As filed with the Securities and Exchange Commission on March 1, 1999.
File Nos.
2-12647
811-730
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post Effective Amendment No. 60
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 21
FRANKLIN ASSET ALLOCATION FUND
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (650) 312-2000
HARMON E. BURNS, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] on May 1, 1999 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on(date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered:
Shares of Beneficial Interest:
Franklin Asset Allocation Fund
Prospectus
FRANKLIN ASSET ALLOCATION FUND
INVESTMENT STRATEGY Growth & Income
MAY 1, 1999
[Insert Franklin Templeton Ben Head]
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS
THE FUND
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INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
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[insert page #] Goal and Strategies
[insert page #] Main Risks
[insert page #] Performance
[insert page #] Fees and Expenses
[insert page #] Management
[insert page #] Distributions and Taxes
[insert page #] Financial Highlights
YOUR ACCOUNT
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INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
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[insert page #] Sales Charges
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
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WHERE TO LEARN MORE ABOUT THE FUND
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Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is total return.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund invests
primarily in equity and debt securities. Equity securities generally entitle
the holder to participate in a company's general operating results. These
include common stocks, preferred stocks, convertible securities, warrants,
and rights. Debt securities represent an obligation of the issuer to repay a
loan of money to it, and generally provide for the payment of interest.
These include bonds, notes, and debentures; commercial paper; and bankers'
acceptances.
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The fund's manager uses a top-down approach based on the current and future
outlook for the economy and the business cycle to determine the fund's asset
allocation mix and sector weightings.
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Historically, different economic sectors and industries have performed better
than others during different stages of the business cycle. The fund's
manager uses quantitative, technical, and fundamental analysis to identify
economic sectors, industries, and companies that it believes offer the best
opportunities for achieving the fund's goal. The fund seeks to diversify its
investments among different asset classes in order to reduce the impact of a
particular security or asset class on the fund, but there is no assurance
that it will be successful. When investments are not available at prices the
manager believes are attractive, the fund may invest in short-term debt
instruments, including high grade commercial paper, repurchase agreements,
and other money market equivalents.
A majority of the fund's investments are in stocks listed in the S&P 500
Index or the S&P 400 Index. These indices represent such sectors as basic
materials (including gold stocks), capital spending, consumer cyclical,
consumer staples, financials, utilities, energy, transportation, health care,
conglomerates, and technology. The fund also invests in securities of
smaller companies that the fund's manager believes offer the opportunity for
growth.
The fund generally invests in debt securities issued or guaranteed by the
U.S. government or its agencies or instrumentalities. The fund may also
invest in investment grade corporate debt securities or unrated securities
the fund's manager determines are comparable. Investment grade debt
securities are rated in the top four ratings categories by independent rating
organizations such as Standard & Poor's Corporation and Moody's Investors
Service, Inc.
The fund may invest up to 25% of its net assets in foreign securities. It
ordinarily buys foreign securities that are traded in the U.S., as well as
American, European, and Global Depositary Receipts. Depositary receipts are
certificates typically issued by a bank or trust company that give their
holders the right to receive securities issued by a foreign or domestic
company.
The fund may buy securities of companies operating in the real estate
industry. These investments will consist primarily of equity and debt
securities of real estate investment trusts and may include equity securities
issued by homebuilders and developers.
The fund may write covered put and call options and buy put and call options
on securities and securities industries to help protect its portfolio against
market and/or exchange rate movements. The fund may only engage in option
transactions if the total premiums it paid for such options are 5% or less of
its total assets. The fund may also buy and sell financial futures
contracts, stock index futures contracts, foreign currency futures contracts,
and options on futures contracts to reduce its exposure to changes in
interest rates, securities prices, or foreign currency valuations. The fund
may only enter into futures contract or related options if its initial margin
deposits and premiums are 5% or less of its total assets.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal, because it may not invest
or may invest substantially less in equity and debt securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
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Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
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STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
SMALLER COMPANIES Historically, smaller company securities have been more
volatile in price than larger company securities, especially over the short
term. Among the reasons for the greater price volatility are the less
certain growth prospects of smaller companies, the lower degree of liquidity
in the markets for such securities, and the greater sensitivity of smaller
companies to changing economic conditions.
In addition, small companies may lack depth of management, they may be unable
to generate funds necessary for growth or development, or they may be
developing or marketing new products or services for which markets are not
yet established and may never become established.
Therefore, while smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also involve
greater risks and should be considered speculative.
INTEREST RATE When interest rates rise, debt securities prices fall. The
opposite is also true: debt securities prices go up when interest rates fall.
Generally, interest rates rise during times of inflation or a growing
economy, and will fall during an economic slowdown or recession. Securities
with longer maturities usually are more sensitive to interest rate changes
than securities with shorter maturities.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value and, thus,
impact the value of fund shares.
FOREIGN SECURITIES Securities of companies located outside the U.S. may
offer significant opportunities for gain, but they also involve additional
risks that can increase the potential for losses in the fund. Investments in
depositary receipts also involve some or all of the following risks.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns which trade in that country. These movements will affect the fund's
share price and fund performance.
The political, economic and social structures of some countries the fund
invest in 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, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. 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 U.S.
companies in U.S. courts.
CURRENCY To the extent the fund's investments are 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.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not as regulated as securities
markets.
EURO. 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. If the fund holds investments in countries
with currencies replaced by the euro, the investment process, including
trading, foreign exchange, payments, settlements, cash accounts, custody and
accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on fund performance. To the extent the fund holds
non-U.S. dollar (euro or other) denominated securities, it will still be
exposed to currency risk due to fluctuations in those currencies versus the
U.S. dollar.
DERIVATIVE SECURITIES Derivative investments are those whose values are
dependent upon the performance of one or more other securities or investments
or indices. Option transactions and futures contracts are considered
derivative investments. To the extent the fund engages in these
transactions, their success will depend on the manager's ability to predict
pertinent market movements.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to
verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities will also be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page [#] for more information.
More detailed information about the fund, its policies (including temporary
investments), and risks can be found in the fund's Statement of Additional
Information (SAI).
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Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
ANNUAL TOTAL RETURNS1
[Insert bar graph]
14.85% -8.69% 22.20% 14.16% 18.51% 0.48% 21.79% 17.41% 15.24% 13.54%
89 90 91 92 93 94 95 96 97 98
YEAR
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BEST QUARTER:
Q4 '98 13.64%
WORST QUARTER:
Q3 '90 -14.55%
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AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Asset Allocation Fund2 7.03% 12.12% 11.88%
S&P 500 Index3 28.58% 24.06% 19.21%
1. Figures do not reflect sales charges. If they did, returns would be
lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, the fund implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
- -------------------------------------------------------------------------
Maximum sales charge (load) as a percentage of
offering price 5.75%
Load imposed on purchases 5.75%
Maximum deferred sales charge (load) None1
Exchange fee2 $5.00
Please see "Sales Charges" on page [#] for an explanation of how and when
these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
- -------------------------------------------------------------------------
Management fees 0.63%
Distribution and service
(12b-1) fees3 0.24%
Other expenses 0.26%
------------------------
Total annual fund operating expenses 1.13%
------------------------
1. Except for investments of $1 million or more (see page [#]) and purchases
by certain retirement plans without an initial sales charge.
2. This fee is only for market timers (see page [#]).
3. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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$684 1 $913 $1,161 $1,871
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd, San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $220 billion in assets.
The team responsible for the fund's management is:
LISA A. COSTA CMT, VICE PRESIDENT OF ADVISERS
Ms. Costa has been a manager of the fund since 1985. She joined the Franklin
Templeton Group in 1980.
