FRANKLIN ASSET
ALLOCATION FUND
ANNUAL REPORT
DECEMBER 31, 1998
SHAREHOLDER LETTER
Your Fund's Goal: Franklin Asset Allocation Fund seeks to provide total return
through investment in common stocks, investment grade corporate and U.S.
government bonds, short-term money market instruments, securities of foreign
issuers and real estate securities.
Dear Shareholder:
We are pleased to bring you this annual report of the Franklin Asset Allocation
Fund for the 12 months ended December 31, 1998. During the first quarter of
1998, U.S. gross domestic product (GDP) increased at an annualized rate of 5.5%.
After that, however, the manufacturing sector was hurt by the Asian currency
crisis during the second, third and fourth quarters, and GDP rose 1.8%, 3.7% and
5.6% respectively. The U.S. stock market performed well through July, but
declined precipitously in August. Responding to the slowing economy and benign
inflation, the Federal Reserve Board (the Fed) lowered interest rates in
September, October and November. Following the Fed's action, the U.S. equity
market rebounded, and the Standard and Poor's(R) 500 (S&P 500(R)) Stock Index
ended the year with a return of +28.58%.(1) Within this environment, Franklin
Asset Allocation Fund (which has had only one negative return in the last
sixteen years) delivered a +13.54% one-year total return as shown in the
Performance Summary on page 5. Largely
(1) Source: Standard & Poor's Micropal. Indices are unmanaged and include
reinvested dividends and interest. One cannot invest directly in an index.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 8 of
this report.
CONTENTS
Shareholder Letter ......... 1
Performance Summary ........ 5
Financial Highlights &
Statement of Investments ... 7
Financial Statements ....... 12
Notes to
Financial Statements ....... 15
Independent
Auditors' Report ........... 19
Tax Information ............ 20
[FUND CATEGORY GRAPHIC]
<PAGE>
ASSET ALLOCATION
Based on Total Net Assets
12/31/98
[ASSET ALLOCATION PIE CHART]
GRAPHIC MATERIAL (1)
This chart shows in pie format the asset allocation breakdown of securities in
Franklin Asset Allocation Fund on December 31, 1998, based on total net assets.
Stocks .................... 67.2%
Fixed-Income
Securities ................ 17.9%
Short-Term
Investments and
Other Net Assets .......... 14.9%
because of its asset allocation among equities as well as bonds and cash, it
outperformed the Lehman Brothers Government/Corporate (LB Gov't/Corp.) Bond
Index which posted a total return of only +9.47%.(1)
During the reporting period, we actively shifted assets among stocks, bonds and
cash. For example, in late spring and early summer we began increasing our
weighting in fixed-income securities to insulate the fund from stock market
volatility. When the Fed lowered the discount rate in October, we expected a
positive response in the stock market and began moving the fund's assets back
into equities. By the end of the reporting period, we suspected that many stocks
were overvalued, and decreased our equity weighting in favor of bonds and cash.
On December 31, 1998, 67.2% of the fund's total net assets were in equities,
17.9% were in fixed-income securities and 14.9% were in short-term investments
and other net assets.
The fund's performance benefited from the rise in value of many of our
technology stocks during the reporting period. Shares of Cisco Systems Inc., one
of our largest holdings, appreciated 149.7% during the year. The fund also
profited when we sold our position in Tellabs Inc. after the failure of its
proposed merger with Ciena Corp. Taking advantage of market volatility, we
established a position in Ascend Communications Inc. at what we believed to be a
reasonable price. In our opinion, Ascend, like many other technology companies,
has strong growth potential.
2
<PAGE>
At the beginning of the reporting period, we continued to lower our exposure to
sectors such as energy and basic materials, which had been adversely affected by
economic turmoil in Asia. But seeking to profit from lower U.S. interest rates,
we boosted the fund's financial services weighting. Because we believed its
merger with NationsBank would result in economies of scale, we increased our
holdings of BankAmerica Corp. We also initiated positions in American
International Group Inc., one of the world's largest property and casualty
insurance providers, and Fannie Mae, the main source of U.S. residential
mortgage funds and a beneficiary of refinancing activity induced by lower
interest rates. Within the consumer cyclicals sector, we focused on the general
merchandising retail industry. We maintained positions in leading companies and
our shares of Costco Companies Inc., Wal-Mart Stores Inc. and Dayton Hudson
Corp. appreciated 61.8%, 106.5% and 60.7%, respectively, during the fiscal year.
Looking forward, we believe that 1999 probably will be a year of transition for
the U.S. economy. We expect this to cause continued volatility in equity
markets, creating an excellent opportunity for the fund to exercise its
flexibility in shifting between asset types, market sectors and industry groups.
GRAPHIC MATERIAL (2)
This table shows the top 10 sectors represented in Franklin Asset Allocation
Fund on December 31, 1998, based on total net assets.
Top 10 Sectors
12/31/98
<TABLE>
<CAPTION>
% of Total
Sector Net Assets
- ------ ----------
<S> <C>
Electronic Technology 12.9%
Finance .............. 8.3%
Telecommunications ... 8.3%
Health Technology .... 5.8%
Utilities ............ 5.8%
Consumer Non-Durables 5.0%
Retail Trade ......... 4.6%
Consumer Services .... 3.1%
Energy Minerals ...... 2.7%
Producer Manufacturing 2.7%
</TABLE>
3
<PAGE>
GRAPHIC MATERIAL (3)
This table lists the top 10 equity holdings, including industry, of Franklin
Asset Allocation Fund as of December 31, 1998, based on total net assets.
Top 10 Equity Holdings
12/31/98
<TABLE>
<CAPTION>
% of Total
Company/Industry Net Assets
<S> <C>
The Time Warner Inc./ Consumer Services 2.29%
Philip Morris Cos. Inc./ Consumer Non-Durables 1.98%
Symbol Technologies Inc./ Electronic Technology 1.96%
Cisco Systems Inc./ Electronic Technology 1.93%
Swisscom AG/ Utilities and Telecommunications 1.89%
Equant NV, N.Y. shs./ Technology Services 1.89%
IMS Health Inc./ Health Services 1.74%
Motorola Inc./ Electronic Technology 1.69%
BankAmerica Corp./ Finance 1.67%
Genzyme Corp., General Division/ Health Technology 1.61%
</TABLE>
This discussion reflects our views and opinions as of December 31, 1998, the end
of the reporting period. However, market and economic conditions are changing
constantly, which may affect our strategies and portfolio holdings. Although
historic performance is no guarantee of future results, these insights may lead
to a better understanding of how we pursue our investment goal.
