o 158 P-2
SUPPLEMENT DATED JANUARY 1, 2000
TO THE PROSPECTUS OF
FRANKLIN RISING DIVIDENDS FUND
DATED FEBRUARY 1, 1999
The prospectus is amended as follows:
I. On October 26, 1999, shareholders approved a revision to the criteria for
the selection of portfolio companies related to the issuer's treatment of
debt on its balance sheet.
The fourth category on page 2 of the prospectus describing companies that
have consistently paid rising dividends is amended to read as follows:
o strong balance sheets, with long-term debt that is no more than 50% of
total capitalization or senior debt that has been rated investment grade
by at least one of the major bond rating agencies (except for utility
companies)
II. The following sentence is added after the minimum investments table on
page 22:
Please note that you may only buy shares of a fund eligible for sale in your
state or jurisdiction.
III. In the Selling Shares table on page 28 the section "By Wire" is replaced
with the following:
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[Insert graphic of You can call or write to have redemption
three lightning proceeds sent to a bank account. See the
bolts] policies above for selling shares by mail or
phone.
BY ELECTRONIC FUNDS
TRANSFER (ACH) Before requesting to have redemption
proceeds sent to a bank account, please make
sure we have your bank account information
on file. If we do not have this information,
you will need to send written instructions
with your bank's name and address, a voided
check or savings account deposit slip, and a
signature guarantee if the ownership of the
bank and fund accounts is different.
If we receive your request in proper form by
1:00 p.m. Pacific time, proceeds sent by ACH
generally will be available within two to
three business days.
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IV. The sections "Waivers for investments from certain payments," "Waivers
for certain investors," "CDSC waivers" and "Retirement plans," on pages 19
through 21, are replaced with the following:
SALES CHARGE WAIVERS Class A shares may be purchased without an initial sales
charge or CDSC by various individuals, institutions and retirement plans or
by investors who reinvest certain distributions and proceeds within 365 days.
Certain investors also may buy Class C shares without an initial sales
charge. The CDSC for each class may be waived for certain redemptions and
distributions. If you would like information about available sales charge
waivers, call your investment representative or call Shareholder Services at
1-800/632-2301. For information about retirement plans, you may call
Retirement Plan Services at 1-800/527-2020. A list of available sales charge
waivers also may be found in the Statement of Additional Information (SAI).
V. The section "Dealer compensation" on page 31 is replaced with the
following:
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive sales
commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and
service (12b-1) fees and its other resources.
CLASS A CLASS B CLASS C
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COMMISSION (%) - 4.00 2.00
Investment under $50,000 5.00 - -
$50,000 but under $100,000 3.75 - -
$100,000 but under $250,000 2.80 - -
$250,000 but under $500,000 2.00 - -
$500,000 but under $1 million 1.60 - -
$1 million or more up to 1.00 1 - -
12B-1 FEE TO DEALER 0.50 0.25 2 1.00 3
A dealer commission of up to 1% may be paid on Class A NAV purchases by
certain retirement plans1 and on Class C NAV purchases. A dealer commission
of up to 0.25% may be paid on Class A NAV purchases by certain trust
companies and bank trust departments, eligible governmental authorities, and
broker-dealers or others on behalf of clients participating in comprehensive
fee programs.
1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
2. Dealers may be eligible to receive up to 0.25% from the date of purchase.
After 8 years, Class B shares convert to Class A shares and dealers may then
receive the 12b-1 fee applicable to Class A.
3. Dealers may be eligible to receive up to 0.25% during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the
13th month.
VI. The section "Statements and reports" on page 29 is replaced with the
following:
STATEMENTS AND REPORTS You will receive quarterly account statements that
show all your account transactions during the quarter. You also will receive
written notification after each transaction affecting your account (except
for distributions and transactions made through automatic investment or
withdrawal programs, which will be reported on your quarterly statement). You
also will receive the fund's financial reports every six months. To reduce
fund expenses, we try to identify related shareholders in a household and
send only one copy of the financial reports. If you need additional copies,
please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive copies of all notifications and
statements and other information about your account directly from the fund.
Please keep this supplement for future reference.
FRANKLIN
MANAGED TRUST
FRANKLIN RISING DIVIDENDS FUND - CLASS A, B & C
FRANKLIN INVESTMENT GRADE INCOME FUND - CLASS A
STATEMENT OF
ADDITIONAL INFORMATION
FEBRUARY 1, 1999, AS AMENDED JANUARY 1, 2000
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)
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This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in each fund's
prospectus. Each fund's prospectus, dated February 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 each
fund's prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended September 30, 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).
On August 12, 1999, Franklin Strategic Income Fund acquired the assets of
Franklin Investment Grade Income Fund. In exchange, Franklin Investment Grade
Income Fund received shares of Franklin Strategic Income Fund, which it
distributed to its shareholders. All references to the Franklin Investment
Grade Income Fund in this SAI are deleted.
CONTENTS
Goals and Strategies 2
Risks 8
Officers and Trustees 11
Management and Other Services 14
Portfolio Transactions 15
Distributions and Taxes 16
Organization, Voting Rights
and Principal Holders 18
Buying and Selling Shares 19
Pricing Shares 26
The Underwriter 27
Performance 29
Miscellaneous Information 32
Description of Bond Ratings 33
[Begin callout]
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.