R. MARTIN WISKEMANN, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Wiskemann has been a manager of the fund since 1972 and has more than 30
years' experience in the securities industry.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid 0.63% of its average monthly net assets to the manager.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a leap year
may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. The fund could experience difficulties in effecting transactions if
any of its foreign subcustodians, or if foreign broker-dealers or foreign
markets are not ready for Year 2000.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least quarterly representing its net investment income. Capital gains, if
any, may be distributed twice a year. The amount of these distributions will
vary and there is no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will receive some of your investment back in the
form of a taxable distribution. If you would like information on upcoming
record dates for the fund's distributions, please call 1-800/DIAL BEN(R).
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional shares of the fund or receive them in cash.
Any capital gains the fund distributes are taxable to you as long-term
capital gains no matter how long you have owned your shares.
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BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct taxpayer identification number (TIN) or
certify that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of the fund, you may have a capital gain or loss.
For tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale. The individual tax rate on any
gain from the sale or exchange of your shares depends on how long you have
held your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Non-U.S. investors may be
subject to U.S. withholding and estate tax. You should consult your tax
advisor about the federal, state, local or foreign tax consequences of your
investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, 9.05 8.32 7.25 6.11 6.22
beginning of year
-----------------------------------------------
Net investment income .18 .15 .14 .18 .14
Net realized and unrealized 1.03 1.10 1.11 1.14 (.11)
gains (losses)
-----------------------------------------------
Total from investment 1.21 1.25 1.25 1.32 .03
operations
-----------------------------------------------
Dividends from net (.19) (.15) (.15) (.18) (.14)
investment income
Distributions from net (.11) (.37) (.03) -- --
realized gains
-----------------------------------------------
Total distributions (.30) (.52) (.18) (.18) (.14)
-----------------------------------------------
Net asset value, end of year 9.96 9.05 8.32 7.25 6.11
-----------------------------------------------
Total return (%)1 13.54 15.24 17.41 21.79 .46
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year 108,268 89,630 56,867 39,319 25,631
($ x 1,000)
Ratios to average net
assets: (%)
Expenses 1.13 1.12 1.21 1.17 1.27
Net investment income 1.91 1.73 1.86 2.86 2.29
Portfolio turnover rate (%) 54.28 54.57 60.11 62.01 45.18
1. Total return does not include sales charges, and is not annualized.
YOUR ACCOUNT
[Insert graphic of percentage sign] SALES CHARGES
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $50,000 5.75 6.10
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either
as a lump sum or through our cumulative quantity discount or letter of intent
programs (see page [#]), you can buy shares without an initial sales charge.
However, there is a 1% contingent deferred sales charge (CDSC) on any shares
you sell within 12 months of purchase.
The CDSC is based on the current value of the shares being sold or their net
asset value when purchased, whichever is less. There is no CDSC on shares you
acquire by reinvesting your dividends.
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The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, we will sell
the shares in the order they were purchased. We will use this same method if
you exchange your shares into another Franklin Templeton Fund (please see
page [#] for exchange information).
DISTRIBUTION AND SERVICE (12B-1) FEES The fund has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution fees of up to 0.25% per year to those who sell and distribute
the fund's shares and provide other services to shareholders. Because these
fees are paid out of the fund's assets on an on-going basis, over time these
fees will increase the cost of your investment and may cost you more than
paying other types of sales charges.
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below,
please let us know at the time you make your investment to help ensure you
receive the lower sales charge.
QUANTITY DISCOUNTS 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 of fund shares.
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The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
may also combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts may also be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar
amount of shares over a 13-month period and lets you receive the same
sales charge as if all shares had been purchased at one time. We will
reserve a portion of your shares to cover any additional sales charge that
may apply if you do not buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION OF YOUR
ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you
may reinvest some or all of the proceeds within 365 days without an initial
sales charge. The proceeds must be reinvested within the same share class,
except proceeds from the sale of Class B shares will be reinvested in Class A
shares.
Certain Franklin Templeton Funds offer multiple share classes not offered by
this fund. For purposes of this privilege, the fund's shares are considered
Class A shares.
If you paid a CDSC when you sold your Class A shares, we will credit your
account with the amount of the CDSC paid but a new CDSC will apply. For Class
B shares reinvested in Class A, a new CDSC will not apply, although your
account will not be credited with the amount of any CDSC paid when you sold
your Class B shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD)
also may be reinvested without an initial sales charge if you reinvest them
within 365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject
to a sales charge.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS Shares of the fund may be
purchased without an initial sales charge or CDSC by investors who reinvest
within 365 days:
o certain payments received under an annuity contract that offers a
Franklin Templeton insurance fund option
o distributions from an existing retirement plan invested in the Franklin
Templeton Funds
o dividend or capital gain distributions from a real estate investment
trust sponsored or advised by Franklin Properties, Inc.
o redemption proceeds from a repurchase of Franklin Floating Rate Trust
shares held continuously for at least 12 months
o redemption proceeds from Class A of any Templeton Global Strategy Fund,
if you are a qualified investor. If you paid a CDSC when you sold your
shares, we will credit your account with the amount of the CDSC paid but a
new CDSC will apply.
WAIVERS FOR CERTAIN INVESTORS Shares of the fund also may be purchased
without an initial sales charge or CDSC by various individuals and
institutions, including:
o certain trust companies and bank trust departments investing $1 million
or more in assets over which they have full or shared investment discretion
o government entities that are prohibited from paying mutual fund sales
charges
o certain unit investment trusts and their holders reinvesting trust
distributions
o group annuity separate accounts offered to retirement plans
o employees and other associated persons or entities of Franklin Templeton
or of certain dealers
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 Chilean retirement plans that meet the requirements for retirement plans
described below
IF YOU THINK YOU MAY BE ELIGIBLE FOR A SALES CHARGE WAIVER,
CALL YOUR INVESTMENT REPRESENTATIVE OR CALL SHAREHOLDER SERVICES
AT 1-800/632-2301 FOR MORE INFORMATION.
CDSC WAIVERS The CDSC generally will be waived:
o to pay account fees
o to make payments through systematic withdrawal plans, up to 1% monthly,
3% quarterly, 6% semiannually or 12% annually depending on the frequency
of your plan
o for redemptions by investors who purchased $1 million or more without an
initial sales charge if Franklin Templeton Distributors, Inc. did not make
any payment to the securities dealer of record in connection with the
purchase
o for redemptions by Franklin Templeton Trust Company employee benefit
plans or employee benefit plans serviced by ValuSelect(R)
o for IRA distributions due to death or disability or upon periodic
distributions based on life expectancy
o to return excess contributions (and earnings, if applicable) from
retirement plan accounts
o for redemptions following the death of the shareholder or beneficial owner
o for participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
RETIREMENT PLANS Certain retirement plans may buy shares of the fund without
an initial sales charge. To qualify, the plan must be sponsored by an
employer:
o with at least 100 employees, or
o with retirement plan assets of $1 million or more, or
o that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13-month period
A CDSC may apply. Retirement plans other than SIMPLEs, SEPs, or plans that
qualify under section 401 of the Internal Revenue Code also must qualify
under our group investment program to buy shares without an initial sales
charge.
FOR MORE INFORMATION, CALL YOUR INVESTMENT REPRESENTATIVE OR
RETIREMENT PLAN SERVICES AT 1-800/527-2020.
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors
to invest as a group. For sales charge purposes, the group's investments are
added together. There are certain other requirements and the group must have
a purpose other than buying fund shares at a discount.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
MINIMUM INVESTMENTS
- --------------------------------------------------------------------------
INITIAL ADDITIONAL
- --------------------------------------------------------------------------
Regular accounts $1,000 $50
- --------------------------------------------------------------------------
UGMA/UTMA accounts $100 $50
- --------------------------------------------------------------------------
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers, Education
IRAs or Roth IRAs)
- --------------------------------------------------------------------------
IRAs, IRA rollovers, Education IRAs or Roth
IRAs $250 $50
- --------------------------------------------------------------------------
Broker-dealer sponsored wrap account
programs $250 $50
- --------------------------------------------------------------------------
Full-time employees, officers, trustees and
directors of Franklin Templeton entities,
and their immediate family members
$100 $50
- --------------------------------------------------------------------------
Certain Franklin Templeton Funds offer multiple share classes not offered by
this fund. Please note that for selling or exchanging your shares, or for
other purposes, the fund's shares are considered Class A shares. Before
January 1, 1999, the fund's shares were considered Class I shares.