We appreciate your participation in Franklin Asset Allocation Fund and welcome
your comments and suggestions.
Sincerely,
/s/ Lisa A. Costa
- -----------------
Lisa A. Costa
Portfolio Manager
Franklin Asset Allocation Fund
4
<PAGE>
PERFORMANCE SUMMARY AS OF 12/31/98
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (1/1/98 - 12/31/98)
<TABLE>
<CAPTION>
CLASS I CHANGE 12/31/98 12/31/97
------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$0.91 $9.96 $9.05
</TABLE>
<TABLE>
<CAPTION>
Distributions
------------------------------
<S> <C>
Dividend Income $0.1850
Long-term Capital Gain $0.1078
Short-term Capital Gain $0.0058
TOTAL $0.2986
</TABLE>
Performance
<TABLE>
<CAPTION>
SINCE
OBJECTIVE
CHANGE
Class I 1-Year 5-Year (5/1/91) 10-Year
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +13.54% +88.00% +173.18% +225.97%
Average Annual Total Return(2) +7.03% +12.12% +13.12% +11.88%
Value of $10,000 Investment(3) $10,703 $17,718 $25,730 $30,736
30-Day Standardized Yield(4) +1.07%
</TABLE>
<TABLE>
<CAPTION>
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One Year
Total Return(5) +0.48% +21.79% +17.41% +15.24% +13.54%
</TABLE>
Franklin Asset Allocation Fund paid distributions derived from long-term capital
gains totaling 10.78 cents ($0.1078) per share in July and December 1998. The
fund hereby designates such distributions as capital gain dividends per Internal
Revenue Code Section 852 (b)(3).
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares.
Past performance is not predictive of future results.
CLASS I:
Subject to the current, maximum 5.75% initial sales charge. Prior to August 3,
1998, fund shares were offered at a lower initial sales charge, thus actual
returns may differ. Effective May 1, 1994, the fund eliminated the sales charge
on reinvested dividends and implemented a Rule 12b-1 Plan, which affects
subsequent performance.
Name and objective changed in August 1996 and May 1991. Formerly Franklin
Premier Return Fund and Franklin Option Fund, respectively.
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the applicable, maximum
sales charge(s) for that class.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the current applicable, maximum
sales charge(s) for that class.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended December 31, 1998.
5. One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include the sales
charges.
5
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
12/31/98
Class 1
- ---------------------------------
<S> <C>
1-Year +7.03%
5-Year +12.12%
Since Objective
Change (5/1/91) +13.12%
10-Year +11.88%
</TABLE>
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged indices differ from the fund in composition, do not pay management
fees or expenses and include reinvested dividends. One cannot invest directly in
an index. Total return represents the change in value of an investment over the
periods shown. It includes the current, applicable, maximum sales charge, fund
expenses, account fees, and reinvested distributions. Performance of the fund's
shares exceeded the rate of inflation as measured by the Consumer Price Index
(CPI).
CLASS I Since Objective Change (5/1/91-12/31/98)
[LINE GRAPH]
GRAPHIC MATERIAL (4)
The following line graph compares the performance of Franklin Asset Allocation
Fund with the Standard and Poor's(R) 500 (S&P 500(R)) Index, the Lehman Brothers
Government/Corporate (LB Gov't/Corp.) Bond Index, and the Consumer Price Index
(CPI) based on a $10,000 investment from 5/1/91 to 12/31/98. *Source: Standard
and Poor's Micropal.
DATE FRANKLIN ASSET S&P 500 LB GOV'T/CORP CPI
ALLOCATION FUND BOND INDEX
- -------------------------------------------------------------------------------
5/1/91 $9,419 $10,000 $10,000 $10,000
5/31/91 $9,840 $10,431 $10,047 $10,030
6/30/91 $9,458 $9,953 $10,036 $10,059
7/31/91 $9,661 $10,417 $10,162 $10,074
8/31/91 $9,823 $10,664 $10,396 $10,103
