolio is changed by the rating
service or the security goes into default, the manager will consider the event
in its evaluation of the overall investment merits of the security but will not
automatically sell the security.
FOREIGN SECURITIES As described in the prospectus, the fund will ordinarily buy
foreign securities that are traded in the U.S. or depositary receipts (described
below). The fund also may 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.
DEPOSITARY RECEIPTS. American Depositary Receipts (ADRs) are typically issued by
a U.S. bank or trust company and evidence ownership of underlying securities
issued by a foreign company. European Depositary Receipts (EDRs) and Global
Depositary Receipts (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 A convertible security is generally a debt obligation or
preferred stock 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 provides a fixed-income stream and the opportunity, through its
conversion feature, to participate in the capital appreciation resulting from a
market price advance in its underlying common stock. As with a straight
fixed-income security, a convertible security tends to increase in market value
when interest rates decline and decrease in value when interest rates rise. Like
a common stock, the value of a convertible security also tends to increase as
the market value of the underlying stock rises, and it tends to decrease as the
market value of the underlying stock declines. Because both interest rate and
market movements can influence its value, 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.
When issued by an operating company, a convertible security tends to be senior
to common stock, but subordinate to other types of fixed-income securities
issued by that company. When a convertible security issued by an operating
company is "converted," the operating company often issues new stock to the
holder of the convertible security. If the parity price of the convertible
security is less than the call price, the operating company may pay out cash
instead of common stock. If the convertible security is issued by an investment
bank, the security is an obligation of and is convertible through the issuing
investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
ENHANCED CONVERTIBLE SECURITIES. In addition to "plain vanilla" convertibles, a
number of different structures have been created to fit the characteristics of
specific investors and issuers. Examples of these enhanced characteristics for
investors include yield enhancement, increased equity exposure or enhanced
downside protection. From an issuer's perspective, enhanced structures are
designed to meet balance sheet criteria, interest/dividend payment deductibility
and reduced equity dilution. The following are descriptions of common structures
of enhanced convertible securities.
Mandatorily convertible securities (e.g., ACES, DECS, PRIDES, SAILS-each issuer
has a different acronym for their version of these securities) are considered
the most equity like of convertible securities. At maturity these securities are
mandatorily convertible into common stock offering investors some form of yield
enhancement in return for some of the upside potential in the form of a
conversion premium. Typical characteristics of mandatories include: issued as
preferred stock, convertible at premium, pay fixed quarterly dividend (typically
500 to 600 basis points higher than common stock dividend), and are non-callable
for the life of the security (usually three to five years). An important feature
of mandatories is that the number of shares received at maturity is determined
by the difference between the price of the common stock at maturity and the
price of the common stock at issuance.
Enhanced convertible preferred securities (e.g., QUIPS, TOPRS, and TECONS) are,
from an investor's viewpoint, essentially convertible preferred securities, i.e.
they are issued as preferred stock convertible into common stock at a premium
and pay quarterly dividends. Through this structure the company establishes a
wholly owned special purpose vehicle whose sole purpose is to issue convertible
preferred stock. The offering proceeds pass-through to the company who issues
the special purpose vehicle a convertible subordinated debenture with identical
terms to the convertible preferred issued to investors. Benefits to the issuer
include increased equity credit from rating agencies and the deduction of coupon
payments for tax purposes.
A company divesting a holding in another company often uses exchangeable
securities. The primary difference between exchangeables and standard
convertible structures is that the issuing company is a different company to
that of the underlying shares.
Yield enhanced stock (YES, also known as PERCS) mandatorily converts into common
stock at maturity and offers investors a higher current dividend than the
underlying common stock. The difference between these structures and other
mandatories is that the participation in stock price appreciation is capped.
Zero-coupon and deep-discount convertible bonds (OID and LYONs) include the
following characteristics: no or low coupon payments, imbedded put options
allowing the investor to put them on select dates prior to maturity, call
protection (usually three to five years), and lower than normal conversion
premiums at issuance. A benefit to the issuer is that while no cash interest is
actually paid, the accrued interest may be deducted for tax purposes. Because of
their put options, these bonds tend to be less sensitive to changes in interest
rates than either long maturity bonds or preferred stocks. The put options also
provide enhanced downside protection while retaining the equity participation
characteristics of traditional convertible bonds.
An investment in an enhanced convertible security or any other security may
involve additional risks. The fund may have difficulty disposing of such
securities because there may be a thin trading market for a particular security
at any given time. Reduced liquidity may have an adverse impact on market price
and the fund's ability to dispose of particular securities, when necessary, to
meet the fund's liquidity needs or in response to a specific economic event,
such as the deterioration in the credit worthiness of an issuer. Reduced
liquidity in the secondary market for certain securities also may make it more
difficult for the fund to obtain market quotations based on actual trades for
purposes of valuing the fund's portfolio.