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. To save time, you can sign up now for
services you may want on your account by completing the appropriate sections
of the application (see the next page).
BUYING SHARES
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- -------------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------------
Make your check payable to Make your check payable to
[Insert graphic of Franklin Asset Allocation Franklin Asset Allocation
envelope] Fund. Fund. Include your account
number on the check.
BY MAIL Mail the check and your
signed application to Fill out the deposit slip
Investor Services. from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and
your account number.
Mail the check and deposit
slip or note to Investor
Services.
- -------------------------------------------------------------------------------
[Insert graphic of Call to receive a wire Call to receive a wire
three lightning control number and wire control number and wire
bolts] instructions. instructions.
Wire the funds and mail your To make a same day wire
signed application to investment, please call us
BY WIRE Investor Services. Please by 1:00 p.m. pacific time
include the wire control and make sure your wire
1-800/632-2301 number or your new account arrives by 3:00 p.m.
(or 1-650/312-2000 number on the application.
collect)
To make a same day wire
investment, please call us
by 1:00 p.m. pacific time
and make sure your wire
arrives by 3:00 p.m.
- -------------------------------------------------------------------------------
[Insert graphic of Call Shareholder Services at Call Shareholder Services at
two arrows pointing the number below, or send the number below or our
in opposite signed written instructions. automated TeleFACTS system,
directions] The TeleFACTS system cannot or send signed written
be used to open a new instructions.
BY EXCHANGE account.
(Please see page # for (Please see page # for
TeleFACTS(R) information on exchanges.) information on exchanges.)
1-800/247-1753
(around-the-clock
access)
- -------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES
777 MARINERS ISLAND BLVD., P.O. BOX 777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in the fund by automatically transferring money from your checking or
savings account each month to buy shares. The minimum investment to open an
account with an automatic investment plan is $50 ($25 for an Education IRA).
To sign up, complete the appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in
shares of the fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your
application that you would like to receive an Automatic Payroll Deduction
Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the
fund in an existing account in the same share class of the fund or another
Franklin Templeton Fund. Initial sales charges and CDSCs will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class*, generally without paying any additional sales
charges. If you exchange shares held for less than six months, however, you
may be charged the difference between the initial sales charge of the two
funds if the difference is more than 0.25%. If you exchange shares from a
money fund, a sales charge may apply no matter how long you have held the
shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC
will continue to be calculated from the date of your initial investment and
will not be charged at the time of the exchange. The purchase price for
determining a CDSC on exchanged shares will be the price you paid for the
original shares. If you exchange shares subject to a CDSC into a Class A
money fund, the time your shares are held in the money fund will not count
towards the CDSC holding period.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page [#]).
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may
exchange into the fund without any sales charge. Advisor Class shareholders
of another Franklin Templeton Fund also may exchange into the fund without
any sales charge. Advisor Class shareholders who exchange their shares for
shares of the fund and later decide they would like to exchange into another
fund that offers Advisor Class may do so.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. Sometimes, however, to protect
you and the fund we will need written instructions signed by all registered
owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud.
You can obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
We may also require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with
a check or draft, we may delay sending you the proceeds until your check or
draft has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in
a Franklin Templeton Trust Company retirement plan. For participants under
age 591/2, tax penalties may apply. Call Retirement Plan Services at
1-800/527-2020 for details.
SELLING SHARES
- -------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- -------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. Be sure to include all necessary
signatures and any additional documents, as
well as signature guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise according
to your written instructions.
- -------------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000 or
phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your
shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and
address on the account. Written instructions,
with a signature guarantee, are required to
send the check to another address or to make
it payable to another person.
- -------------------------------------------------------------------------
[Insert graphic of You can call or write to have redemption
three lightning bolts] proceeds of $1,000 or more wired to a bank or
escrow account. See the policies above for
selling shares by mail or phone.
Before requesting a bank wire, please make
BY WIRE 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, your bank
account number, the ABA routing number, and a
signature guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business
day.
- -------------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund you
arrows pointing in are considering.
opposite directions]
Call Shareholder Services at the number below
BY EXCHANGE or our automated TeleFACTS system, or send
signed written instructions. See the policies
TeleFACTS(R) above for selling shares by mail or phone.
1-800/247-1753
(around-the-clock If you hold share certificates, you will need
access) to return them to the fund before your
exchange can be processed.
- -------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES
777 MARINERS ISLAND BLVD., P.O. BOX 7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE The fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). The fund's NAV is calculated by
dividing its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the
NAV plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
The fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If the fund holds securities listed primarily on a foreign exchange
that trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250
($50 for employee and UGMA/UTMA accounts) because you sell some of your
shares, we may mail you a notice asking you to bring the account back up to
its applicable minimum investment amount. If you choose not to do so within
30 days, we may close your account and mail the proceeds to the address of
record. You will not be charged a CDSC if your account is closed for this
reason.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You will also 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 will also receive confirmations, account statements and
other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS The fund may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5. You will be
considered a market timer if you have (i) requested an exchange out of the
fund within two weeks of an earlier exchange request, or (ii) exchanged
shares out of the fund more than twice in a calendar quarter, or (iii)
exchanged shares equal to at least $5 million, or more than 1% of the fund's
net assets, or (iv) otherwise seem to follow a timing pattern. Shares under
common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies
and reserves certain rights, including:
o The fund may refuse any order to buy shares , including any purchase
under the exchange privilege.
o At any time, the fund may change its investment minimums or waive or
lower its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to
make payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check or wire would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
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.
- ---------------------------------------------------------
COMMISSION (%) ---
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 1.001
12B-1 FEE TO DEALER 0.25
A dealer commission of up to 1% may be paid on NAV purchases by certain
retirement plans1 and up to 0.25% on 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.
[Insert graphic of question mark]QUESTIONS
If you have any questions about the fund or your account, you can write to us
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. You
can also call us at one of the following numbers. For your protection and to
help ensure we provide you with quality service, all calls may be monitored
or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- ---------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m.
(Saturday)
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Plan Services
1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about the fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-730
FRANKLIN ASSET ALLOCATION FUND
STATEMENT OF
ADDITIONAL INFORMATION
MAY 1, 1999
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 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
Risks
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Bond Ratings
- ------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------
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 total 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 may also participate in
a company's success or lack of success through increases or decreases in the
value of the company's shares as traded in the public trading market for such
shares. Equity securities generally take the form of common stock or
preferred stock. Preferred stockholders typically receive greater dividends
but may realize less capital appreciation than common stockholders who may
have greater voting rights as well. Equity securities may also include
convertible securities, warrants or rights. Convertible securities typically
are debt securities or preferred stocks which are convertible into common
stock after certain time periods or under certain circumstances. Warrants or
rights give the holder the right to purchase a common stock within a given
time for a specified price.
DEBT SECURITIES. A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the 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 dent
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 Bond 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 may also purchase securities of foreign issuers
directly in foreign markets, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.
Securities that are acquired by the fund outside the U.S. and that are
publicly traded in the U.S. or on a foreign securities exchange or in a
foreign securities market are not considered by the fund to be an illiquid
asset so long as the fund acquires and holds the security with the intention
of re-selling the security in the foreign trading market, the fund reasonably
believes it can readily dispose of the security for cash in the U.S. or
foreign market and current market quotations are readily available.