[End callout]
GOALS AND STRATEGIES
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INVESTMENT GRADE FUND
The fund's investment goal is to seek a maximum level of income consistent
with prudent exposure to risk. This goal is fundamental, which means it may
not be changed without shareholder approval.
The fund tries to achieve its goal by investing primarily in
intermediate-term, investment grade debt securities. It may also invest in
dividend-paying common and preferred stocks.
At times, particularly during periods when the yield curve is positive, the
fund will try to provide a higher yield than that available from a money
market fund, while attempting to avoid the potential risks to principal often
associated with both non-investment grade securities and longer-term
instruments.
Below is a description of the various types of securities the fund may buy.
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; time deposits; and
bankers' acceptances. A debt security typically has a fixed payment schedule
that obligates the issuer to pay interest to the lender and to return the
lender's money over a certain time period. A company typically meets its
payment obligations associated with its outstanding debt securities before it
declares and pays any dividend 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
such securities generally declines. These changes in market value will be
reflected in the fund's net asset value.
Independent rating organizations rate debt securities based upon their
assessment of the financial soundness of the issuer. Debt securities within
the top three categories (AAA, AA, A by Standard & Poor's Corporation (S&P)
or Aaa, Aa, A by Moody's Investors Service (Moody's)) comprise what are known
as high-grade bonds and are regarded as having a strong capacity to pay
principal and interest. Medium-grade bonds (BBB by S&P or Baa by Moody's) are
regarded as having an adequate capacity to pay principal and interest but
with greater vulnerability to adverse economic conditions and some
speculative characteristics. Debt securities rated B by Moody's are regarded
as generally lacking the characteristics of desirable investments and, in
Moody's judgment, assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may
be small. Debt securities rated BB or B by S&P are regarded, on balance, as
predominantly speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the obligation. Generally, a
lower rating indicates higher risk.
The fund may invest up to 25% of its total assets in non-investment grade
securities (rated lower than BBB by S&P or Baa by Moody's). The fund,
however, will not invest in any debt securities rated lower than B by Moody's
or S&P. Similarly, the fund will not invest in any unrated debt securities
that the fund considers to be of lower comparable quality than securities
rated B by Moody's or S&P. At present, the fund does not intend to invest
more than 5% of its assets in debt securities rated below Baa by Moody's or
BBB by S&P.
Although market risks are inherent in any investment program, the fund
believes that, for securities rated "investment grade," these risks may be
reduced by the manager's careful analysis of the relative values offered
among the investment alternatives available at the time of purchase.
Moreover, while the opinion of the rating services is considered in selecting
securities rated lower than "investment grade" for the fund's portfolio, the
manager relies primarily on its own credit analysis, which consists of a
study of the existing debt issuer's capital structure, ability to service
debt and to pay dividends, and the current trend of earnings, for any such
company under consideration for investment by the fund. The net asset value
per share of the fund will fluctuate, however, as the market value of its
investment portfolio fluctuates.
Although the fund normally invests at least 65% of its total assets in
intermediate-term obligations, the fund may invest the remaining 35%, to the
extent available and permissible, in obligations with maturities that are
shorter than two years or longer than ten years at the time of purchase. The
average maturity of the debt securities in the fund's portfolio will
fluctuate depending upon the manager's judgment as to future interest rate
changes.
ADDITIONAL INFORMATION ON RATES OF RETURN. Since 1926 bonds have typically
provided a return averaging over 2% above the inflation rate. The following
table demonstrates the real rate of return from corporate bonds rated "A" by
Moody's over the past ten years. Investors should note that the fund's
portfolio is not comprised exclusively of such bonds. Accordingly, the table
is for illustrative purposes only and is not indicative of the fund's past,
present or future performance. Moreover, historical returns are not
indicative of future returns. The source of this information is the U.S.
Bureau of Labor Statistics and Lehman Brothers:
REAL RATES OF RETURN
LEHMAN
BROTHERS REAL
CORPORATE INFLATION RATE OF
A BOND INDEX 1 RATE (CPI) 2 RETURN
- --------------------------------------------------------------
1988 8.78% 4.42% 4.18%
1989 14.15 4.65 9.08
1990 7.33 6.11 1.15
1991 18.70 3.06 15.18
1992 8.80 2.90 5.73
1993 12.01 2.75 9.01
1994 -4.23 2.67 -6.72
1995 22.41 2.54 19.38
1996 3.17 3.32 -0.15
1997 9.72 1.70 7.89
Average 10.08 3.41 6.47
1. Standard & Poor's(R) Micropal (Lehman Brothers Corporate A Bond Index).
Investors cannot invest directly in an index.
2. Standard & Poor's(R) Micropal (U.S. Bureau of Labor Statistics). Inflation
rate is demonstrated by annual rates of the Consumer Price Index (CPI).
PUTABLE BONDS are obligations that allow a holder to redeem the securities at
the holder's option on a date or dates before the final stated maturity. The
fund may consider the optional redemption date or dates as the effective
maturity of the obligations. When purchasing obligations that require the
obligor to repay periodically portions of the obligation before the stated
final maturity (whether by operation of a fixed known pro rata sinking fund
or, as in collateralized securities, by the periodic passing through of
variable payments made to the issuer on the underlying collateral), the
expected average life or average term of the investment may also be
considered to be its effective maturity. These are not fundamental policies
of the fund and may be changed by the fund's board of trustees.