SYNTHETIC CONVERTIBLES. The fund may invest a portion of its assets in
"synthetic convertible" securities. A synthetic convertible is created by
combining distinct securities that together possess the two principal
characteristics of a true convertible security, i.e., fixed income and the right
to acquire the underlying equity security. This combination is achieved by
investing in nonconvertible fixed-income securities and in warrants or stock or
stock index call options which grant the holder the right to purchase a
specified quantity of securities within a specified period of time at a
specified price or to receive cash in the case of stock index options. Synthetic
convertible securities are generally not considered to be "equity securities"
for purposes of the fund's investment policy regarding those securities.
Synthetic convertible securities differ from the true convertible security in
several respects. The value of a synthetic convertible is the sum of the values
of its fixed-income component and its convertibility component. Thus, the values
of a synthetic convertible and a true convertible security will respond
differently to market fluctuations. Further, although the manager expects
normally to create synthetic convertibles whose two components represent one
issuer, the character of a synthetic convertible allows the fund to combine
components representing distinct issuers, or to combine a fixed income security
with a call option on a stock index, when the manager determines that such a
combination would better promote the fund's investment objectives. In addition,
the component parts of a synthetic convertible security may be purchased
simultaneously or separately; and the holder of a synthetic convertible faces
the risk that the price of the stock, or the level of the market index
underlying the convertibility component will decline.
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.
Certain issuers of convertible securities may be deemed to be "investment
companies" as defined in the Investment Company Act of 1940, as amended (1940
Act). As a result, the fund's investment in these securities may be limited by
the restrictions contained in the 1940 Act.
ILLIQUID SECURITIES The fund may invest up to 10% of its net assets in
securities, including restricted securities, that are not readily marketable.
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.
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 issued by home-builders and developers.
OPTIONS ON SECURITIES The fund may write covered put and call options and buy
put and call options on securities and indices that trade on securities
exchanges and in the over-the-counter market to help protect its portfolio
against market and/or exchange movements. Additionally, the fund may "close out"
options it has entered into. The fund may only engage in option transactions if
the total provisions it paid for such options are 5% or less of its total
assets.
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.
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 also may 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 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 the manager
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 SECURITIES INDICES Call and put options on securities indices are
similar to options on securities except that, rather than the right to buy or
sell stock at a specified price, options on a securities index give the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the underlying securities 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 indices. When the fund
writes an option on a securities index, the fund will establish a segregated
account containing liquid assets in an amount at least equal to the market value
of the underlying securities 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 the manager may be considered to be
such a group. An exchange may order the liquidation of positions found to be in
violation of these limits, and it may impose certain other sanctions. These
position limits may restrict the number of options which the fund will be able
to write on a particular security.
FUTURES CONTRACTS The fund may buy and sell financial futures contracts, stock
index futures contracts, foreign currency futures contracts and options on any
of these contracts to reduce its exposure to changes in interest rates,
securities prices, or foreign currency valuations. Additionally, the fund may
"close out" futures and options it has entered into. The fund may only enter
into futures contracts or related options if its initial margin deposits and
premiums are 5% or less of its total assets.
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 the manager 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 an amount of liquid assets 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. The fund may buy and sell stock index futures contracts and
options on stock index futures contracts. 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.
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. 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 also may 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 goal 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 temporary borrowings for extraordinary purposes may be made
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.
REPURCHASE AGREEMENTS The fund generally will have a portion of its assets in
cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income on
this portion of its assets, the fund may enter into repurchase agreements. Under
a repurchase agreement, the fund agrees to buy securities guaranteed as to
payment of principal and interest by the U.S. government or its agencies from a
qualified bank or broker-dealer and then to sell the securities back to the bank
or broker-dealer 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 market value of at least 102% of the dollar
amount invested by the fund in each repurchase agreement. The manager will
monitor the value of such securities daily to determine that the value equals or
exceeds the repurchase price.
Repurchase agreements may involve risks in the event of default or insolvency of
the bank or broker-dealer, including possible delays or restrictions upon the
fund's ability to sell the underlying securities. The fund will enter into
repurchase agreements only with parties who meet certain creditworthiness
standards, i.e., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the fund's
portfolio in a temporary defensive manner. Under such circumstances, the fund
may invest up to 100% of its assets in short-term debt instruments, including
high grade commercial paper, repurchase agreements, and other money market
equivalents.