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 may
also make it more difficult for the fund to obtain market quotations based on
actual trades for purposes of valuing the fund's portfolio.
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.
SHORT-TERM MONEY MARKET INSTRUMENTS The fund may invest cash being held for
liquidity purposes in short-term debt instruments, including high grade
commercial paper, repurchase agreements, and other money market equivalents.
The fund may also invest in these securities when investments are not
available at prices the fund's manager believes are attractive.
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.
OPTIONS ON SECURITIES The fund may write covered put and call options and
buy put and call options on securities and indexes that trade on securities
exchanges and in the over-the-counter market. Additionally, the fund may
"close out" options it has entered into.
A call option gives the option holder the right to buy the underlying
security from the option writer at the option exercise price at any time
prior to the expiration of the option. A put option gives the option holder
the right to sell the underlying security to the option writer at the option
exercise price at any time prior to the expiration of the option. From time
to time, under certain market conditions, the fund may receive little or no
short-term capital gains from its options transactions, which will reduce the
fund's return.
WRITING COVERED CALL AND PUT OPTIONS ON SECURITIES. The writer of covered
calls gives up the potential for capital appreciation above the exercise
price of the option should the underlying stock rise in value. If the value
of the underlying stock rises above the exercise price of the call option,
the security may be "called away" and the fund required to sell shares of the
stock at the exercise price. The fund will realize a gain or loss from the
sale of the underlying security depending on whether the exercise price is
greater or less than the purchase price of the stock. Any gain will be
increased by the amount of the premium received from the sale of the call;
any loss will be decreased by the amount of the premium received. If a
covered call option expires unexercised, the fund will realize a gain in the
amount of the premium received. If, however, the stock price decreases, the
hedging benefit of the covered call option is limited to the amount of the
premium received.
A call option written by the fund is "covered" if the fund owns the
underlying security that is subject to the call or has an absolute and
immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated
account by its custodian bank) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the fund
holds a call on the same security and in the same principal amount as the
call written where the exercise price of the call held (a) is equal to or
less than the exercise price of the call written or (b) is greater than the
exercise price of the call written if the difference in exercise prices is
maintained by the fund in cash and high grade debt securities in a segregated
account with its custodian bank. A put option written by the fund is
"covered" if the fund maintains cash and high grade debt securities with a
value equal to the exercise price in a segregated account with its custodian
bank, or holds a put on the same security and in the same principal amount as
the put written where the exercise price of the put held is equal to or
greater than the exercise price of the put written.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the
case of a put option, because the option writer may be assigned an exercise
notice at any time prior to the option's expiration. Whether or not an option
expires unexercised, the writer retains the amount of the premium received
from the sale of the option. This amount, of course, may not, in the case of
a covered call option, be sufficient to offset a decline in the market value
of the underlying security during the option period. If a call option is
exercised, the writer realizes a profit or loss from the sale of the
underlying security. If a put option is exercised, the writer must buy the
underlying security at the exercise price, which will usually exceed the
current market value of the underlying security.
The writer of an option who wishes to terminate its obligation may effect a
"closing purchase transaction." This is done by buying an option of the same
series as the option previously written. The effect of the purchase is that
the writer's position will be canceled by the clearing corporation. However,
a writer may not effect a closing purchase transaction after being notified
of the exercise of an option. Likewise, an investor who is the holder of an
option may liquidate its position by effecting a "closing sale transaction."
This is done by selling an option of the same series as the option previously
purchased. There is no guarantee that either a closing purchase or a closing
sale transaction will be available at the time desired by the fund.
Effecting a closing transaction in the case of a written call option will
permit the fund to write another call option on the underlying security, and,
in the case of a written put option, will permit the fund to write another
put option to the extent that the exercise price thereof is secured by
deposited cash or short-term securities. Also, effecting a closing
transaction will permit the proceeds from the sale of any securities subject
to the option or deposited as collateral to be used for other fund
investments. If the fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or at the same time as the sale of the security.
The fund will realize a profit from a closing transaction if the cost of the
transaction is less than the premium received from writing the option. The
fund will realize a loss from a closing transaction if the cost of the
transaction is more than the premium received from writing the option.
Because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the closing transaction of a written call option is likely to be offset
in whole or in part by appreciation of the underlying security owned by the
fund.
The writer of covered puts retains the risk of loss should the underlying
security decline in value. If the value of the underlying stock declines
below the exercise price of the put option, the security may be "put to" the
fund and the fund required to buy the stock at the exercise price. The fund
will incur an unrealized loss to the extent that the current market value of
the underlying security is less than the exercise price of the put option.
However, the loss will be offset at least in part by the premium received
from the sale of the put. If a put option written by the fund expires
unexercised, the fund will realize a gain in the amount of the premium
received.
BUYING CALL AND PUT OPTIONS ON SECURITIES. The premium paid by the buyer of
an option will reflect, among other things, the relationship of the exercise
price to the market price and the volatility of the underlying security, the
remaining term of the option, supply and demand and interest rates.
The fund may buy call options on securities that it intends to buy in order
to limit the risk of a substantial increase in the market price of the
security before the purchase is effected. The fund may also buy call options
on securities held in its portfolio and on which it has written call options.
Prior to its expiration, a call option may be sold in a closing sale
transaction. Profit or loss from such a sale will depend on whether the
amount received is more or less than the premium paid for the call option
(including transaction costs).
The fund may buy put options on particular securities in order to protect
against a decline in the market value of the underlying security below the
exercise price less the premium paid for 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 cash or high quality fixed-income securities with its
custodian bank 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. Additionally, the fund may "close out" futures and
options it has entered into.
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 with its custodian cash or U.S. Treasury obligations equal to a
specified percentage of the value of the futures contract (the "initial
margin"), as required by the relevant contract market and futures commission
merchant. The futures contract will be marked-to-market daily. Should the
value of the futures contract decline relative to the fund's position, the
fund will be required to pay to the futures commission merchant an amount
equal to such change in value.
The fund expects that in the normal course of business it will buy securities
upon termination of long futures contracts and long call options on future
contracts, but under unusual market conditions it may terminate any of the
positions without a corresponding purchase of securities.
STOCK INDEX FUTURES. 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 may also buy and write put and call options on such index futures
and enter into closing transactions with respect to such options.
FUTURE DEVELOPMENTS. The fund may take advantage of opportunities in the area
of options and futures contracts and options on futures contracts and any
other derivative investments that are not presently contemplated for use by
the fund or which are not currently available but that may be developed, to
the extent such opportunities are both consistent with the fund's investment
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 borrowings for temporary or emergency purposes may be
made from banks in an amount up to 10% of its total asset value. No new
investments will be made while any such borrowings are in excess of 5% of
total assets.
REPURCHASE AGREEMENTS The fund will generally 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 fudn may enter into repurchase
agreements with certain banks and broker-dealers. Under a repurchase
agreement, the fudn agrees to buy a u.S. Government security from one of
these issuers and then to sell the security back to the issuer after a short
period of time (generally, less than seven days) at a higher price. The bank
or broker-dealer must transfer to the fund's custodian securities with an
initial value of at least 102% of the dollar amount invested by the fund in
each repurchase agreement.
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.
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
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FOREIGN SECURITIES RISK 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.
All of these factors make developing market equity and fixed-income
securities prices generally more volatile than securities issued in developed
countries.
CURRENCY RISK 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 AGREEMENT RISK 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.
DERIVATIVE SECURITIES RISK 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
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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 affiliations of the officers and board members and their principal
occupations for the past five years are shown below.