U.S. GOVERNMENT SECURITIES The fund may invest in all types of U.S.
government securities including: (1) U.S. Treasury obligations with varying
interest rates, maturities and dates of issuance, such as U.S. Treasury bills
(maturities of one year or less), U.S. Treasury notes (original maturities of
one to ten years) and U.S. Treasury bonds (generally original maturities of
greater than ten years); and (2) obligations issued or guaranteed by U.S.
government agencies and instrumentalities such as the Government National
Mortgage Association (GNMA), the Export-Import Bank and the Farmers Home
Administration. Some of the fund's investments will include obligations that
are supported by the full faith and credit of the U.S. government. In the
case of U.S. government obligations that are not backed by the full faith and
credit of the U.S. government (e.g., obligations of the Federal National
Mortgage Association (FNMA) and a Federal Home Loan Bank), the fund must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment and may not be able to assert a claim against the United States
itself in the event the agency or instrumentality does not meet its
commitments.
FOREIGN SECURITIES Investments in debt securities issued by foreign
corporations, governments and their instrumentalities, and by supranational
entities offer potential benefits not available from investments solely in
securities issued by the U.S. government. The fund presently has no intention
of investing more than 25% of its assets in foreign debt securities. The fund
does not presently intend to buy debt securities of issuers in developing
nations.
A supranational entity is an entity designated or supported by the national
government of one or more countries to promote economic reconstruction or
development. Examples of supranational entities include, among others, the
World Bank, the European Development Bank and the Asian Development Bank.
The fund may invest in securities issued in any currency and may hold foreign
currency to the extent consistent with its goal and policies. Securities of
issuers within a given country (including Canadian provinces and their
instrumentalities) may be denominated in the currency of that or another
country, or in multinational currency units.
COLLATERALIZED OBLIGATIONS generally are bonds issued by single purpose,
stand-alone finance subsidiaries or trusts of financial institutions,
government agencies or instrumentalities, investment bankers or other similar
institutions, such as Collateralized Automobile Receivables ("CARs") and
Collateralized Mortgage Obligations ("CMOs"). The collateralized obligations
will either be issued or guaranteed by a U.S. government agency or
instrumentality rated AAA by a nationally recognized statistical rating
agency.
CARs are generally automobile loan pass-through certificates issued by single
purpose, stand alone financial subsidiaries or trusts (such as Grantor
Trusts) of financial institutions, government agencies or instrumentalities,
investment bankers or other similar institutions.
CMOs purchased by the fund may be:
(1) collateralized by pools of mortgages in which each mortgage is guaranteed
as to payment of principal and interest by an agency or instrumentality of
the U.S. government;
(2) collateralized by pools of mortgages in which payment of principal and
interest are guaranteed by the issuer and the guarantee is collateralized by
U.S. government securities; or
(3) securities in which the proceeds of the issuance are invested in mortgage
securities and payment of the principal and interest is supported by the
credit of an agency or instrumentality of the U.S. government.
DERIVATIVE SECURITIES Although the fund has no present intention of investing
in the following, it has the authority to enter into options on securities
and options on futures, which are generally considered "derivative
securities."
OPTIONS ON SECURITIES. The fund may write covered call and put options and
under limited circumstances purchase certain options on securities. An option
on a security is a contract that allows the buyer of the option the right to
buy or sell a specific security at a stated price during the option's term.
The principal reason for writing call or put options is to obtain, through
the receipt of premiums, a greater current return than would be realized on
the underlying securities alone. The fund's current return can be expected to
fluctuate because opportunities to realize net gains from a covered call and
put option writing program and income yields vary as economic and market
conditions change. The fund may receive a higher or lower total return from
its positions in options than it would have received from its underlying
securities if they had not been subject to options.
The fund does not engage in option writing strategies for speculative
purposes, and writes call and put options on a covered basis only.
The fund may also purchase call and put options on securities, but only for
limited purposes. The fund may purchase put options only on U.S. government
securities in its portfolio in anticipation of a decline in the market value
of such securities and then only in amounts not exceeding 10% of its total
assets. The fund's ability to purchase put options allows it to protect
unrealized gains in appreciated U.S. government securities in its portfolio
without actually selling the securities and while continuing to receive
interest income on the securities.
The writing and purchasing of options is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The fund will pay brokerage
commissions or spreads in connection with its options transactions, as well
as for purchases and sales of underlying securities. The writing of options
could result in significant increases in the fund's portfolio turnover rate.
OPTIONS ON FUTURES. The fund may purchase put and call options on interest
rate futures contracts that are traded on exchanges licensed and regulated by
the Commodities Futures Trading Commission (CFTC) for the purposes of options
trading. The fund may not purchase or sell options on interest rate futures
contracts if immediately thereafter the value of those contracts would
constitute more than 30% of the fund's total assets or if the sum of the
premiums paid for the options would exceed 5% of the fund's total assets.
A "call" option on a futures contract gives the purchaser the right, in
return for the premium paid, to purchase a futures contract (assume a "long"
position) at a specified exercise price at any time before the option
expires. A "put" option gives the purchaser the right, in return for the
premium paid, to sell a futures contract (assume a "short" position) for a
specified exercise price at any time before the option expires. Interest rate
futures contracts are contracts for the future delivery of U.S. government
securities and index-based futures contracts that are, in the opinion of the
manager, sufficiently correlated with the fund's portfolio to permit
effective hedging against adverse changes in interest rates.