The fund also may invest cash being held for liquidity purposes in short-term
debt instruments, and may invest in these securities when investments are not
available at prices the fund's manager believes are attractive.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50% of
the fund's outstanding shares 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.
The fund presently has the following additional restrictions, which are not
fundamental and may be changed without shareholder approval.
The fund may not:
1. 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.
2. Invest in oil, gas or other mineral exploration or development programs.
3. 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.
4. 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.
5. Invest more than 10% of its assets in securities, including restricted
securities, which are not readily marketable.
6. Invest in warrants, other than those acquired by the fund as a part of a
unit, valued at the lower of cost or market, in excess of 5% of the value of the
fund's net assets, including not more than 2% in warrants which are not listed
on the New York or American Stock Exchange.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
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.
RISKS
FOREIGN SECURITIES The value of foreign (and U.S.) securities is affected by
general economic conditions and individual company and industry earnings
prospects. While foreign securities may offer significant opportunities for
gain, they also involve additional risks that can increase the potential for
losses in the fund. These risks can be significantly greater for investments in
emerging markets. Many of the risks described below also apply to investments in
depositary receipts.
The political, economic and social structures of some countries in which the
fund invests may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the imposition
of exchange controls, expropriation, restrictions on removal of currency or
other assets, nationalization of assets, and punitive taxes.
There may be less publicly available information about a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing, and financial reporting standards and may have less government
supervision of financial markets. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs on
foreign securities markets are generally higher than in the U.S. The settlement
practices may be cumbersome and result in delays that may affect portfolio
liquidity. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies, and obtaining judgments with
respect to foreign investments in foreign courts than with respect to domestic
issuers in U.S. courts.
Some of the countries in which the fund may invest are considered developing or
emerging markets. Investments in these markets are subject to all of the risks
of foreign investing generally, and have additional and heightened risks due to
a lack of legal, business, and social frameworks to support securities markets.
Emerging markets involve additional significant risks, including:
o political and social uncertainty (for example, regional conflicts and risk of
war)
o currency exchange rate volatility
o pervasiveness of corruption and crime
o delays in settling portfolio transactions
o risk of loss arising out of the system of share registration
o comparatively smaller size and lesser liquidity than developed markets
o dependency upon foreign economic assistance and international trade
o less government supervision and regulation of business and industry
practices, stock exchanges, brokers, and listed companies than in the U.S.
o currency and capital controls
o imposition of taxes
All of these factors make developing market equity and fixed-income securities
prices generally more volatile than securities issued in developed countries.
CURRENCY Some of the fund's investments may be denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value of
what the fund owns and the fund's share price. Generally, when the U.S. dollar
rises in value against a foreign currency, an investment in that country loses
value because that currency is worth fewer U.S. dollars.
EURO RISK. On January 1, 1999, the European Monetary Union (EMU) introduced a
new single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of currency
risk among EMU countries may change the economic environment and behavior of
investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect on
the fund, the fund's manager and its affiliated services providers are taking
steps they believe are reasonably designed to address the euro issue.
REPURCHASE AGREEMENTS The use of repurchase agreements involves certain risks.
For example, if the other party to a repurchase agreement defaults on its
obligation to repurchase the underlying security at a time when the value of the
security has declined, the fund may incur a loss upon disposition of the
security. If the other party to the agreement becomes insolvent and subject to
liquidation or reorganization under the bankruptcy code or other laws, a court
may determine that the underlying security is collateral for the loan by the
fund not within the control of the fund, and therefore the realization by the
fund on the collateral may be automatically stayed. Finally, it is possible that
the fund may not be able to substantiate its interest in the underlying security
and may be deemed an unsecured creditor of the other party to the agreement.
While the manager acknowledges these risks, it is expected that if repurchase
agreements are otherwise deemed useful to the fund, these risks can be
controlled through careful monitoring procedures.
REITS An investment in REITs includes the possibility of a decline in the value
of real estate, risks related to general and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, changes in zoning laws, casualty or condemnation losses,
variations in rental income, changes in neighborhood values, the appeal of
properties to tenants, and increases in interest rates. The value of securities
of companies that service the real industry will also be affected by these
risks.
In addition, equity REITs are affected by changes in the value of the underlying
property owned by the trusts, while mortgage REITs are affected by the quality
of the properties to which they have extended credit. Equity and mortgage REITs
are dependent upon the REITs management skill. REITs may not be diversified and
are subject to the risks of financing projects.