9/30/91 $9,827 $10,486 $10,613 $10,148
10/31/91 $9,971 $10,626 $10,708 $10,163
11/30/91 $9,559 $10,198 $10,815 $10,193
12/31/91 $10,116 $11,365 $11,179 $10,200
1/31/92 $10,365 $11,153 $11,014 $10,215
2/29/92 $10,655 $11,297 $11,072 $10,252
3/31/92 $10,595 $11,077 $11,011 $10,304
4/30/92 $10,846 $11,403 $11,078 $10,318
5/31/92 $10,804 $11,459 $11,292 $10,333
6/30/92 $10,678 $11,288 $11,458 $10,370
7/31/92 $10,888 $11,749 $11,752 $10,392
8/31/92 $10,657 $11,509 $11,856 $10,421
9/30/92 $10,911 $11,643 $12,018 $10,450
10/31/92 $10,763 $11,683 $11,834 $10,487
11/30/92 $11,166 $12,080 $11,823 $10,501
12/31/92 $11,548 $12,229 $12,026 $10,494
1/31/93 $11,805 $12,331 $12,289 $10,545
2/28/93 $11,933 $12,499 $12,544 $10,582
3/31/93 $12,191 $12,763 $12,587 $10,619
4/30/93 $12,299 $12,454 $12,684 $10,649
5/31/93 $12,514 $12,786 $12,677 $10,664
6/30/93 $12,697 $12,824 $12,965 $10,679
7/31/93 $12,632 $12,772 $13,048 $10,679
8/31/93 $13,044 $13,256 $13,348 $10,709
9/30/93 $13,184 $13,154 $13,395 $10,731
10/31/93 $13,424 $13,427 $13,450 $10,775
11/30/93 $13,315 $13,299 $13,298 $10,783
12/31/93 $13,686 $13,460 $13,356 $10,783
1/31/94 $14,126 $13,918 $13,557 $10,812
2/28/94 $14,016 $13,540 $13,261 $10,849
3/31/94 $13,565 $12,950 $12,936 $10,886
4/30/94 $13,609 $13,116 $12,829 $10,901
5/31/94 $13,764 $13,331 $12,806 $10,909
6/30/94 $13,597 $13,004 $12,776 $10,946
7/31/94 $13,842 $13,431 $13,032 $10,975
8/31/94 $14,221 $13,981 $13,037 $11,019
9/30/94 $14,054 $13,640 $12,840 $11,049
10/31/94 $14,121 $13,947 $12,826 $11,057
11/30/94 $13,651 $13,440 $12,803 $11,071
12/31/94 $13,752 $13,638 $12,888 $11,071
1/31/95 $13,909 $13,992 $13,135 $11,115
2/28/95 $14,382 $14,537 $13,440 $11,160
3/31/95 $14,663 $14,966 $13,530 $11,197
4/30/95 $14,731 $15,406 $13,718 $11,233
5/31/95 $15,093 $16,022 $14,293 $11,256
6/30/95 $15,353 $16,394 $14,407 $11,278
7/31/95 $15,627 $16,939 $14,351 $11,278
8/31/95 $15,718 $16,981 $14,535 $11,308
9/30/95 $16,014 $17,697 $14,683 $11,330
10/31/95 $15,968 $17,634 $14,899 $11,368
11/30/95 $16,634 $18,408 $15,144 $11,360
12/31/95 $16,749 $18,763 $15,367 $11,352
1/31/96 $17,257 $19,401 $15,462 $11,419
2/29/96 $17,419 $19,582 $15,135 $11,455
3/31/96 $17,627 $19,769 $15,007 $11,515
4/30/96 $17,952 $20,060 $14,904 $11,560
5/31/96 $18,231 $20,578 $14,879 $11,582
6/30/96 $18,313 $20,656 $15,078 $11,589
7/31/96 $17,589 $19,743 $15,113 $11,611
8/31/96 $18,032 $20,159 $15,076 $11,633
9/30/96 $18,651 $21,294 $15,345 $11,670
10/31/96 $18,910 $21,882 $15,702 $11,707
11/30/96 $19,801 $23,536 $15,991 $11,730
12/31/96 $19,665 $23,070 $15,814 $11,730
1/31/97 $20,091 $24,512 $15,833 $11,767
2/28/97 $19,972 $24,703 $15,866 $11,804
3/31/97 $19,807 $23,688 $15,677 $11,833
4/30/97 $20,068 $25,102 $15,906 $11,847
5/31/97 $21,089 $26,631 $16,054 $11,840
6/30/97 $21,588 $27,824 $16,246 $11,855
7/31/97 $22,757 $30,039 $16,744 $11,869
8/31/97 $22,137 $28,357 $16,556 $11,891
9/30/97 $23,222 $29,911 $16,816 $11,921
10/31/97 $22,456 $28,912 $17,085 $11,951
11/30/97 $22,575 $30,250 $17,176 $11,944
12/31/97 $22,662 $30,771 $17,356 $11,929
1/31/98 $22,687 $31,112 $17,601 $11,952
2/28/98 $23,589 $33,355 $17,565 $11,975
3/31/98 $23,989 $35,063 $17,620 $11,997
4/30/98 $24,115 $35,417 $17,708 $12,019
5/31/98 $23,813 $34,808 $17,898 $12,041
6/30/98 $24,128 $36,221 $18,080 $12,055
7/31/98 $23,798 $35,834 $18,095 $12,070
8/31/98 $21,692 $30,652 $18,447 $12,084
9/30/98 $22,643 $32,617 $18,975 $12,099
10/31/98 $23,739 $35,269 $18,840 $12,128
11/30/98 $24,657 $37,406 $18,953 $12,128
12/31/98 $25,730 $39,561 $19,001 $12,120
CLASS I (1/1/89-12/31/98)
[LINE GRAPH]
GRAPHIC MATERIAL (5)
The following line graph compares the performance of Franklin Asset Allocation
Fund with the Standard and Poor's(R) 500 (S&P 500(R)) Index, the Lehman Brothers
Government/Corporate (LB Gov't/Corp.) Bond Index, and the Consumer Price Index
(CPI) based on a $10,000 investment from 1/1/89 to 12/31/98. *Source: Standard
and Poor's Micropal.