Upon the exercise of a call option, the writer of the option is obligated to
sell the futures contract (i.e., to deliver a "long" position to the fund as
the option holder) at the option exercise price, which will presumably be
lower than the current market price of the contract in the futures market.
Upon exercise of a put option, the writer of the option is obligated to
purchase the futures contract (i.e., deliver a "short" position to the fund
as the option holder) at the option exercise price, which will presumably be
higher than the current market price of the contract in the futures market.
The fund is entitled to be paid the amount of any gain realized by it with
respect to any option it has purchased upon the exercise of the option. Most
participants in the options markets, however, do not seek to realize their
gains or losses by exercise of their options rights. Instead, the holder of
an option will usually realize a gain or loss by buying or selling an
offsetting option at a market price that will reflect an increase or a
decrease from the premium originally paid. The fund's ability to establish
and close out options positions at fairly established prices is subject to
the maintenance of a liquid market.
If the fund purchases an option on a futures contract, it may obtain benefits
similar to those that would result if it held the futures position itself.
But, in contrast to a futures transaction in which only transaction costs are
involved, the benefits received in an option transaction will be reduced by
the amount of the premium and transaction costs paid by the fund. There may
also be circumstances when the purchase of an option on an interest rate
futures contract would result in a loss to the fund when the purchase (or
sale) of the futures contract itself would not result in a loss, such as when
there is no movement in the price of the futures contract or the underlying
security. In the event of an adverse market movement, however, the fund will
not be subject to a risk of loss on the option transaction beyond the price
of the premium paid, plus any transaction costs.
LIMITATIONS ON FUTURES TRANSACTIONS. The fund has represented to the CFTC
that it will not purchase any options on interest rate futures contracts if,
as a result, the sum of premiums paid for the options the fund has purchased
would exceed 5% of the fund's total assets. This limitation on the fund's
options transactions is not fundamental and may be changed by the board of
trustees as the CFTC permits.
U.S. TREASURY ROLLS The fund may enter into "U.S. Treasury rolls" in which
the fund sells outstanding U.S. Treasury securities and buys back
"when-issued" U.S. Treasury securities of slightly longer maturity for
simultaneous settlement on the settlement date of the "when-issued" U.S.
Treasury security. Two potential advantages of this strategy are (1) the fund
can regularly and incrementally adjust its weighted average maturity (which
otherwise would constantly diminish with the passage of time); and (2) in a
normal yield curve environment (in which shorter maturities yield less than
longer maturities), a gain in yield to maturity can be obtained along with
the desired extension.
During the period before the settlement date, the fund continues to earn
interest on the securities it is selling. It does not earn interest on the
securities that it is purchasing until after the settlement date. The fund
could suffer an opportunity loss if the counterparty to the roll failed to
perform its obligations on the settlement date, and if market conditions
changed adversely. The fund intends, however, to enter into U.S. Treasury
rolls only with government securities dealers recognized by the Federal
Reserve Board or with member banks of the Federal Reserve System.
BORROWING The fund may borrow money only from banks for temporary or
emergency purposes in amounts not to exceed 15% of the fund's total assets,
and additional investments may not be made while any amounts borrowed are in
excess of 5% of the fund's total assets.
RISING DIVIDENDS FUND
The fund's investment goal is long-term capital appreciation. This goal is
fundamental, which means it may not be changed without shareholder approval.
Preservation of capital, while not an objective, is also an important
consideration.
The fund invests primarily in financially sound companies that have paid
consistently rising dividends. The fund's manager believes that because of
these companies' dividend records, their securities have a strong potential
to increase in value. The manager believes that a focus on companies with a
pattern of rising dividends will help the fund attain its goal of long-term
capital appreciation. In addition, because capital preservation is an
important consideration, the manager also reviews a company's stability and
the strength of its balance sheet in selecting among growth companies
generally. The manager also considers other factors, such as return on
shareholder's equity, rate of earnings growth, and anticipated price/earnings
ratios, in selecting investments for the fund.
The fund diversifies its investments among different companies in different
industry segments, with no more than 25% of the fund's portfolio concentrated
in any one industry.
The following is a description of the various types of securities the fund
may buy.
FOREIGN SECURITIES The fund may invest in foreign securities, generally by
purchasing sponsored or unsponsored American Depositary Receipts (ADRs),
Global Depositary Receipts (GDRs), and European Depositary Receipts (EDRs).
The fund may also purchase the securities of foreign issuers directly in
foreign markets if, in the manager's judgment, an established public trading
market exists. The fund currently intends to limit its foreign investments to
no more than 10% of its net assets.
The fund does not consider securities that it acquires outside of the U.S.
and that are publicly traded in the U.S. or on a foreign securities market to
be illiquid assets if (a) the fund reasonably believes it can readily dispose
of the securities for cash in the U.S. or foreign market, or (b) current
market quotations are readily available.
DEPOSITARY RECEIPTS. ADRs are typically issued by a U.S. bank or trust
company and evidence ownership of underlying securities issued by a foreign
corporation. EDRs and GDRs are typically issued by foreign banks or trust
companies, although they 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.
Depositary receipts may not necessarily be denominated in the same currency
as the underlying securities into which they may be converted.
Depositary receipts may be issued pursuant to 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 such information and the market
value of the depositary receipts.
BOTH FUNDS
The following is a description of the various types of securities each fund
may buy.