DERIVATIVE SECURITIES 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 the manager's ability to
predict correctly movements in the direction of the markets, particular market
segments, interest rates and other economic factors. The manager's judgment in
these respects may not be correct, resulting in losses to the fund. 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.
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.
OFFICERS AND TRUSTEES
The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of the fund's
investment activities. The board, in turn, elects the officers of the trust who
are responsible for administering the trust's day-to-day operations. The board
also monitors the fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (78)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) and Vacu-Dry Co. (food processing).
S. Joseph Fortunato (66)
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 51 of the investment companies in the Franklin Templeton
Group of Funds.
*Edward B. Jamieson (50)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
Executive Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer and trustee of four of the investment companies in the Franklin
Templeton Group of Funds.
*Charles B. Johnson (66)
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 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 50 of the investment
companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102
Cupertino, CA 95014
TRUSTEE
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); director or trustee, as the case may be, of
27 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Director, Fischer Imaging Corporation (medical imaging systems),
Digital Transmission Systems, Inc. (wireless communications) and Quarterdeck
Corporation (software firm), and General Partner, Peregrine Associates, which
was the General Partner of Peregrine Ventures (venture capital firm).
Hayato Tanaka (81)
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 (72)
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 15 of the investment companies in the Franklin Templeton Group
of Funds.
Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory
Services, Inc. and 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 53 of the investment companies
in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and Director,
Templeton Investment Counsel, Inc.; Executive Vice President and Chief Financial
Officer, Franklin Advisers, Inc.; Chief Financial Officer, Franklin Advisory
Services, LLC and Franklin Investment Advisory Services, Inc.; President and
Director, Franklin Templeton Services, Inc.; officer and/or director of some of
the other subsidiaries of Franklin Resources, Inc.; and officer and/or director
or trustee, as the case may be, of 53 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
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.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 54 of the investment
companies in the Franklin Templeton Group of Funds.
Rupert H. Johnson, Jr. (58)
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.
and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin
Advisory Services, LLC; 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 53 of the investment companies
in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32 of
the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal securities
laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
The trust pays noninterested board members $175 per quarter plus $125 per
meeting attended. Board members who serve on the audit committee of the trust
and other funds in the Franklin Templeton Group of Funds receive a flat fee of
$2,000 per committee meeting attended, a portion of which is allocated to the
trust. Members of a committee are not compensated for any committee meeting held
on the day of a board meeting. Noninterested board members also may serve as
directors or trustees of other funds in the Franklin Templeton Group of Funds
and may receive fees from these funds for their services. The following table
provides the total fees paid to noninterested board members by the trust and by
the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM GROUP ON WHICH
NAME THE TRUST1 OF FUNDS2 EACH SERVES3
- ------------------------ ---------------- ------------------- ------------------
Frank H. Abbott, III $735 $159,051 27
S. Joseph Fortunato $646 $367,835 51
Frank W.T. LaHaye $760 $163,753 27
Hayato Tanaka $800 $5,300 2
1. For the fiscal year ended December 31, 1998. During the period from January
1, 1998, through May 31, 1998, fees at the rate of $100 per meeting attended
were in effect.
2. For the calendar year ended December 31, 1998.
3. 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 54 registered investment companies, with approximately 163 U.S.
based funds or series.
Noninterested board members 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 Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
Messrs. Abbott, Fortunato and LaHaye serve on multiple boards within the
Franklin Templeton Group of Funds and historically have followed a policy of
having substantial investments in one or more of the funds in the Franklin
Templeton Group of Funds, as is consistent with their individual financial
goals. In February 1998, this policy was formalized through adoption of a
requirement that each such board member invest one-third of fees received for
serving as a director or trustee of a Templeton fund in shares of one or more
Templeton funds and one-third of fees received for serving as a director or
trustee of a Franklin fund in shares of one or more Franklin funds until the
value of such investments equals or exceeds five times the annual fees paid such
board member. Investments in the name of family members or entities controlled
by a board member constitute fund holdings of such board member for purposes of
this policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisers, Inc. The
manager is a wholly owned subsidiary of Franklin Resources, Inc. (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.
The manager provides investment research and portfolio management services, and
selects the securities for the fund to buy, hold or sell. The manager also
selects the brokers who execute the fund's portfolio transactions. The manager
provides periodic reports to the board, which reviews and supervises the
manager's investment activities. To protect the fund, the manager and its
officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager 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 the manager on behalf of the fund. Similarly, with respect to the fund,
the manager is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that the manager and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. The manager is
not obligated to refrain from investing in securities held by the fund or other
funds it manages. Of course, any transactions for the accounts of the manager
and other access persons will be made in compliance with the fund's code of
ethics.