POSITION(S)
HELD WITH
THE TRUST PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS DURING THE PAST FIVE YEARS
- -------------------------------------------------------------------------------
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
Advisory Services, Inc., Franklin Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor
Services, Inc. and Franklin Templeton Services, Inc.; officer and/or director
or trustee, as the case may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 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, Quarterdeck Corporation
(software firm) and Digital Transmission Systems, Inc. (wireless
communications); 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) 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,
Inc.; Executive Vice President 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, Inc. 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, Inc. and Franklin Mutual Advisers,
Inc.; 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 and
Director, Franklin Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
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 may
also 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
fees payable to certain noninterested board members by the trust are subject
to reductions resulting from fee caps limiting the amount of fees payable to
board members who serve on other boards within the Franklin Templeton Group
of Funds. 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 TOTAL FEES RECEIVED THE FRANKLIN
RECEIVED FROM THE FRANKLIN TEMPLETON GROUP OF
FROM THE TRUST 1 TEMPLETON GROUP OF FUNDS ON WHICH EACH
NAME FUNDS 2 SERVES 3
- -------------------------------------------------------------------------------
Frank Abbott, III $735.00 $159,051 27
S. Joseph Fortunato $646.00 $367,835 51
Frank W.T. LaHaye $760.00 $163,753 27
Hayato Tanaka $800.00 $ 5,300 2
1. For the fiscal year ended December 31, 1998.
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 164 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. Abbot, 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 wholly owned by 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 $100,000,000;
and
o 1/24 of 1% of the value of net assets over $1000,000,000 and not over
$250,000,000; and
o 9/140 of 1% of the value of net assets in excess of $250,000,000.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement.
For the last three fiscal years ended December 31, the fund paid the
following management fees:
Management Fees Paid ($)
- -------------------------------------------------
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.
For its services, Investor Services receives a fixed fee per account. The
fund may also reimburse Investor Services for certain out-of-pocket expenses,
which may include payments by Investor Services to entities, including
affiliated entities, that provide sub-shareholder services, recordkeeping
and/or transfer agency services to beneficial owners of the fund. The amount
of reimbursements for these services per benefit plan participant fund
account per year may not exceed the per account fee payable by the fund to
Investor Services in connection with maintaining shareholder accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, 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, may also 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 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.
Certain funds in the Franklin Templeton Funds offer multiple classes of
shares. The different classes have proportionate interests in the same
portfolio of investment securities. They differ, however, primarily in their
sales charge structures and Rule 12b-1 plans. Because the fund's sales charge
structure and Rule 12b-1 plan are similar to those of Class A shares, shares
of the fund are considered Class A shares for redemption, exchange and other
purposes. Before January 1, 1999, the fund's shares were considered Class I
shares.
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 may also 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 Percentage (%)
- --------------------------------------------------
Texas Commerce Bank-Avesta 5.86%
Asset Trading Unit
PO Box 2558
Houston TX 77252-2558
FTTC TTEE FOR VALUSELECT 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
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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%. The initial
sales charge 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,
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 may also 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 may also add any company accounts, including retirement plan
accounts. Companies with one or more retirement plans may add together the
total plan assets invested in the Franklin Templeton Funds to determine the
sales charge that applies.
LETTER OF INTENT (LOI). You may buy 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 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 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 purchases you made within 90 days before you filed your LOI may
also 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 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
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. Fund 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 of another
Franklin Templeton Fund who chose to reinvest their distributions in
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.
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. Fund shares may also 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
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 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 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 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, 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 $1
million or more: 1% on sales of $1 million to $2 million, plus 0.80% on sales
over $2 million to $3 million, plus 0.50% on sales over $3 million to $50
million, plus 0.25% on sales over $50 million to $100 million, plus 0.15% on
sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts,
out of its own resources, to securities dealers who initiate and are
responsible for purchases by certain retirement plans without 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,
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. 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 shares without an initial sales charge may also 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 will generally be waived for:
o Account fees
o Sales of 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 by investors who purchased $1 million or more without an
initial sales charge if Distributors did not make any payment to the
securities dealer of record 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 may
also 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 may also 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 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
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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
Connection with
Total Commissions Amount Retained by Redemptions 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 plan, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES The fund has a distribution or "Rule
12b-1" plan. Under the 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 fund. These expenses may include, among others, distribution or
service fees paid to securities dealers or others who have executed a
servicing agreement with the fund, Distributors or its affiliates; a prorated
portion of Distributors' overhead expenses; and the expenses of printing
prospectuses and reports used for sales purposes, and preparing and
distributing sales literature and advertisements.
Payments by the fund under the plan may not exceed 0.25% per year of average
daily net assets, payable quarterly. All distribution expenses over this
amount will be borne by those who have incurred them.
In implementing the plan, the board has determined that the annual fees
payable under the plan will be equal to the sum of: (i) the amount obtained
by multiplying 0.25% by the average daily net assets represented by shares
that were acquired by investors on or after May 1, 1994, the effective date
of the plan (new assets), and (ii) the amount obtained by multiplying 0.15%
by the average daily net assets represented by shares that were acquired
before May 1, 1994 (old assets). These fees will be paid to the current
securities dealer of record on the account. In addition, until such time as
the maximum payment of 0.25% is reached on a yearly basis, up to an
additional 0.05% will be paid to Distributors under the plan. The payments
made to Distributors will be used by Distributors to defray other marketing
expenses that have been incurred in accordance with the plan, such as
advertising.
The fee is a fund expense. This means that all shareholders, regardless of
when they purchased their shares, will bear Rule 12b-1 expenses at the same
rate. The initial rate will be at least 0.20% (0.15% plus 0.05%) of the
average daily net assets of the fund and, as shares are sold on or after May
1, 1994, will increase over time. Thus, as the proportion of shares purchased
on or after May 1, 1994, increases in relation to outstanding shares, the
expenses attributable to payments under the plan will also increase (but will
not exceed 0.25% of average daily net assets). While this is the currently
anticipated calculation for fees payable under the plan, the plan permits the
board to allow the fund to pay a full 0.25% on all assets at any time. The
approval of the board would be required to change the calculation of the
payments to be made under the plan.
The plan does not permit unreimbursed expenses incurred in a particular year
to be carried over to or reimbursed in later years.
In addition to the payments that Distributors or others are entitled to under
the plan, the plan also provides that to the extent the fund, 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 the 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 the plan, plus any other payments deemed to be made
pursuant to the plan, exceed the amount permitted to be paid under the rules
of the 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 plan as a result of
applicable federal law prohibiting certain banks from engaging in the
distribution of mutual fund shares. These banking institutions, however, are
permitted to receive fees under the plan for administrative servicing or for
agency transactions. If you are a customer of a bank that is prohibited from
providing these services, you would be permitted to remain a shareholder of
the fund, and alternate means for continuing the servicing would be sought.
In this event, changes in the services provided might occur and you might no
longer be able to avail yourself of any automatic investment or other
services then being provided by the bank. It is not expected that you would
suffer any adverse financial consequences as a result of any of these changes.
The plan has been approved in accordance with the provisions of Rule 12b-1.
The plan is renewable annually by a vote of the board, including a majority
vote of the board members who are not interested persons of the fund and who
have no direct or indirect financial interest in the operation of the plan,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such board members be done by the
noninterested members of the fund's board. The plan 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 may also terminate their respective distribution or
service agreement at any time upon written notice.
The plan and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a
majority of the outstanding shares, and all material amendments to the plan
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 plan and any related
agreements, as well as to furnish the board with such other information as
may reasonably be requested in order to enable the board to make an informed
determination of whether the plan should be continued.
For the fiscal year ended December 31, 1998, Distributors' eligible
expenditures for advertising, printing, and payments to underwriters and
broker-dealers pursuant to the plan and the amounts the fund paid
Distributors under the plan were:
Distributors' Eligible Amount Paid
Expenses ($) by the Fund ($)
- -----------------------------------------------------------------------------
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. If a Rule 12b-1 plan is adopted, performance figures reflect fees
from the date of the plan's implementation. An explanation of these and other
methods used by the fund to compute or express performance follows.