1/1/89 $9,429 $10,000 $10,000 $10,000
1/31/89 $9,890 $10,732 $10,133 $10,050
2/28/89 $9,779 $10,465 $10,056 $10,091
3/31/89 $9,945 $10,709 $10,109 $10,150
4/30/89 $10,285 $11,264 $10,324 $10,216
5/31/89 $10,513 $11,721 $10,578 $10,274
6/30/89 $10,475 $11,654 $10,922 $10,299
7/31/89 $11,008 $12,706 $11,150 $10,323
8/31/89 $11,242 $12,955 $10,977 $10,340
9/30/89 $11,125 $12,902 $11,025 $10,373
10/31/89 $10,768 $12,603 $11,304 $10,423
11/30/89 $10,909 $12,860 $11,406 $10,448
12/31/89 $10,830 $13,168 $11,423 $10,464
1/31/90 $10,183 $12,285 $11,266 $10,572
2/28/90 $10,329 $12,443 $11,291 $10,622
3/31/90 $10,558 $12,773 $11,292 $10,680
4/30/90 $10,420 $12,455 $11,188 $10,697
5/31/90 $11,043 $13,669 $11,513 $10,722
6/30/90 $10,960 $13,578 $11,699 $10,780
7/31/90 $10,761 $13,534 $11,844 $10,821
8/31/90 $9,919 $12,311 $11,673 $10,920
9/30/90 $9,366 $11,711 $11,770 $11,012
10/31/90 $8,998 $11,661 $11,926 $11,078
11/30/90 $9,569 $12,414 $12,186 $11,103
12/31/90 $9,889 $12,761 $12,370 $11,103
1/31/91 $10,570 $13,317 $12,509 $11,169
2/28/91 $10,922 $14,269 $12,616 $11,186
3/31/91 $11,110 $14,614 $12,703 $11,203
4/30/91 $11,251 $14,650 $12,849 $11,220
5/31/91 $11,754 $15,281 $12,910 $11,253
6/30/91 $11,299 $14,581 $12,896 $11,286
7/31/91 $11,541 $15,261 $13,058 $11,303
8/31/91 $11,735 $15,622 $13,358 $11,336
9/30/91 $11,735 $15,361 $13,638 $11,385
10/31/91 $11,911 $15,567 $13,759 $11,403
11/30/91 $11,418 $14,940 $13,897 $11,436
12/31/91 $12,084 $16,649 $14,365 $11,444
1/31/92 $12,381 $16,339 $14,152 $11,461
2/29/92 $12,728 $16,550 $14,227 $11,502
3/31/92 $12,653 $16,227 $14,149 $11,561
4/30/92 $12,956 $16,704 $14,234 $11,577
5/31/92 $12,906 $16,786 $14,510 $11,593
6/30/92 $12,756 $16,536 $14,723 $11,635
7/31/92 $13,007 $17,212 $15,100 $11,659
8/31/92 $12,730 $16,860 $15,235 $11,692
9/30/92 $13,032 $17,057 $15,442 $11,725
10/31/92 $12,857 $17,115 $15,206 $11,766
11/30/92 $13,338 $17,697 $15,192 $11,782
12/31/92 $13,795 $17,914 $15,453 $11,774
1/31/93 $14,102 $18,065 $15,790 $11,832
2/28/93 $14,255 $18,311 $16,118 $11,873
3/31/93 $14,563 $18,697 $16,173 $11,915
4/30/93 $14,691 $18,244 $16,298 $11,948
5/31/93 $14,948 $18,732 $16,290 $11,965
6/30/93 $15,166 $18,786 $16,659 $11,981
7/31/93 $15,090 $18,711 $16,766 $11,981
8/31/93 $15,581 $19,420 $17,152 $12,015
9/30/93 $15,750 $19,270 $17,212 $12,040
10/31/93 $16,036 $19,669 $17,282 $12,090
11/30/93 $15,905 $19,482 $17,087 $12,098
12/31/93 $16,349 $19,718 $17,162 $12,098
1/31/94 $16,874 $20,389 $17,420 $12,131
2/28/94 $16,743 $19,836 $17,040 $12,172
3/31/94 $16,204 $18,971 $16,622 $12,213
4/30/94 $16,257 $19,214 $16,484 $12,230
5/31/94 $16,442 $19,529 $16,455 $12,239
6/30/94 $16,243 $19,051 $16,417 $12,281
7/31/94 $16,535 $19,675 $16,745 $12,314
8/31/94 $16,987 $20,482 $16,752 $12,363
9/30/94 $16,788 $19,982 $16,499 $12,396
10/31/94 $16,869 $20,432 $16,481 $12,405
11/30/94 $16,307 $19,688 $16,451 $12,421
12/31/94 $16,427 $19,980 $16,560 $12,421
1/31/95 $16,615 $20,497 $16,878 $12,471
2/28/95 $17,180 $21,297 $17,269 $12,521
3/31/95 $17,516 $21,925 $17,385 $12,562
4/30/95 $17,597 $22,569 $17,627 $12,603
5/31/95 $18,030 $23,472 $18,365 $12,629
6/30/95 $18,341 $24,017 $18,512 $12,654
7/31/95 $18,667 $24,814 $18,440 $12,654
8/31/95 $18,776 $24,876 $18,676 $12,687
9/30/95 $19,130 $25,926 $18,866 $12,712
10/31/95 $19,075 $25,833 $19,144 $12,754
11/30/95 $19,870 $26,967 $19,460 $12,745
12/31/95 $20,007 $27,487 $19,746 $12,736
1/31/96 $20,615 $28,422 $19,868 $12,811
2/29/96 $20,808 $28,686 $19,447 $12,852
3/31/96 $21,056 $28,961 $19,284 $12,919
4/30/96 $21,445 $29,387 $19,150 $12,970
5/31/96 $21,778 $30,145 $19,118 $12,994
6/30/96 $21,876 $30,260 $19,374 $13,002
7/31/96 $21,011 $28,922 $19,419 $13,027
8/31/96 $21,541 $29,533 $19,372 $13,052
9/30/96 $22,280 $31,195 $19,717 $13,093
10/31/96 $22,588 $32,056 $20,176 $13,135
11/30/96 $23,653 $34,480 $20,548 $13,160
12/31/96 $23,491 $33,797 $20,319 $13,160
1/31/97 $23,999 $35,909 $20,344 $13,202
2/28/97 $23,858 $36,189 $20,387 $13,243
3/31/97 $23,660 $34,702 $20,144 $13,276
4/30/97 $23,973 $36,774 $20,438 $13,292
5/31/97 $25,192 $39,013 $20,628 $13,284
6/30/97 $25,788 $40,761 $20,876 $13,300
7/31/97 $27,184 $44,006 $21,514 $13,316
8/31/97 $26,444 $41,541 $21,273 $13,342
9/30/97 $27,740 $43,818 $21,607 $13,375
10/31/97 $26,825 $42,354 $21,953 $13,408
11/30/97 $26,968 $44,315 $22,070 $13,400
12/31/97 $27,071 $45,077 $22,301 $13,384
1/31/98 $27,101 $45,578 $22,616 $13,410
2/28/98 $28,178 $48,864 $22,571 $13,435
3/31/98 $28,657 $51,366 $22,640 $13,461
4/30/98 $28,807 $51,885 $22,754 $13,485
5/31/98 $28,446 $50,992 $22,997 $13,509
6/30/98 $28,822 $53,063 $23,232 $13,525