EQUITY SECURITIES 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, preferred stock, securities convertible into common
stocks, or rights or warrants to subscribe for or purchase common stocks.
Preferred stockholders typically receive greater dividends but may receive
less appreciation than common stockholders and may have greater voting rights
as well. Warrants or rights give the holder the right to buy a common stock
at a given time for a specified price. The Investment Grade Fund will not
invest in any equity securities of an issuer if a majority of the issuer's
debt securities are rated lower than B by Moody's or S&P.
REPURCHASE AGREEMENTS The fund generally will have a portion of its assets in
cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, the fund may enter into repurchase agreements.
Under a repurchase agreement, the fund agrees to buy securities guaranteed as
to payment of principal and interest by the U.S. government or its agencies
from a qualified bank or broker-dealer and then to sell the securities back
to the bank or broker-dealer after a short period of time (generally, less
than seven days) at a higher price. The bank or broker-dealer must transfer
to the fund's custodian securities with an initial market value of at least
102% of the dollar amount invested by the fund in each repurchase agreement.
The manager will monitor the value of such securities daily to determine that
the value equals or exceeds the repurchase price.
Repurchase agreements may involve risks in the event of default or insolvency
of the bank or broker-dealer, including possible delays or restrictions upon
the fund's ability to sell the underlying securities. The fund will enter
into repurchase agreements only with parties who meet certain
creditworthiness standards, i.e., banks or broker-dealers that the manager
has determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase transaction.
SECURITIES LENDING Each fund may lend to broker-dealers portfolio securities
with an aggregate market value up to 30% of its total assets. Each fund
currently intends to limit its lending of securities to no more than 5% of
its total assets. Such loans must be secured by collateral (consisting of any
combination of cash, U.S. government securities or irrevocable letters of
credit) in an amount at least equal (on a daily marked-to-market basis) to
the current market value of the securities loaned. A fund may terminate a
loan at any time and obtain the return of the securities. A fund will
continue to receive any interest or dividends paid on the loaned securities
and will continue to have voting rights with respect to the securities.
However, as with other extensions of credit, there are risks of delay or even
loss of rights in the collateral should the borrower fail.
ILLIQUID INVESTMENTS Each fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally
securities that cannot be sold within seven days in the normal course of
business at approximately the amount at which the fund has valued them.
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 each fund's
portfolio in a temporary defensive manner. Under such circumstances, each
fund may invest up to 100% of its assets in U.S. government securities, bank
CDs, bankers' acceptances and high-grade commercial paper issued by domestic
corporations, and commercial deposits or equivalents.
INVESTMENT RESTRICTIONS Each 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.
Each fund may not:
1. Invest in the securities of any one issuer (other than the U.S.
government and its agencies and instrumentalities), if immediately after and
as a result of such investment (a) more than 5% of the total assets of the
fund would be invested in such issuer or (b) more than 10% of the outstanding
voting securities of such issuer would be owned by the fund.
2. Make loans to others, except (a) through the purchase of debt securities
in accordance with its investment objectives and policies, (b) through the
lending of its portfolio securities as described above and in its prospectus,
or (c) to the extent the entry into a repurchase agreement is deemed to be a
loan.
3. (a) Borrow money, except temporarily for extraordinary or emergency
purposes from a bank and then not in excess of 15% of its total assets (at
the lower of cost or fair market value) or (b) mortgage, pledge or
hypothecate any of its assets except in connection with any such borrowings.
Any such borrowing will be made only if immediately thereafter there is an
asset coverage of at least 300% of all borrowings, and no additional
investments may be made while any such borrowings are in excess of 5% of
total assets.
4. Purchase securities on margin, sell securities short, participate on a
joint or joint and several basis in any securities trading account, or
underwrite securities. (Does not preclude a fund from obtaining such
short-term credit as may be necessary for the clearance of purchases and
sales of its portfolio securities.)
5. Buy or sell interests in oil, gas or mineral exploration or development
programs, or real estate. (Does not preclude investments in marketable
securities of companies engaged in such activities.)
6. Purchase or hold securities of any issuer if, at the time of purchase or
thereafter, any of the trustees or officers of the trust or the manager own
beneficially more than one-half of 1%, and all such trustees or officers
holding more than one-half of 1% together own beneficially more than 5% of
the issuer's securities.
7. Purchase or sell commodities or commodity contracts or invest in put,
call, straddle or spread options. (Does not preclude bona fide hedging
transactions by the Investment Grade Fund, including the purchase or sale of
options and options on futures contracts.)
8. Invest more than 10% of its assets in securities with legal or
contractual restrictions on resale, securities which are not readily
marketable, and repurchase agreements with more than seven days to maturity.
9. Invest in any issuer for purposes of exercising control or management.
10. Invest more than 25% of the market value of its assets in the securities
of companies engaged in any one industry. (Does not apply to investment in
the securities of the U.S. government, its agencies or instrumentalities.)
Each fund presently has the following additional restrictions, which are not
fundamental and may be changed without shareholder approval.
Each fund may not:
1. Invest more than 5% of the value of its total assets in securities of any
issuer which has not had a record, together with predecessors, of at least
three years of continuous operation.
2. With respect to the Investment Grade Fund, invest in securities of other
investment companies, except as they may be acquired as part of a merger,
consolidation or acquisition of assets. With respect to the Rising Dividends
Fund, it may invest up to 10% of its assets in the securities of other
investment companies, subject to the limitations of the Investment Company
Act of 1940 (1940 Act), or more as they may be acquired pursuant to a merger,
consolidation or acquisition of assets.
3. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit any fund from (a) making any
permitted borrowings, mortgages or pledges, or (b) entering into repurchase
transactions.
The Rising Dividends Fund may also be subject to investment limitations
imposed by foreign jurisdictions in which the fund sells its shares.
If a bankruptcy or other extraordinary event occurs concerning a particular
security a 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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INTEREST RATE RISK Because the Investment Grade Fund invests primarily in
debt securities, changes in interest rates in any country where the fund is
invested will affect the value of the fund's portfolio and, consequently, its
share price. Rising interest rates, which often occur during times of
inflation or a growing economy, are likely to cause the face value of a debt
security to decrease, having a negative effect on the value of the fund's
shares. Of course, interest rates have increased and decreased, sometimes
very dramatically, in the past. These changes are likely to occur again in
the future at unpredictable times.
LOWER-RATED SECURITIES Although they may offer higher yields than do higher
rated securities, low rated and unrated debt securities in which the
Investment Grade Fund may invest generally involve greater volatility of
price and risk to principal and income, including the possibility of default
by, or bankruptcy or, the issuers of the securities. In addition, the markets
in which low rated and unrated debt securities are traded are more limited
than those in which higher rated securities are traded. The existence of
limited markets for particular securities may diminish the fund's ability to
sell the securities at fair value either to meet redemption requests or to
respond to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for
certain low rated or unrated debt securities may also make it more difficult
for the fund to obtain accurate market quotations for the purposes of valuing
the fund's portfolio. Market quotations are generally available on many low
rated or unrated securities only from a limited number of dealers and may not
necessarily represent firm bids of such dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated debt securities may be more complex
than for issuers of higher rated securities. The ability of the fund to
achieve its investment goal may, to the extent of investment in low rated
debt securities, be more dependent upon such creditworthiness analysis than
would be the case if the fund were invested in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be
less sensitive to interest rate changes than higher rated investments, but
more sensitive to adverse economic downturns or individual corporate
developments. A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in low rated debt
securities prices because the advent of a recession could lessen the ability
of a highly leveraged company to make principal and interest payments on its
debt securities. If the issuer of low rated debt securities defaults, the
fund may incur additional expenses to seek recovery.
FOREIGN SECURITIES The value of foreign (and U.S.) securities is affected by
general economic conditions and individual company and industry earnings
prospects. While foreign securities may offer significant opportunities for
gain, they also involve additional risks that can increase the potential for
losses in the funds. These risks can be significantly greater for investments
in emerging markets. Investments in depositary receipts also involve some or
all of the risks described below.
There is the possibility of cessation of trading on national exchanges,
expropriation, nationalization of assets, confiscatory or punitive taxation,
withholding and other foreign taxes on income or other amounts, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), restrictions on removal of assets, political
or social instability, or diplomatic developments that could affect
investments in securities of issuers in foreign nations.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or
financial reporting standards, and auditing practices and requirements may
not be comparable to those applicable to U.S. companies. A fund, therefore,
may encounter difficulty in obtaining market quotations for purposes of
valuing its portfolio and calculating its net asset value.
Certain countries' financial markets and services are less developed than
those in the U.S. or other major economies. In many foreign countries there
is less government supervision and regulation of stock exchanges, brokers,
and listed companies than in the U.S. Foreign markets have substantially less
volume than the New York Stock Exchange and securities of some foreign
companies are less liquid and more volatile than securities of comparable
U.S. companies. Commission rates in foreign countries, which are generally
fixed rather than subject to negotiation as in the U.S., are likely to be
higher. Settlement practices may be cumbersome and result in delays that may
affect portfolio liquidity. The funds 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.
A fund's investments in foreign securities may increase the risks with
respect to the liquidity of the fund's portfolio. This could inhibit the
fund's ability to meet a large number of shareholder redemption requests in
the event of economic or political turmoil in a country in which the fund has
a substantial portion of its assets invested or deterioration in relations
between the U.S. and the foreign country.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less economic stability; (ii) political and social uncertainty
(for example, regional conflicts and risk of war); (iii) pervasiveness of
corruption and crime; (iv) the small current size of the markets for such
securities and the currently low or nonexistent volume of trading, which
result in a lack of liquidity and in greater price volatility; (v) delays in
settling portfolio transactions; (vi) risk of loss arising out of the system
of share registration and custody; (vii) certain national policies that may
restrict the funds' investment opportunities, including restrictions on
investment in issuers or industries deemed sensitive to national interests;
(viii) foreign taxation; (ix) the absence of developed legal structures
governing private or foreign investment or allowing for judicial redress for
injury to private property; (x) the absence of a capital market structure or
market-oriented economy; and (xi) the possibility that recent favorable
economic developments may be slowed or reversed by unanticipated political or
social events.
In addition, many countries in which the funds may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency, and balance of payments
position.
CURRENCY RISK The funds' management endeavors to buy and sell foreign
currencies on as favorable a basis as practicable. Some price spread in
currency exchange (to cover service charges) may be incurred, particularly
when a fund changes investments from one country to another or when proceeds
of the sale of shares in U.S. dollars are used for the purchase of securities
in foreign countries. Some countries may adopt policies that would prevent
the funds from transferring cash out of the country or withhold portions of
interest and dividends at the source.