Regardless of the method used, past performance does not guarantee future
results, and is an indication of the return to shareholders only for the
limited historical period used.
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
- ----------------------------------------------------
7.03% 12.12% 11.88%
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of each period at the end
of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum 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
- ----------------------------------------------------
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 during
the base period. The yield for the 30-day period ended December 31, 1998, was
1.07%.
This figure was obtained using the following SEC formula:
6
Yield = 2 [(A-B + 1) - 1]
----
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
CURRENT DISTRIBUTION RATE Current yield, which is calculated according to a
formula prescribed by the SEC, is not indicative of the amounts which were or
will be paid to shareholders. Amounts paid to shareholders are reflected in
the quoted current distribution rate. The current distribution rate is
usually computed by annualizing the dividends paid per share during a certain
period and dividing that amount by the current maximum offering price. The
current distribution rate differs from the current yield computation because
it may include distributions to shareholders from sources other than
dividends and interest, such as premium income from option writing and
short-term capital gains, and is calculated over a different period of time.
The 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 may also 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 may also compare performance (as calculated
above) to performance as reported by other investments, indices, and
averages. These comparisons may include, but are not limited to, the
following examples:
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 - Fixed Income Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
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 may also 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 3 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 $220 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 115 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 BOND 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 may also 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.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually their promissory obligations not having an original maturity
in excess of nine months. Moody's employs the following designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
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.
FRANKLIN ASSET ALLOCATION FUND
File Nos. 2-12646
811-730
FORM N-1A
PART C
Other Information
ITEM 23. EXHIBITS.
The following exhibits are incorporated by reference to the previously
filed document indicated below, except as noted:
(A) ARTICLES OF INCORPORATION
(i) Agreement and Declaration of Trust for the Franklin Asset
Allocation Fund dated March 21, 1996
Filing: Post-effective Amendment No. 56 to Registration
Statement on Form N-1A
File No. 2-12647
Filing Date: May 17, 1996
(ii) Certificate of Trust for the Franklin Asset Allocation Fund
dated March 21, 1996
Filing: Post-effective Amendment No. 56 to Registration
Statement on Form N-1A
File No. 2-12647
Filing Date: May 17, 1996
(B) BY-LAWS
(i) By-Laws
Filing: Post-effective Amendment No. 56 to Registration
Statement on Form N-1A
File No. 2-12647
Filing Date: May 17, 1996
(C) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS
Not Applicable
(D) INVESTMENT ADVISORY CONTRACTS
(i) Management Agreement between Registrant and Franklin
Advisers, Inc. dated March 21, 1996
Filing: Post-Effective Amendment No. 58 to Registration
Statement on Form N-1A
File No. 2-21647
Filing Date: April 29, 1997
(E) UNDERWRITING CONTRACTS
(i) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc. and Securities Dealers
Registrant: Franklin Value Investors Trust
Filing: Post-effective Amendment No. 19 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: December 29, 1998
(ii) Amended and Restated Distribution Agreement between the
Registrant and Franklin/Templeton Distributors, Inc. dated
July 26, 1996
Filing: Post-effective Amendment No. 59 to Registration
Statement on Form N-1A
File No. 2-12647
Filing Date: February 23, 1998
(F) BONUS OR PROFIT SHARING CONTRACTS
Not Applicable
(G) CUSTODIAN AGREEMENTS
(i) Master Custodian Agreement between Registrant and Bank of New
York dated February 16, 1996
Filing: Post-effective Amendment No. 55 to Registration
Statement on Form N-1A
File No. 2-12647
Filing Date: March 1, 1996
(ii) Amendment dated May 7, 1997 to Master Custody Agreement
Between Registrant and Bank of New York dated February 16, 1996
Filing: Post-effective Amendment No. 59 to Registration
Statement on Form N-1A
File No. 2-12647
Filing Date: February 23, 1998
(iii) Amendment dated February 27, 1998 to Exhibit A in the Master
Custody Agreement between Registrant and Bank of New York dated
February 16, 1996
Registrant: Franklin Value Investors Trust
Filing: Post-effective Amendment No. 19 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: December 29, 1998
(iv) Terminal Link Agreement between Registrant and Bank of New York
dated February 16, 1996
Filing: Post-effective Amendment No. 55 to Registration
Statement on Form N-1A
File No. 2-12647
Filing Date: March 1, 1996
(H) OTHER MATERIAL CONTRACTS
(i) Subcontract for Fund Administrative Services
(I) LEGAL OPINION
(i) Opinion and Consent of Counsel dated February 5, 1999
(J) OTHER OPINIONS
(i) Consent of Independent Auditors
(K) OMITTED FINANCIAL STATEMENTS
Not Applicable
(L) INITIAL CAPITAL AGREEMENTS
Not Applicable
(M) RULE 12B-1 PLAN
(i) Distribution Plan pursuant to Rule 12b-1 between the
Registrant and Franklin/Templeton Distributors, Inc. dated
August 1, 1996
Filing: Post-effective Amendment No. 59 to Registration
Statement on Form N-1A
File No. 2-12647
Filing Date: February 23, 1998
(O) RULE 18F-3 PLAN
Not Applicable
(P) POWER OF ATTORNEY
(i) Power of Attorney dated March 21, 1996
Filing: Post-effective Amendment No. 56 to Registration
Statement on Form N-1A
File No. 2-12647
Filing Date: May 17, 1996
(ii) Certificate of Secretary dated March 21, 1996
Filing: Post-effective Amendment No. 56 to Registration
Statement on Form N-1A
File No. 2-12647
Filing Date: May 17, 1996
(27) FINANCIAL DATA SCHEDULE
(i) Financial Data Schedule
ITEM 24 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 25 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
Please see the Declaration of Trust, By-Laws, Management Agreement and
Distribution Agreements previously filed as exhibits and incorporated herein
by reference.
ITEM 26 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
The officers and directors of the Registrant's manager also serve as officers
and/or directors for (1) Franklin Advisers, Inc.'s ("Advisers") corporate
parent, Franklin Resources, Inc., and/or (2) other investment companies in
the Franklin Templeton Group of Funds. In addition, Mr. Charles B. Johnson
was formerly a director of General Host Corporation. For additional
information please see Part B and Schedules A and D of Form ADV of Advisers
(SEC File 801-26292), incorporated herein by reference, which sets forth the
officers and directors of Advisers and information as to any business,
profession, vocation or employment of a substantial nature engaged in by
those officers and directors during the past two years.
ITEM 27 PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund, Inc.
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
Franklin Templeton Japan Fund
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
(b) The information required by this Item 29 with respect to each director
and officer of Distributors is incorporated by reference to Schedule A of
Form BD filed by Distributors with the Securities and Exchange Commission
pursuant to the Securities Act of 1934 (SEC File No. 8-5889).
(c) Not Applicable. Registrant's principal underwriter is an affiliated
person of an affiliated person of the Registrant.
ITEM 28 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 are kept by the Registrant or
its shareholder services agent, Franklin/Templeton Investor Services, Inc.,
both of whose address is 777 Mariners Island Blvd., San Mateo, CA.
94404-1585.
ITEM 29 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 30 UNDERTAKINGS
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of San Mateo and the State of
California, on the 26th day of February 1999.