7/31/98 $28,428 $52,495 $23,250 $13,542
8/31/98 $25,913 $44,904 $23,704 $13,558
9/30/98 $27,048 $47,782 $24,382 $13,574
10/31/98 $28,358 $51,667 $24,208 $13,607
11/30/98 $29,454 $54,798 $24,354 $13,607
12/31/98 $30,736 $57,954 $24,415 $13,598
(*)Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
6
<PAGE>
FRANKLIN ASSET ALLOCATION FUND
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year . . . . . . . . . . $9.05 $8.32 $7.25 $6.11 $6.22
----- ----- ----- ----- -----
Income from investment operations:
Net investment income . . . . . . . . . . . . . . . .. .18 .15 .14 .18 .14
Net realized and unrealized gains (losses) . . . . . . 1.03 1.10 1.11 1.14 (.11)
----- ----- ----- ----- -----
Total from investment operations . . . . . . . . . . . 1.21 1.25 1.25 1.32 .03
----- ----- ----- ----- -----
Less distributions from:
Net investment income . . . . . . . . . . . . . . . . (.19) (.15) (.15) (.18) (.14)
Net realized gains . . . . . . . . . . . . . . . . . . (.11) (.37) (.03) -- --
----- ----- ----- ----- -----
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* . . . . . . . . . . . . . . . . . . . . . 13.54% 15.24% 17.41% 21.79% .46%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) . . . . . . . . . . .. $108,268 $89,630 $56,867 $39,319 $25,631
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%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
See notes to financial statements. 7
<PAGE>
FRANKLIN ASSET ALLOCATION FUND
STATEMENT OF INVESTMENTS, DECEMBER 31,1998
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks 65.5%
Consumer Non-Durables 5.0%
Estee Lauder Cos., A . . . . . . . . . . . . . . . . . . . United States 15,000 $ 1,282,500
Nestle, SA . . . . . . . . . . . . . . . . . . . . . . . Switzerland 480 1,044,922
Philip Morris Cos. Inc. . . . . . . . . . . . . . . . . . United States 40,000 2,140,000
The Procter & Gamble Co. . . . . . . . . . . . . . . . . . United States 10,000 913,125
------------
5,380,547
------------
Consumer Services 3.1%
(a)Clear Channel Communications Inc. . . . . . . . . . . . . United States 10,000 545,000
Hilton Hotels Corp. . . . . . . . . . . . . . . . . . . . . United States 20,000 382,500
The Time Warner Inc. . . . . . . . . . . . . . . . . . . . United States 40,000 2,482,500
------------
3,410,000
------------
Electronic Technology 12.9%
(a)Altera Corp. . . . . . . . . . . . . . . . . . . . . . . United States 20,000 1,217,500
Compaq Computer Corp.* . . . . . . . . . . . . . . . . . . United States 20,000 838,750
(a)Equant NV, N.Y. shs. . . . . . . . . . . . . . . . . . . Netherlands 30,200 2,047,938
First Data Corp. . . . . . . . . . . . . . . . . . . . . . United States 30,000 950,625
Hewlett-Packard Co. . . . . . . . . . . . . . . . . . . . . United States 15,000 1,024,688
Hitachi Ltd. . . . . . . . . . . . . . . . . . . . . . . . Japan 210,000 1,303,191
Intel Corp. . . . . . . . . . . . . . . . . . . . . . . . . United States 5,000 592,813
Linear Technology Corp.* . . . . . . . . . . . . . . . . . United States 15,000 1,343,438
NEC Corp. . . . . . . . . . . . . . . . . . . . . . . . . . Japan 150,000 1,382,979
(a)Seagate Technology Inc. . . . . . . . . . . . . . . . . United States 25,000 756,250
Symbol Technologies Inc.* . . . . . . . . . . . . . . . . . United States 33,150 2,119,528
(a)Waters Corp. . . . . . . . . . . . . . . . . . . . . . . United States 5,000 436,250
------------
14,013,950
------------
Energy Minerals 2.7%
Chevron Corp. . . . . . . . . . . . . . . . . . . . . . . . United States 15,000 1,244,063
Exxon Corp. . . . . . . . . . . . . . . . . . . . . . . . . United States 10,000 731,250
Schlumberger Ltd. . . . . . . . . . . . . . . . . . . . . . United States 20,000 922,500
------------
2,897,813
------------
Finance 8.3%
American International Group Inc. . . . . . . . . . . . . . United States 17,500 1,690,938
BankAmerica Corp. . . . . . . . . . . . . . . . . . . . . . United States 30,000 1,803,750
Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . United States 20,000 1,480,000
Hartford Life Inc., A . . . . . . . . . . . . . . . . . . United States 15,000 873,750
Marsh & McLennan Cos. Inc. .. . . . . . . . . . . . . . . . United States 20,000 1,168,750
Merrill Lynch & Co. Inc. . . . . . . . . . . . . . . . . . United States 10,000 667,500
(a)Security Capital Group Inc., B . . .. . . . . . . . . . . United States 10,000 135,625
UNUM Corp. . . . . . . . . . . . . . . . . . . . . . . . . United States 20,000 1,167,500
------------
8,987,813
------------
</TABLE>
8
<PAGE>
FRANKLIN ASSET ALLOCATION FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks (cont.)