The funds may be affected either unfavorably or favorably by fluctuations in
the relative rates of exchange between the currencies of different nations,
by exchange control regulations, and by indigenous economic and political
developments. Some countries in which the funds may invest may also have
fixed or managed currencies that are not free-floating against the U.S.
dollar. Certain currencies may not be internationally traded.
Certain currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which a fund's portfolio
securities are denominated may have a detrimental impact on the fund. Through
the funds' flexible policy, management endeavors to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where, from time to time, it places the funds' investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove
profitable and others may not. No assurance can be given that profits, if
any, will exceed losses.
The funds' board of trustees considers at least annually the likelihood of
the imposition by any foreign government of exchange control restrictions
that would affect the liquidity of the funds' assets maintained with
custodians in foreign countries, as well as the degree of risk from political
acts of foreign governments to which such assets may be exposed. The board of
trustees also considers the degree of risk involved through the holding of
portfolio securities in domestic and foreign securities depositories.
However, in the absence of willful misfeasance, bad faith, or gross
negligence on the part of the funds' manager, any losses resulting from the
holding of the funds' portfolio securities in foreign countries and/or with
securities depositories will be at the risk of the shareholders. No assurance
can be given that the board of trustees' appraisal of the risks will always
be correct or that such exchange control restrictions or political acts of
foreign governments might not occur.
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.
COLLATERALIZED AUTOMOBILE RECEIVABLES (CARS) Because CARs are asset-backed
securities, they have certain risks not presented by mortgage-backed
securities. Asset-backed securities do not have the benefit of the same type
of security interests in the related collateral. In the case of automobile
receivables, there is a risk that the holders may not have either a proper or
first security interest in all of the obligations backing the receivables due
to the large number of vehicles involved in a typical issuance and technical
requirements under state laws. Therefore, recoveries on repossessed
collateral may not always be available to support payments on the securities.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) CMOs and other mortgage-backed
securities differ from conventional bonds in that the principal is paid back
over the life of the certificate rather than at maturity. As a result, the
Investment Grade Fund will receive monthly scheduled payments of principal
and interest on its investment in these securities, and may receive
unscheduled principal payments representing prepayments on the underlying
mortgages. When the fund reinvests the payments and any unscheduled
prepayments of principal it receives, it may receive a rate of interest which
is lower than the rate on the existing security. For this reason,
mortgage-backed securities may be less effective than other types of U.S.
government securities as a means of "locking in" long-term interest rates.
The market value of mortgage-backed securities, like other U.S. government
securities in the Investment Grade Fund's portfolio, will generally vary
inversely with changes in market interest rates, declining when interest
rates rise and rising when interest rates decline. However, mortgage-backed
securities, while having comparable risk of decline in value during periods
of rising rates, may have less potential for capital appreciation than other
investments of comparable maturities due to the likelihood of increased
prepayments of mortgages as interest rates decline. To the extent these
securities are purchased at a premium, mortgage foreclosures and unscheduled
principal prepayments may result in some loss of the fund's principal
investment to the extent of the premium paid.
OPTIONS AND OPTIONS ON FUTURES Purchasing call and put options involves the
risk that the price of the underlying securities or interest rate futures
contracts will not move in the anticipated direction during the option
periods, and that the fund may lose all or some portion of the amount of the
premiums it has paid (plus transaction costs). Options on interest rate
futures contracts involve a somewhat greater risk because a liquid market for
these options may not exist to permit the fund to establish or close out its
positions. Although the Investment Grade Fund generally will purchase only
options for which there appears to be an active market, there is no assurance
that a liquid market on any exchange will exist for any particular option or
at any particular time.
The principal risk with respect to writing covered call and put options is
the Investment Grade Fund's possible inability to effect closing transactions
at favorable prices. By writing the option, the fund agrees to buy or sell
the security at a specified price during a specified period, and, until the
option lapses (i.e., the specified period expires or the option is exercised)
or is canceled by a closing transaction, the fund cannot sell the covering
security to recognize a profit (or limit a loss). In addition, if the price
of the underlying security does not move in the anticipated direction, the
fund will have to sell or buy the covering security at a price that is below
market (in the case of a security sold upon the exercise of a written call
option) or buy the covering security at a price that is above market (in the
case of a security purchased upon the exercise of a written put option)
unless the fund can close out its optioned position prior to the option
exercise date. Moreover, until an option lapses or is canceled by a closing
transaction, the maximum sales price the fund may realize on a security
subject to an option is limited to the option price. If the fund is unable to
effect a closing sale transaction with respect to options it has purchased,
it would have to exercise the options in order to realize any profit and may
incur transaction costs upon the purchase or sale of underlying securities.
The fund continues, however, to bear the risk of a decline in the price of a
security subject to an option during the option period, although any
potential loss during that period would be reduced by the amount of the
option premium received. The fund expects to purchase and write only exchange
traded options until such time as the manager determines that the
over-the-counter market in options is sufficiently developed.
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 each
fund's investment activities. The board, in turn, elects the officers of the
trust who are responsible for administering the trust's day-to-day
operations. The board also monitors each fund to ensure no material conflicts
exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.
The affiliations of the officers and board members and their principal
occupations for the past five years are shown below.