FRANKLIN ASSET ALLOCATION FUND
By: EDWARD B. JAMIESON*
Edward B. Jamieson
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
and on the dates indicated:
EDWARD B. JAMIESON* Principal Executive Officer
(Edward B. Jamieson) and Trustee
Dated: February 26, 1999
MARTIN L. FLANAGAN* Principal Financial Officer
(Martin L. Flanagan) Dated: February 26, 1999
DIOMEDES LOO-TAM* Principal Accounting Officer
(Diomedes Loo-Tam) Dated: February 26, 1999
FRANK H. ABBOTT, III* Trustee
(Frank H. Abbott, III) Dated: February 26, 1999
S. JOSEPH FORTUNATO* Trustee
(S. Joseph Fortunato) Dated: February 26, 1999
CHARLES B. JOHNSON* Trustee and Chairman
(Charles B. Johnson) of the Board
Dated: February 26, 1999
HAYATO TANAKA* Trustee
(Hayato Tanaka) Dated: February 26, 1999
R. MARTIN WISKEMANN* Trustee
(R. Martin Wiskemann) Dated: February 26, 1999
*By /s/ Larry L. Greene
Attorney-in-Fact
(Pursuant to Power of Attorney previously filed)
FRANKLIN ASSET ALLOCATION FUND
REGISTRATION STATEMENT
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.(a)(i) Agreement and Declaration of Trust dated *
March 21, 1996
EX-99.(a)(ii) Certificate of Trust dated March 21, 1996 *
EX-99.(b)(i) By-Laws *
EX-99.(d)(i) Management Agreement between Registrant and *
Franklin Advisers, Inc. dated March 21, 1996
EX-99.(e)(i) Forms of Dealer Agreement between *
Franklin/Templeton Distributors, Inc.
and Securities Dealers
EX-99.(e)(ii) Amended and Restated Distribution Agreement *
between the Registrant and
Franklin/Templeton Distributors, Inc. dated
July 26, 1996
EX-99.(g)(i) Master Custodian Agreement between *
Registrant and Bank of New York dated
February 16, 1996
EX-99.(g)(ii) Amendment dated May 7, 1997 to Master *
Custody Agreement Between Registrant and
Bank of New York
EX-99.(g)(iii) Amendment dated February 27, 1998 to
Exhibit A in the Master Custody *
Agreement between Registrant and
Bank of New York
EX-99.(g)(iv) Terminal Link Agreement between *
Registrant and Bank of New York, dated
February 16, 1996
EX-99.(h)(i) Subcontract for Fund Administrative Services Attached
EX-99.(i)(i) Opinion and Consent of Counsel Attached
EX-99.(j)(i) Consent of Independent Auditors Attached
EX-99.(m)(i) 12b-1 plan between Registrant and *
Franklin/Templeton Distributors, Inc. dated
August 1, 1996
EX-99.(p)(i) Power of Attorney dated March 21, 1996 *
EX-99.(p)(ii) Certificate of Secretary dated March 21, *
1996
EX-27.(i) Financial Data Schedule Attached
*Incorporated by reference
SUBCONTRACT FOR FUND ADMINISTRATIVE SERVICES
This Subcontract for Fund Administrative Services ("Subcontract")
is made as of October 1, 1996 between FRANKLIN ADVISERS, INC., a California
corporation, hereinafter called the "Investment Manager," and FRANKLIN
TEMPLETON SERVICES, INC. (the "Administrator").
In consideration of the mutual agreements herein made, the
Administrator and the Investment Manager understand and agree as follows:
I. Prime Contract.
This Subcontract is made in order to assist the Investment Manager in
fulfilling certain of the Investment Manager's obligations under each
investment management and investment advisory agreement ("Agreement") between
the Investment Manager and each Investment Company listed on Exhibit A,
("Investment Company") for itself or on behalf of each of its series listed
on Exhibit A (each, a "Fund"). This Subcontract is subject to the terms of
each Agreement, which is incorporated herein by reference.
II. Subcontractual Provisions.
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to each Fund:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless
these facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment on
behalf of the Fund;
(d) supervising preparation of periodic reports to
shareholders, notices of dividends, capital gains distributions and tax
credits; and attending to routine correspondence and other communications
with individual shareholders when asked to do so by the Fund's shareholder
servicing agent or other agents of the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by
the Fund; providing fund accounting services, including preparing and
supervising publication of daily net asset value quotations, periodic
earnings reports and other financial data; and coordinating trade settlements;
(f) monitoring relationships with organizations serving the
Fund, including custodians, transfer agents, public accounting firms, law
firms, printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the 1940 Act and
the rules and regulations thereunder, and under other applicable state and
federal laws; and maintaining books and records for the Fund (other than
those maintained by the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's
income tax returns, and monitoring the Fund's compliance with subchapter M of
the Internal Revenue Code, as amended, and other applicable tax laws and
regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and
foreign laws and regulations applicable to the operation of investment
companies; the Fund's investment objectives, policies and restrictions; and
the Code of Ethics and other policies adopted by the Investment Company's
Board of Trustees or Directors ("Board") or by the Fund's investment adviser
and applicable to the Fund;
(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities;
(k) preparing and filing regulatory reports, including without
limitation Forms N-1A and NSAR, proxy statements, information statements and
U.S. and foreign ownership reports; and
(l) providing support services incidental to carrying out these
duties.
Nothing in this Agreement shall obligate the Investment Company or any Fund
to pay any compensation to the officers of the Investment Company. Nothing
in this Agreement shall obligate the Administrator to pay for the services of
third parties, including attorneys, auditors, printers, pricing services or
others, engaged directly by the Fund to perform services on behalf of the
Fund.
(2) The Investment Manager agrees to pay to the Administrator as
compensation for such services a monthly fee equal on an annual basis to
0.15% of the first $200 million of the average daily net assets of each Fund
during the month preceding each payment, reduced as follows: on such net
assets in excess of $200 million up to $700 million, a monthly fee equal on
an annual basis to 0.135%; on such net assets in excess of $700 million up to
$1.2 billion, a monthly fee equal on an annual basis to 0.1%; and on such net
assets in excess of $1.2 billion, a monthly fee equal on an annual basis to
0.075%.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually
bound hereunder by the terms of any publicly announced waiver of its fee, or
any limitation of each affected Fund's expenses, as if such waiver or
limitation were fully set forth herein.
(3) This Subcontract shall become effective on the date written above
and shall continue in effect as to each Investment Company and each Fund so
long as (1) the Agreement applicable to the Investment Company or Fund is in
effect and (2) this Subcontract is not terminated. This Subcontract will
terminate as to any Investment Company or Fund immediately upon the
termination of the Agreement applicable to the Investment Company or Fund,
and may in addition be terminated by either party at any time, without the
payment of any penalty, on sixty (60) days' written notice to the other party.
(4) In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Administrator, or of reckless disregard of its
duties and obligations hereunder, the Administrator shall not be subject to
liability for any act or omission in the course of, or connected with,
rendering services hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Subcontract to
be executed by their duly authorized officers.
FRANKLIN ADVISERS, INC.
By: /s/ Deborah R. Gatzek
Title: Vice President
& Assistant Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By: /s/ Harmon E. Burns
Title: Executive Vice President
TERMINATION OF AGREEMENT
Franklin Advisers, Inc. and Templeton Global Investors, Inc., hereby agree
that the Subcontracts for Administrative Services between them dated: (1)
August 28, 1996 for the Franklin Templeton Global Trust on behalf of all
series of the Trust; (2) July 24, 1995 for the Franklin Templeton
International Trust on behalf of its series Templeton Foreign Smaller
Companies Fund (formerly known as Franklin International Equity Fund); (3)
July 18, 1995 for the Franklin Templeton International Trust on behalf of its
series Templeton Pacific Growth Fund; and (4) July 14, 1995 for the Franklin
Investors Securities Trust on behalf of its series Franklin Global Government
Income Fund are terminated effective as of the date of the Subcontract for
Fund Administrative Services above.
FRANKLIN ADVISERS, INC.
By /s/ Harmon E. Burns
Executive Vice President
Templeton Global Investors, Inc.
By /s/ Martin L. Flanagan
President, CEO
SUBCONTRACT FOR FUND ADMINISTRATIVE SERVICES
BETWEEN
FRANKLIN ADVISERS, INC.