Health Services 2.3%
IMS Health Inc. . . . . . . . . . . . . . . . . . . . . . . United States 25,000 $ 1,885,938
McKesson Corp. . . . . . . . . . . . . . . . . . . . . . . United States 7,500 592,969
-----------
2,478,907
-----------
Health Technology 5.8%
Abbott Laboratories . . . . . . . . . . . . . . . . . . . United States 35,000 1,715,000
Bristol-Myers Squibb Co. . . . . . . . . . . . . . . . . . United States 5,000 669,063
(a)Genzyme Corp., General Division* . . . . . . . . . . . United States 35,000 1,741,250
Novartis, AG . . . . . . . . . . . . . . . . . . . . . . Switzerland 550 1,081,179
Roche Holding, AG . . . . . . . . . . . . . . . . . . . . Switzerland 90 1,098,216
-----------
6,304,708
-----------
Non-Energy Minerals .6%
Rio Tinto PLC, ADR . . .. . . . . . . . . . . . . . . . . United Kingdom 15,000 679,688
-----------
Process Industries 1.7%
Bowater Inc. . . . . . . . . . . . . . . . . . . . . . . . United States 20,000 828,750
E.I. du Pont de Nemours and Co. .. . . . . . . . . . . . . United States 12,500 663,281
(a)Owens-Illinois Inc. . . . . . . . . . . . . . . . . . . United States 10,000 306,250
-----------
1,798,281
-----------
Producer Manufacturing 2.7%
Emerson Electric Co. . . . . . . . . . . . . . . . . . . . United States 25,000 1,512,500
Mitsubishi Electric Corp. . . . . . . . . . . . . . . . . Japan 440,000 1,384,752
-----------
2,897,252
-----------
Real Estate 1.7%
Glenborough Realty Trust Inc. . . . . . . . . . . . . . .. United States 20,000 407,500
Simon Property Group Inc. . . . . . . . . . . . . . . . .. United States 30,000 855,000
Starwood Hotels & Resorts . . . . . . . . . . . . . . . .. United States 27,500 623,906
-----------
1,886,406
-----------
Retail Trade 4.6%
(a)Costco Cos. Inc. . .. . . . . . . . . . . . . . . . . .. United States 15,000 1,082,813
Dayton Hudson Corp. . . . . . . . . . . . . . . . . . . .. United States 30,000 1,627,500
Family Dollar Stores Inc. . . . . . . . . . . . . . . . . United States 30,000 660,000
Wal-Mart Stores Inc. . . . . . . . . . . . . . . . . . . . United States 20,000 1,628,750
-----------
4,999,063
-----------
Telecommunications 8.3%
(a)Ascend Communications Inc. . . . . . . . . . . . . . . . United States 20,000 1,315,000
(a)Cisco Systems Inc. . . . . . . . . . . . . . . . . . . . United States 22,500 2,088,281
(a)Loral Space & Communications Ltd. . . . . . . . . . . .. United States 40,000 712,500
Motorola Inc. . . . . . . . . . . . . . . . . . . . . . .. United States 30,000 1,831,875
Portugal Telecom, SA . . . . . . . . . . . . . . . . . .. Portugal 20,300 930,748
(a)Swisscom, AG . . . . . . . . . . . . . . . . . . . . .. Switzerland 4,900 2,051,329
-----------
8,929,733
-----------
</TABLE>
9
<PAGE>
FRANKLIN ASSET ALLOCATION FUND
STATEMENT OF INVESTMENTS, DECEMBER 31,1998 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
UTILITIES 5.8%
Cinergy Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 40,000 $ 1,375,000
Duke Energy Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 15,000 960,938
Enron Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 30,000 1,711,875
Montana Power Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 18,700 1,057,719
Southern Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States 40,000 1,162,500
------------
6,268,032
------------
TOTAL COMMON STOCKS (COST $50,407,375) . . . . . . . . . . . . . . . . . 70,932,193
------------
CONVERTIBLE PREFERRED STOCKS 1.7%
MediaOne Group Inc., 6.25%, cvt. pfd. . . . . . . . . . . . . . . . . . United States 16,900 1,123,850
Ingersoll Rand Co., 6.75%, cvt. pfd., PRIDES . . . . . . . . . . . . . . United States 30,000 712,500
------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $1,667,383) . . . . . . . . . . 1,836,350
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT**
----------
<S> <C> <C> <C>
BONDS .6%
Georgia Pacific Corp., 9.125%, 7/01/22 . . . . . . . . . . . . . . . . . United States $ 100,000 103,873
Dayton Hudson Corp., 8.60%, 1/15/12 . . . . . . . . . . . . . . . . . . . United States 250,000 310,265
Pan-American Beverage Inc., senior note, 8.125%, 4/01/03 . . . . . . . . Mexico 250,000 250,170
----------
TOTAL BONDS (COST $596,005) . . . . . . . . . . . . . . . . . . . . . . . 664,308
----------
CONVERTIBLE BONDS 1.1%
Rite Aid Corp., cvt. sub. note, 144A, 5.25%, 9/15/02 (COST $800,000). . . United States 800,000 1,183,000
----------
U.S.GOVERNMENT AGENCY SECURITIES 1.0%
Freddie Mac, 5.75%, 4/15/08 (COST $990,155) . . . . . . . . . . . . . . . United States 1,000,000 1,029,502
----------
U.S. GOVERNMENT SECURITIES 15.2%
U.S. Treasury Bond, 8.00%, 11/15/21 . . . . . . . . . . . . . . . . . . . United States 250,000 335,000
U.S. Treasury Bond, 6.25%, 8/15/23 . . . . . . . . . . . . . . . . . . . United States 1,900,000 2,126,220
U.S. Treasury Bond, 6.875%, 8/15/25 . . . . . . . . . . . . . . . . . . . United States 1,000,000 1,213,438
U.S. Treasury Bond, 6.00%, 2/15/26 . . . . . . . . . . . . . . . . . . . United States 3,000,000 3,274,689
U.S. Treasury Note, 6.50%, 4/30/99 . . . . . . . . . . . . . . . . . . . United States 1,000,000 1,006,250
U.S. Treasury Note, 5.50%, 1/31/03 . . . . . . . . . . . . . . . . . . . United States 2,000,000 2,058,750
U.S. Treasury Note, 7.25%, 5/15/04 . . . . . . . . . . . . . . . . . . . United States 1,300,000 1,457,219
U.S. Treasury Note, 5.875%, 11/15/05 . . . . . . . . . . . . . . . . . . United States 2,000,000 2,134,376
U.S. Treasury Note, 6.125%, 8/15/07 . . . . . . . . . . . . . . . . . . . United States 1,700,000 1,858,312
U.S. Treasury Note, Inflation-Indexed, 3.375%, 1/15/07 . . . . . . . . . United States 1,035,040 997,843
----------
TOTAL U.S.GOVERNMENT SECURITIES (COST $15,214,540) . . . . . . . . . . . 16,462,097
----------
TOTAL LONG TERM INVESTMENTS (COST $69,675,458) . . . . . . . . . . . . . 92,107,450
----------
SHORT TERM INVESTMENTS 2.8%
COMMERCIAL PAPER .9%
General Electric Capital Corp., 5/11/99 (Cost $982,232) . . . . . . . . . United States 1,000,000 981,987
----------
</TABLE>
10
<PAGE>
FRANKLIN ASSET ALLOCATION FUND
STATEMENT OF INVESTMENTS, DECEMBER 31,1998 (cont.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT(**) VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS (CONT.)