Under the fund's code of ethics, employees of the Franklin Templeton Group who
are access persons may 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 and statements 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.
MANAGEMENT FEES The fund pays the manager a fee equal to a monthly rate of:
o 5/96 of 1% of the value of net assets up to and including $100 million; and
o 1/24 of 1% of the value of net assets over $100 million and not over
$250,000,000; and
o 9/240 of 1% of the value of net assets in excess of $250 million.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of the
fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended December 31, the fund paid the following
management fees:
MANAGEMENT FEES PAID ($)
1998 623,263
1997 461,208
1996 298,727
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by Resources
and is an affiliate of the fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion; and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended December 31, the manager paid FT
Services the following administration fees:
ADMINISTRATION FEES PAID ($)
1998 149,463
1997 109,164
1996 20,4831
1. For the period from October 1, 1996, through December 31, 1996.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/ Templeton Investor Services,
Inc. (Investor Services) is the fund's shareholder servicing agent and acts as
the fund's transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777.
Please send all correspondence to Investor Services to P.O. Box 997151,
Sacramento, CA 95899-9983.
For its services, Investor Services receives a fixed fee per account. The fund
also will 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 will 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, NY 10286, acts as custodian of the fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105,
is the fund's independent auditor. The auditor gives an opinion on the financial
statements included in the trust's Annual Report to Shareholders and reviews the
trust's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
PORTFOLIO TRANSACTIONS
The manager 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, the manager 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 is negotiated between
the manager 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. The manager 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 the
manager, a better price and execution can otherwise be obtained. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager 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 the manager's overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the manager 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 the manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit the fund. They
must, however, be of value to the manager 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 the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services allows the manager 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, the manager 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, also may be considered a factor in the selection of broker-dealers to
execute the fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture 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 the manager 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 the manager 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 the
manager, 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 may improve execution and reduce transaction costs to the
fund.
During the last three fiscal years ended December 31, the fund paid the
following brokerage commissions:
BROKERAGE COMMISSIONS ($)
1998 126,991
1997 107,813
1996 70,969
As of December 31, 1998, the fund owned securities issued by BankAmerica Corp.
valued in the aggregate at $1,804,000; securities issued by General Electric
Capital Corp. valued in the aggregate at $982,000; and securities issued by
Merrill Lynch & Co. Inc. valued in the aggregate at $668,000. Except as noted,
the fund did not own any securities issued by its regular broker-dealers as of
the end of the fiscal year.
DISTRIBUTIONS AND TAXES
The fund calculates dividends and capital gains the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
the difference in the distribution and service (Rule 12b-1) fees of each class.
The fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in the
form of dividends and interest on its investments. This income, less expenses
incurred in the operation of the fund, constitutes the fund's 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 from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in the fund. Any net capital gains realized by the fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities 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 of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, the fund may designate and distribute 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.
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 Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As a regulated investment company,
the fund generally pays no federal income tax on the income and gains it
distributes to you. 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 shareholders. In such case, the fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains, and distributions to you will be taxed as ordinary dividend
income to the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires the fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. The fund intends to declare and pay these amounts in
December (or in January that are treated by you as received in December) to
avoid these excise taxes, but can give no assurances that its distributions will
be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. If you redeem your fund
shares, or exchange your fund shares for shares of a different Franklin
Templeton Fund, the IRS will require that you report a gain or loss on your
redemption or exchange. 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 or
short-term, generally depending on how long you hold your shares. 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.
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 buy 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 buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in the fund, and then
reinvest the sales proceeds in the fund or in another Franklin Templeton Fund
within 90 days of buying the original shares, the sales charge that would
otherwise apply to your reinvestment may be reduced or eliminated. The IRS will
require you to report gain or loss on the redemption of your original shares in
the fund. In doing so, all or a portion of the sales charge that you paid for
your original shares in the fund will be excluded from your tax basis in the
shares sold (for the purpose of determining gain or loss upon the sale of such
shares). The portion of the sales charge excluded 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.
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 Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial paper
and repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that 35.38% of the dividends paid by the fund for
the most recent fiscal year qualified for the dividends-received deduction. In
some circumstances, you will be allowed 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. All
dividends (including the deducted portion) must be included in your alternative
minimum taxable income calculation.
INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the fund are
treated as ordinary income or capital gain, accelerate the recognition of income
to the fund and/or defer the fund's ability to recognize losses, and, in limited
cases, subject the fund to U.S. federal income tax on income from certain of its
foreign securities. In turn, these rules may affect the amount, timing or
character of the income distributed to you by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
The fund is a diversified series of 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 currently offers two classes of shares, Class A and Class C. Before
January 1, 1999, Class A shares were designated Class I. The fund began offering
Class C shares on May 1, 1999. The fund may offer additional classes of shares
in the future. The full title of each class is:
o Franklin Asset Allocation Fund - Class A
o Franklin Asset Allocation Fund - Class C
Shares of each class represent proportionate interests in the fund's assets. On
matters that affect the fund as a whole, each class has the same voting and
other rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes separately on
matters affecting only that class, or expressly required to be voted on
separately by state or federal law.
The trust has noncumulative voting rights. For board member elections, 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 be called by the board to consider the removal of a board member if
requested in writing 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. A special meeting also
may be called by the board in its discretion.
As of December 31, 1998, the principal shareholders of the fund, beneficial or
of record, were:
NAME AND ADDRESS SHARE CLASS PERCENTAGE (%)
Texas Commerce Bank-Avesta A 5.86%
Asset Trading Unit
PO Box 2558
Houston TX 77252-2558
FTTC TTEE FOR VALUSELECT A 5.82%
CACI INTERNATIONAL INC
PO Box 2438
Rancho Cordova CA 95741-2438
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.
As of December 31, 1998, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of the fund. The
board members may own shares in other funds in the Franklin Templeton Group of
Funds.
BUYING AND SELLING SHARES
The fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial institutions that
sell shares of the fund may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
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.
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.
If you buy shares through the reinvestment of dividends, the shares 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.
INITIAL SALES CHARGES The maximum initial sales charge is 5.75% for Class A and
1% for Class C.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of the
lower sales charges for large purchases. The Franklin Templeton Funds include
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., and Templeton Variable Products Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may 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 (LOI). You may buy Class A shares at a reduced sales charge by
completing the letter of intent section of your account 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 application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
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 LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the sales
charge applicable to the amount specified in your LOI. 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. Any Class A purchases you made within 90 days before you filed your
LOI also may qualify for a retroactive reduction in the sales charge. If you
file your LOI with the fund before a change in the fund's sales charge, you may
complete the LOI at the lower of the new sales charge or the sales charge in
effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days before
you filed your LOI will be counted towards the completion of the LOI, but they
will not be entitled to a retroactive reduction 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 LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of your
total purchases, less redemptions, is more than the amount specified in your LOI
and is an amount that would qualify for a further sales charge reduction, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made. The price adjustment will be made on
purchases made within 90 days before and on those made after you filed your LOI
and will be applied towards the purchase of additional shares at the offering
price applicable to a single purchase or the dollar amount of the total
purchases.
If the amount of your total purchases, less redemptions, is less than the amount
specified in your LOI, the sales charge will be adjusted upward, depending on
the actual amount purchased (less redemptions) during the period. You will need
to send Distributors an amount equal to the difference in the actual dollar
amount of sales charge paid and the amount of sales charge that would have
applied to the total purchases if the total of the purchases had been made at
one time. Upon payment of this amount, 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, we will redeem an appropriate number of reserved shares to realize
the difference. If you redeem the total amount in your account before you
fulfill your LOI, we will deduct the additional sales charge due from the sale
proceeds and forward the balance to you.
For LOIs filed 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 LOI. These plans are not subject to the requirement to reserve 5% of
the total intended purchase or to the policy on upward adjustments in sales
charges described above, 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 LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class A
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, although any such plan that purchased the fund's Class A
shares at a reduced sales charge under the group purchase privilege before
February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same share class.
Certain exceptions apply, however, to Class C shareholders who chose to
reinvest their distributions in Class A shares of 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's Class A
shares. This waiver category also applies to Class C shares.
o Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option
the Franklin Valuemark Funds or the Templeton Variable Products Series
Fund. You should contact your tax advisor for information on any tax
consequences that may apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or
a Franklin Templeton money fund, you may reinvest them as described above.
The proceeds must be reinvested within 365 days from the date the CD
matures, including any rollover, or the date you redeem your money fund
shares.
o Redemption proceeds from the sale of Class A shares of any of the Templeton
Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund shares
and the CDSC holding period will begin again. We will, however, credit your
fund account with additional shares based on the CDSC you previously paid
and the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without an
initial sales charge or CDSC by various individuals and institutions due to
anticipated economies in sales efforts and expenses, including:
o 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.
o 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 fund shares without paying sales charges.
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.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer or
service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o 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
o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting distributions
from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
In addition, Class C shares may be purchased without an initial sales charge by
any investor who buys Class C shares through an omnibus account with Merrill
Lynch Pierce Fenner & Smith, Inc. A CDSC may apply, however, if the shares are
sold within 18 months of purchase.