AND
FRANKLIN TEMPLETON SERVICES, INC.
EXHIBIT A
- -------------------------------------------------------------------------------
INVESTMENT COMPANY SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------
Franklin High Income Trust
AGE High Income Fund
Franklin Asset Allocation Fund
Franklin California Tax-Free Income
Fund, Inc.
Franklin California Tax-Free Trust
Franklin California Insured Tax-Free Income Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc.
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund
Franklin Federal Tax- Free Income
Fund
Franklin Gold Fund
Franklin Government Securities Trust
Franklin Investors Securities Trust
Franklin Global Government Income Fund
Franklin Short-Intermediate U.S. Government
Securities Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Municipal Securities Trust
Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INVESTMENT COMPANY SERIES ---(IF APPLICABLE)
- --------------------------------------------------------------------------------
Franklin New York Tax-Free Trust
Franklin New York Tax-Exempt Money Fund
Franklin New York Insured Tax-Free Income Fund
Franklin New York Intermediate-Term Tax-Free
Income Fund**
Franklin Tax-Advantaged
International Bond Fund
Franklin Tax-Advantaged U.S.
Government Securities Fund
Franklin Tax-Advantaged High
Yield Securities Fund
Franklin Real Estate Securities
Franklin Real Estate Securities Fund Trust
Franklin Strategic Mortgage
Portfolio
Franklin Strategic Series
Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Massachusetts Insured Tax-Free Income
Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free
Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income Fund
Franklin Michigan Tax-Free Income Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INVESTMENT COMPANY SERIES ---(IF APPLICABLE)
- --------------------------------------------------------------------------------
Franklin Templeton International
Trust Templeton Pacific Growth Fund
Templeton Foreign Smaller Companies Fund
Franklin Templeton Global Trust
Franklin Templeton German Government Bond Fund
Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
CLOSED END FUNDS:
Franklin Multi-Income Trust
Franklin Principal Maturity Trust
Franklin Universal Trust
- --------------------------------------------------------------------------------
Law Offices
STRADLEY, RONON, STEVENS & YOUNG, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
(215) 564-8000
Direct Dial: (215) 564-8115
February 5, 1999
Franklin Asset Allocation Fund
777 Mariners Island Blvd.
San Mateo, CA 94403-7777
Re: LEGAL OPINION-SECURITIES ACT OF 1933
Ladies and Gentlemen:
We have examined the Agreement and Declaration of Trust, as amended
and restated,(the "Declaration of Trust") of the Franklin Asset Allocation Fund
(the "Trust"), a business trust organized under the laws of the State of
Delaware on March 21, 1996, the By-Laws of the Trust, and the resolutions
adopted by the Trust's Board of Trustees organizing the business of the Trust,
all as amended to date, and the various pertinent proceedings we deem material.
We have also examined the Notification of Registration and the Registration
Statements filed under the Investment Company Act of 1940 (the "Investment
Company Act") and the Securities Act of 1933 (the "Securities Act"), all as
amended to date, as well as other items we deem material to this opinion.
The Trust is authorized by its Declaration of Trust to issue an
unlimited number of shares of beneficial interest with a par value of $1.00 per
share. The Trust issues shares of one series designated the Franklin Asset
Allocation Fund. The Declaration of Trust designates, or authorizes the
Trustees to designate, one or more series or classes of shares of the Trust,and
allocates, or authorizes the Trustees to allocate, shares of beneficial interest
to each such series or class. The Declaration of Trust also empowers the
Trustees to designate any additional series or classes and allocate shares to
such series or classes.
The Trust has filed with the U.S. Securities and Exchange Commission
(the "Commission"), a Registration Statement under the Securities Act, which
Registration Statement is deemed to register an indefinite number of shares of
the Trust pursuant to the provisions of Rule 24f-2 under the Investment Company
Act. You have further advised us that the Trust has filed, and each year
hereafter will timely file, a Notice pursuant to Rule 24f-2 perfecting the
registration of the shares sold by the Trust during each fiscal year during
which such registration of an indefinite number of shares remains in effect.
You have also informed us that the shares of the Trust have been,
and will continue to be, sold in accordance with the Trust's usual method of
distributing its registered shares, under which prospectuses are made available
for delivery to offerees and purchasers of such shares in accordance with
Section 5(b) of the Securities Act.
Based upon the foregoing information and examination, so long as the
Trust remains a valid and subsisting trust under the laws of the State of
Delaware, and the registration of an indefinite number of shares of the Trust
remains effective, the authorized shares of the Trust when issued for the
consideration set by the Board of Trustees pursuant to the Declaration of
Trust, and subject to compliance with Rule 24f-2, will be legally outstanding,
fully-paid, and non-assessable shares, and the holders of such shares will have
all the rights provided for with respect to such holding by the Declaration of
Trust and the laws of the State of Delaware.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement of the Trust, and any amendments thereto, covering the
registration of the shares of the Trust under the Securities Act and the
applications,registration statements or notice filings, and amendments thereto,
filed in accordance with the securities laws of the several states in which
shares of the Trust are offered, and we further consent to reference in the
registration statement of the Trust to the fact that this opinion concerning
the legality of the issue has been rendered by us.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
BY: /S/ BRUCE G. LETO
Bruce G. Leto
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No.
60 to the Registration Statement of Franklin Asset Allocation Fund on Form
N-1A (File No. 2-12647) of our report dated February 4, 1999 on our audit of
the financial statements and financial highlights of Franklin Asset
Allocation Fund, which report is included in the Annual Report to
Shareholders for the year ended December 31, 1998 filed with the Securities
and Exchange Commission pursuant to section 30(d) of the Investment Company
Act of 1940, which is incorporated by reference in the Registration
Statement. We also consent to the reference to our firm under the captions
"Financial Highlights" and "Auditor."
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Francisco, California
February 26, 1999
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FRANKLIN ASSET ALLOCATION FUND DECEMBER 31, 1998
ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> FRANKLIN ASSET ALLOCATION FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 72,661,825
<INVESTMENTS-AT-VALUE> 95,092,264
<RECEIVABLES> 15,534,969
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 110,627,233
<PAYABLE-FOR-SECURITIES> 1,490,163
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 869,184
<TOTAL-LIABILITIES> 2,359,347
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 85,695,698
<SHARES-COMMON-STOCK> 10,866,825
<SHARES-COMMON-PRIOR> 9,902,204
<ACCUMULATED-NII-CURRENT> 35,773
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 357,292
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 22,179,123
<NET-ASSETS> 108,267,886
<DIVIDEND-INCOME> 1,005,016
<INTEREST-INCOME> 2,024,036
<OTHER-INCOME> 0
<EXPENSES-NET> (1,123,535)
<NET-INVESTMENT-INCOME> 1,905,517
<REALIZED-GAINS-CURRENT> 1,166,727
<APPREC-INCREASE-CURRENT> 9,935,854
<NET-CHANGE-FROM-OPS> 13,008,098
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,984,332)
<DISTRIBUTIONS-OF-GAINS> (1,213,212)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,374,604
<NUMBER-OF-SHARES-REDEEMED> (3,711,329)
<SHARES-REINVESTED> 301,346
<NET-CHANGE-IN-ASSETS> 18,637,702
<ACCUMULATED-NII-PRIOR> 79,306
<ACCUMULATED-GAINS-PRIOR> 439,059
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (623,263)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,123,535)
<AVERAGE-NET-ASSETS> 99,652,815
<PER-SHARE-NAV-BEGIN> 9.050
<PER-SHARE-NII> .180
<PER-SHARE-GAIN-APPREC> 1.030
<PER-SHARE-DIVIDEND> (.190)
<PER-SHARE-DISTRIBUTIONS> (.110)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 9.960
<EXPENSE-RATIO> 1.130
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