CERTIFICATES OF DEPOSIT 1.9%
Rabobank Nederland NV, 5.64%, 7/30/99 . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands $1,000,000 $ 1,003,073
UBS AG, 4.94%, 6/01/99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Switzerland 1,000,000 999,754
-----------
TOTAL CERTIFICATES OF DEPOSIT (COST $2,004,135) . . . . . . . . . . . . . . . . . . . . 2,002,827
-----------
TOTAL SHORT TERM INVESTMENTS (COST $2,986,367) . . . . . . . . . . . . . . . . . . . . 2,984,814
-----------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENT (COST $72,661,825) . . . . . . . . . . . . 95,092,264
-----------
(b)REPURCHASE AGREEMENT 13.7%
Joint Repurchase Agreement, 4.681%, 1/04/99, (Maturity Value $14,859,843)
(COST $14,852,118) United States 14,852,118 14,852,118
Barclays Capital Inc. (Maturity Value $754,583)
Bear,Stearns & Co. Inc. (Maturity Value $195,704)
Chase Securities Inc. (Maturity Value $1,537,251)
CIBC Oppenheimer Corp. (Maturity Value $1,537,251)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $1,537,251)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $1,537,251)
Goldman, Sachs & Co. (Maturity Value $419,196)
Greenwich Capital Markets Inc. (Maturity Value $1,537,251)
Lehman Brothers Inc. (Maturity Value $279,365)
NationsBanc Montgomery Securities LLC (Maturity Value $1,537,251)
Paine Webber Inc. (Maturity Value $838,244)
Paribas Corp. (Maturity Value $1,537,251)
Warburg Dillon Read LLC (Maturity Value $1,611,994)
Collateralized by U.S. Treasury Bills & Notes
-----------
TOTAL INVESTMENTS (COST $87,513,943) 101.6% . . . . . . . . . . . . . . . . . . . . . . . . . 109,944,382
-----------
OPEN CALL OPTIONS WRITTEN (PREMIUMS RECEIVED $161,759) (.4%) . . . . . . . . . . . . . . . . . (413,075)
OTHER ASSETS, LESS LIABILITIES (1.2%). . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,263,421)
----------
NET ASSETS 100.0% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $108,267,886
-----------
</TABLE>
<TABLE>
<CAPTION>
EXPIRATION STRIKE SHARES
DATE PRICE OPTIONED VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALL OPTIONS WRITTEN
Compaq Computer Corp. . . . . . . . . . . . . . . . . . . . . . . January 99 32 1/2 10,000 $ 95,625
Compaq Computer Corp. . . . . . . . . . . . . . . . . . . . . . . January 99 35 1,200 8,700
Symbol Technologies Inc. . . . . . . . . . . . . . . . . . . . . January 99 50 10,000 143,750
Linear Technology Corp. . . . . . . . . . . . . . . . . . . . . . February 99 70 5,000 104,375
Genzyme Corp., General Division . . . . . . . . . . . . . . . . . April 99 50 10,000 60,625
--------
TOTAL CALL OPTIONS WRITTEN (PREMIUMS RECEIVED $161,759) . . . . $413,075
--------
</TABLE>
* Portion of the security is segregated as collateral for call options
written.
** Securities traded in U.S. dollar unless otherwise indicated.
(a) Non-income producing.
(b) See Note 1(c) regarding joint repurchase agreement.
See notes to financial statements. 11
<PAGE>
FRANKLIN ASSET ALLOCATION FUND
Financial Statements
Statement of Assets and Liabilities
December 31,1998
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $72,661,825) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 95,092,264
Repurchase agreement, at value and cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,852,118
Receivables:
Investment securities sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,797
Capital shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174,549
Dividends and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407,505
------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,627,233
------------
Liabilities:
Payables:
Investment securities purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,490,163
Capital shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217,389
Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,959
Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,067
Options written, at value (premiums received $161,759) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413,075
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,694
------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,359,347
------------
Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $108,267,886
============
Net assets consist of:
Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,773
Net unrealized appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,179,123
Accumulated net realized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357,292
Capital shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,695,698
------------
Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $108,267,886
============
Net asset value per share ($108,267,886 / 10,866,825 shares outstanding)* . . . . . . . . . . . . . . . . . . . . $9.96
============
Maximum offering price per share ($9.96 / 94.25%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10.57
============
</TABLE>
* Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
12 See notes to financial statements.
<PAGE>
FRANKLIN ASSET ALLOCATION FUND
FINANCIAL STATEMENTS (CONTINUED)
Statement of Operations
for the year ended December 31,1998
<TABLE>
<S> <C>
Investment income:
(net of foreign taxes of $14,614)
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,005,016
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,024,036
-----------
Total investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,029,052
-----------
Expenses:
Management fees (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 623,263
Distribution fees (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,332
Transfer agent fees (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,896
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,535
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,098
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,462
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,349
Trustees' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,550
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,050
-----------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,123,535
-----------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,905,517
-----------
Realized and unrealized gains:
Net realized gain from:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 964,974
Transactions in written options which expired or were closed (Note 5) . . . . . . . . . . . . . 166,050
Foreign currency transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,703
-----------
Net realized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,166,727
Net unrealized appreciation on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,935,854
-----------
Net realized and unrealized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,102,581
-----------
Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . . . $13,008,098
-----------
</TABLE>
See notes to financial statements. 13
<PAGE>
FRANKLIN ASSET ALLOCATION FUND
Financial Statements (continued)
Statements of Changes in Net Assets
for the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
-----------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,905,517 $ 1,279,285
Net realized gain from investments, options and foreign currency transactions . . . . . . . 1,166,727 3,485,295
Net unrealized appreciation on investments . . . . . . . . . . . . . . . . . . . . . . . . . 9,935,854 4,935,333
---------------------------------
Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . . . 13,008,098 9,699,913
Distributions to shareholders from:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,984,332) (1,226,791)
Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,213,212) (3,456,153)
---------------------------------
Total distributions to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,197,544) (4,682,944)
Capital share transactions (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,827,148 27,745,965
---------------------------------
Net increase in net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,637,702 32,762,934
Net assets:
Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,630,184 56,867,250
---------------------------------
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $108,267,886 $89,630,184
=================================
Undistributed net investment income included in net assets:
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,773 $ 79,306
---------------------------------
</TABLE>
14 See notes to financial statements.
<PAGE>
FRANKLIN ASSET ALLOCATION FUND
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Asset Allocation Fund (the Trust) is registered under the Investment
Company Act of 1940 as an open-end, diversified investment company. The Trust
consists of one fund (the Fund). The investment objective of the Fund is total
return. The following summarizes the Fund's significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. JOINT REPURCHASE AGREEMENT:
The Fund may enter into a joint repurchase agreement whereby its uninvested cash
balance is deposited into a joint cash account to be used to invest in one or
more repurchase agreements. The value and face amount of the joint repurchase
agreement are allocated to the Fund based on its pro-rata interest. A repurchase
agreement is accounted for as a loan by the Fund to the seller, collateralized
by securities which are delivered to the Fund's custodian. The market value,
including accrued interest, of the initial collateralization is required to be
at least 102% of the dollar amount invested by the Funds, with the value of the
underlying securities marked to market daily to maintain coverage of at least
100%. At December 31, 1998, all outstanding repurchase agreements had been
entered into on that date.
d. OPTIONS:
In order to produce incremental income or protect against changes in the value
of the underlying securities, the Fund may buy and sell put and call options,
and write put and covered call options.
15
<PAGE>
FRANKLIN ASSET ALLOCATION FUND
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)
d. OPTIONS:(CONT.)
The risk in buying an option is that the Fund pays a premium whether or not the
option is exercised. When an option is exercised, the cost of the security for a
purchased put or call option is adjusted by the amount of the premium received
or paid. The Fund also has the risk of not being able to enter into a closing
transaction if a liquid secondary market does not exist.
Premiums received by the Fund upon writing put or covered call options are
recorded as an asset and an equivalent liability which is subsequently adjusted
daily to equal the current market value of the option written. The Fund will
realize a gain or loss upon the expiration or closing of the option transaction.
When an option is exercised, the proceeds on sales for a written call option or
the purchase cost for a written put option is adjusted by the amount of the
premium received or paid. The risk in writing a call option is that the Fund
gives up the opportunity for profit if the market price of the security
increases and the option is exercised. The risk in writing a put option is that
the Fund may incur a loss if the market price of the security decreases and the
option is exercised. All collateral covering written options are held in a
segregated account by the custodian bank.
e. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
f. Security Transactions,Investment Income,Expenses and Distributions:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount is
amortized on an income tax basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.
g. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
At December 31, 1998, there were an unlimited number of shares authorized (no
par value). Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1998 1997
-------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,374,604 $40,768,517 3,999,853 $ 36,150,348
Shares issued in reinvestment of distributions . . . . . . . . . 301,346 2,874,984 460,518 4,097,788
Shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . (3,711,329) (34,816,353) (1,392,075) (12,502,171)
---------- ------------ ---------- ------------
Net increase . . . . . . . . . . . . . . . . . . . . . . . . . . 964,621 $ 8,827,148 3,068,296 $ 27,745,965
---------- ------------ ---------- ------------
</TABLE>
16
<PAGE>
FRANKLIN ASSET ALLOCATION FUND
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Fund are also officers and/or directors of
Franklin Advisers, Inc. (Advisers), Franklin Templeton Services, Inc. (FT
Services), Franklin/Templeton Distributors, Inc. (Distributors), and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Fund's
investment manager, administrative manager, principal underwriter, and transfer
agent, respectively.
The Fund pays an investment management fee to Advisers based on the average net
assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE MONTH-END NET ASSETS
------------------- --------------------
<S> <C>
.625% First $100 million
.500% Over $100 million,up to and including $250
million
.450% In excess of $250 million
</TABLE>
Under an agreement with Advisers, FT Services provides administrative services
to the Fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Fund.
The Fund reimburses Distributors up to .25% per year of its average daily net
assets for costs incurred in marketing the Fund's shares.
Distributors paid net commissions on sales of the Fund's shares, and received
contingent deferred sales charges for the year of $17,275 and $1,362,
respectively.
The Fund paid transfer agent fees of $150,896, of which $116,306 was paid to
Investor Services.
4. INCOME TAXES
At December 31, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes of $87,549,551 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation . . . . . . . . $23,999,883
Unrealized depreciation. . . . . . . . (1,605,052)
-----------
Net unrealized appreciation. . . . . . $22,394,831
===========
</TABLE>
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions.
Net realized capital gains differ for financial statement and tax purposes
primarily due to differing treatment of wash sales and foreign currency
transactions.
17
<PAGE>
FRANKLIN ASSET ALLOCATION FUND
Notes to Financial Statements (continued)
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1998 aggregated $54,630,774 and $45,325,111, respectively.
Transactions in call and put options written during the year ended December 31,
1998 were as follows:
<TABLE>
<CAPTION>
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
-----------------------
<S> <C> <C>
Options outstanding at December 31,1997 . . 400 $ 173,794
Options written . . . . . . . . . . . . . . 2,988 1,077,810
Options expired . . . . . . . . . . . . . . (401) (147,319)
Options exercised . . . . . . . . . . . .. (1,202) (390,646)
Options closed . . . . . . . . . . . . . . (1,423) (551,880)
-----------------------
Options outstanding at December 31,1998 . .. 362 $ 161,759
-----------------------
</TABLE>
18
<PAGE>
FRANKLIN ASSET ALLOCATION FUND
Independent Auditors' Report
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
FRANKLIN ASSET ALLOCATION FUND:
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Asset Allocation Fund (the
Fund) at December 31, 1998, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as financial
statements) are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
February 4, 1999
19
<PAGE>
FRANKLIN ASSET ALLOCATION FUND
Tax Information
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Fund hereby
designates $1,127,781 as a capital gain dividend for the fiscal year ended
December 31, 1998.
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
35.38% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended December 31, 1998.
20
<PAGE>