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without an initial sales charge.
Retirement plans that are not qualified retirement plans (employer sponsored
pension or profit-sharing plans that qualify under section 401 of the Internal
Revenue Code, including 401(k), money purchase pension, profit sharing and
defined benefit plans), SIMPLEs (savings incentive match plans for employees) or
SEPs (employer sponsored simplified employee pension plans established under
section 408(k) of the Internal Revenue Code) must also meet the group purchase
requirements described above to be able to buy Class A shares without an initial
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 CDSC 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.
SALES IN TAIWAN. 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.
The fund's Class A shares 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, Class A
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
DEALER COMPENSATION 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. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the dealer compensation table in the fund's
prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
shares 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 of Class A shares by certain retirement plans without an initial sales
charge: 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 rules of the National Association of Securities Dealers,
Inc.
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. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity discount
or letter of intent programs, a CDSC may apply on any shares you sell within 12
months of purchase. For Class C shares, a CDSC may apply if you sell your shares
within 18 months of purchase. The CDSC 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 Class A shares without an initial sales charge also may be
subject to a CDSC 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.
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Account fees
o Sales of Class A shares purchased without an initial 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 of Class A shares by investors who purchased $1 million or more
without an initial sales charge if the securities dealer of record waived
its commission in connection with the purchase
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, up to 1% monthly, 3% quarterly, 6% semiannually or 12%
annually of your account's net asset value depending on the frequency of
your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares 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 goal exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing 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 seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh 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.
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. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 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. 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 also may be
subject to a CDSC.
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.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. 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.
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 U.S. Securities and Exchange
Commission (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.
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.
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.
The wiring of redemption proceeds is a special service that we make available
whenever possible. 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
the prospectus.
Franklin Templeton Investor Services, Inc. (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 also may
charge a fee for their services directly to their clients.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. 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. 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. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
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.
PRICING SHARES
When you buy shares, you pay the offering price. The offering price is the net
asset value (NAV) per share plus any applicable sales charge, calculated to two
decimal places using standard rounding criteria. When you sell shares, you
receive the NAV minus any applicable CDSC.
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.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The fund does not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The fund values over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the fund
values them according to the broadest and most representative market as
determined by the manager.
The fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option
the fund holds is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects the contract's market value.
The fund determines the value of a foreign security as of the close of trading
on the foreign exchange on which the security 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 NAV. 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 NAV
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 NAV.
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 use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares. Distributors
is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
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.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the fund's shares, the net
underwriting discounts and commissions Distributors retained after allowances to
dealers, and the amounts Distributors received in connection with redemptions or
repurchases of shares for the last three fiscal years ended December 31:
AMOUNT
RECEIVED IN
TOTAL AMOUNT CONNECTION WITH REDEMPTIONS
COMMISSIONS RETAINED BY AND
RECEIVED ($) DISTRIBUTORS ($) REPURCHASES ($)
- ----------- ----------------- ------------------- -----------------------------
1998 374,006 46,480 1,362
1997 389,845 44,287 0
1996 241,223 27,416 0
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each class has a separate distribution or
"Rule 12b-1" plan. Under each plan, the fund shall pay or may reimburse
Distributors or others for the expenses of activities that are primarily
intended to sell shares of the class. 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.
The distribution and service (12b-1) fees charged to each class are based only
on the fees attributable to that particular class.
THE CLASS A PLAN. Payments by the fund under the Class A plan may not exceed
0.25% per year of Class A's average daily net assets, payable quarterly. All
distribution expenses over this amount will be borne by those who have incurred
them.
In implementing the Class A 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 the fund's
Class A shares 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 the fund's
Class A shares 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 Class A expense. This means that all Class A 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 of Class A and, as Class A shares are sold on or after
May 1, 1994, will increase over time. Thus, as the proportion of Class A shares
purchased on or after May 1, 1994, increases in relation to outstanding Class A
shares, the expenses attributable to payments under the plan also will increase
(but will not exceed 0.25% of average daily net assets). While this is the
currently anticipated calculation for fees payable under the Class A 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 Class A plan.
The Class A plan does not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
THE CLASS C PLAN. Under the Class C plan, the fund pays Distributors up to 0.75%
per year of the class's average daily net assets, payable quarterly, to pay
Distributors or others for providing distribution and related services and
bearing certain expenses. All distribution expenses over this amount will be
borne by those who have incurred them. The fund also may pay a servicing fee of
up to 0.25% per year of the class's average daily net assets, payable quarterly.
This fee may be used to pay securities dealers or others for, among other
things, helping to establish and maintain customer accounts and records, helping
with requests to buy and sell shares, receiving and answering correspondence,
monitoring dividend payments from the fund on behalf of customers, and similar
servicing and account maintenance activities.
The expenses relating to the Class C plan also are used to pay Distributors for
advancing the commission costs to securities dealers with respect to the initial
sale of Class C shares.
The Class A and C Plans. In addition to the payments that Distributors or others
are entitled to under each plan, each plan also provides that to the extent the
fund, the manager or Distributors or other parties on behalf of the fund, the
manager or Distributors make payments that are deemed to be for the financing of
any activity primarily intended to result in the sale of fund shares within the
context of Rule 12b-1 under the Investment Company Act of 1940, as amended, then
such payments shall be deemed to have been made pursuant to the plan. The terms
and provisions of each plan relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the National Association of Securities Dealers, Inc.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans 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.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are 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 plans, 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 noninterested
members of the fund's board. The plans and any related agreement may be
terminated at any time, without penalty, by vote of a majority of the
noninterested 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 the manager or by
vote of a majority of the outstanding shares of the class. Distributors or any
dealer or other firm also may terminate their respective distribution or service
agreement at any time upon written notice.
The plans 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 outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the noninterested board
members, 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 plans 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 plans should be continued.
For the fiscal year ended December 31, 1998, Distributors' eligible expenditures
for advertising, printing, and payments to underwriters and broker-dealers
pursuant to the plans and the amounts the fund paid Distributors under the plans
were:
DISTRIBUTORS' ELIGIBLE AMOUNT PAID
EXPENSES ($) BY THE FUND ($)
- ---------------------------------------------------------------------------
Class A 466,021 233,539
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.
Performance figures reflect Rule 12b-1 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.
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 initial 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 initial sales
charge currently in effect.
When considering the average annual total return quotations, you should keep in
mind that the maximum initial sales charge reflected in each quotation is a one
time fee charged on all direct purchases, which will have its greatest impact
during the early stages of your investment. This charge will affect actual
performance less the longer you retain your investment in the fund. The average
annual total returns for the indicated periods ended December 31, 1998, were:
1 YEAR 5 YEARS 10 YEARS
- -------------------- --------------- ------------------ ------------------
Class A 7.03% 12.12% 11.88%
The following SEC formula was used to calculate these figures:
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 initial 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 cumulative total returns for the indicated periods
ended December 31, 1998, were:
1 YEAR 5 YEARS 10 YEARS
- ----------------- ---------------- -------------------- ---------------------
Class A 7.03% 77.18% 207.36%
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 applicable 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 of the class during the base
period. The yield for the 30-day period ended December 31, 1998, was 1.07%.
The following SEC formula was used to calculate these figures:
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 by a class 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 current
distribution rate for the 30-day period ended December 31, 1998, was 1.75%.
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 also may quote the performance of shares
without a sales charge. Sales literature and advertising may quote a cumulative
total return, average annual total return and other measures of performance 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
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 goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. 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 goal, advertisements and other materials about the fund
may discuss certain measures of fund performance as reported by various
financial publications. Materials also may 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:
o Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial Average
(30 blue-chip stocks that are generally leaders in their industry), the Dow
Jones Transportation Average (20 transportation stocks), and the Dow Jones
Utilities Average (15 utility stocks involved in the production of
electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks
listed on the NYSE.
o 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.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o 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.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
o 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.
o 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.
o 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.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o 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.
o 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 also may compare the fund's performance to the
return on certificates of deposit (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 is one of the
oldest mutual fund organizations and now services more than 4 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined forces
with Templeton, 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 $216 billion in assets under management for more than 7 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 114 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 New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the fund are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has already
begun making necessary software changes to help the computer systems that
service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues to
seek reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis. Resources is
also beginning to develop a contingency plan, including identification of those
mission critical systems for which it is practical to develop a contingency
plan. However, in an operation as complex and geographically distributed as
Resources' business, the alternatives to use of normal systems, especially
mission critical systems, or supplies of electricity or long distance voice and
data lines are limited.
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (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. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to a high degree.
These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S CORPORATION (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 a 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 these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is assigned
an actual or implied CCC- rating. The C rating also may reflect the filing of a
bankruptcy petition under circumstances where debt service payments are
continuing. The C1 rating is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
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.
SHORT-TERM DEBT & COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted. 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 for both short-term debt and
commercial paper, 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. The
relative degree of safety, however, 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.