POSITION(S) HELD PRINCIPAL OCCUPATION(S) DURING
NAME, AGE AND ADDRESS WITH THE TRUST THE PAST FIVE YEARS
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Frank T. Crohn (74)
P.O. Box 810516
Boca Raton, FL 33481
TRUSTEE
Chairman, Eastport Lobster & Fish Company; Director, Unity Mutual Life
Insurance Company; trustee of two of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman, Financial Benefit Life
Insurance Company and Director, AmVestors Financial Corporation.
*William J. Lippman (73)
One Parker Plaza, 9th Floor
Fort Lee, NJ 07024
PRESIDENT,
CHIEF EXECUTIVE
OFFICER AND TRUSTEE
Senior Vice President, Franklin Resources, Inc. and Franklin Management,
Inc.; President and Director, Franklin Advisory Services, Inc.; and officer
and/or director or trustee, as the case may be, of six of the investment
companies in the Franklin Templeton Group of Funds.
Charles Rubens II (68)
18 Park Road
Scarsdale, NY 10583
TRUSTEE
Private investor; and trustee of three of the investment companies in the
Franklin Templeton Group of Funds.
Leonard Rubin (73)
2 Executive Drive
Suite 560
Fort Lee, NJ 07024
TRUSTEE
Partner in LDR Equities, LLC (manages various personal investments); Vice
President, Trimtex Co., Inc. (manufactures and markets specialty fabrics);
trustee or director, as the case may be, of three of the investment companies
in the Franklin Templeton Group of Funds; and formerly, Chairman of the
Board, Carolace Embroidery Co., Inc. and President, F.N.C. Textiles, Inc.
Harmon E. Burns (53)
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/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.;
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.; Senior Vice President and Chief Financial Officer,
Franklin/Templeton Investor 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.; Vice President, Chief Legal
Officer and Chief Operating Officer, Franklin Investment Advisory Services,
Inc.; and officer of 53 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.; Senior Vice President and Director, Franklin Advisory Services, Inc.
and Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
TREASURER
AND PRINCIPAL
ACCOUNTING OFFICER
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 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.
R. Martin Wiskemann (72)
777 Mariners Island Blvd.
San Mateo, CA 94404
VICE PRESIDENT
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.
*This board member is considered an "interested person" under federal
securities laws.
The trust pays noninterested board members $1,800 per quarter plus $900 per
meeting attended. 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 following table
provides the total fees paid to noninterested board members by the trust and
by the Franklin Templeton Group of Funds.
TOTAL FEES
RECEIVED NUMBER OF BOARDS
FROM THE IN THE FRANKLIN
TOTAL FEES FRANKLIN TEMPLETON GROUP
RECEIVED TEMPLETON GROUP OF FUNDS ON WHICH
NAME FROM THE TRUST 1 OF FUNDS 2 EACH SERVES 3
Frank T. Crohn $10,800 $20,400 2
Charles Rubens, II $11,700 $50,400 3
Leonard Rubin $11,700 $84,900 3
1. For the fiscal year ended September 30, 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 166, 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
funds 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.
MANAGEMENT AND OTHER SERVICES
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Manager and services provided The funds' manager is Franklin Advisory
Services, 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 each fund to buy, hold or sell. The manager
also selects the brokers who execute each fund's portfolio transactions. The
manager provides periodic reports to the funds' board, which reviews and
supervises the manager's investment activities. To protect the funds, 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 funds. Similarly, with respect
to each 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 funds 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 funds' 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 Rising Dividends Fund pays the manager a fee equal to an
annual rate of:
o 0.75% of the value of net assets up to and including $500 million;
o 0.625% of the value of net assets over $500 million and not over $1
billion; and
o 0.50% of the value of net assets in excess of $1 billion.
The Investment Grade Fund pays the manager a fee equal to an annual rate of:
o 0.50% of the value of net assets up to and including $500 million;
o 0.45% of the value of net assets over $500 million and not over $1 billion;
and
o 0.40% of the value of net assets in excess of $1 billion.
The fee is computed at the close of business on the first business day of
each month according to the terms of the management agreement. Each fund's
management agreement also provides for the payment of $40,000 per year by the
fund to the manager for the provision of certain accounting, bookkeeping and
recordkeeping functions for the fund. Each class of each fund's shares pays
its proportionate share of the fee.
For the last three fiscal years ended September 30, the funds paid the
following management fees:
MANAGEMENT FEES PAID ($)
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1998 1997 1996
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Rising Dividends Fund 3,577,836 2,483,231 2,052,026
Investment Grade Fund 251,633 182,521 144,011
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for each fund. FT Services is wholly owned by
Resources and is an affiliate of the funds' 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 each 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 $1.2 billion.
During the last three fiscal years ended September 30, the manager paid FT
Services the following administration fees:
ADMINISTRATION
FEES PAID ($)
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1998 1997
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Rising Dividends Fund 676,711 476,990
Investment Grade Fund 75,488 54,757
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the funds' shareholder servicing agent
and acts as the funds' 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. Each
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 each fund's securities and other assets.
AUDITOR Tait, Weller & Baker, Eight Penn Center Plaza, Suite 800,
Philadelphia, Pennsylvania 19103, is the funds' 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
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The manager selects brokers and dealers to execute the Rising Dividends
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 for the Rising Dividends Fund, 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 Rising Dividends Fund. They must, however, be of value to the
manager in carrying out its overall responsibilities to its clients.
Since most purchases by the Investment Grade Fund are principal transactions
at net prices, the Investment Grade Fund incurs little or no brokerage costs.
The Investment Grade Fund deals directly with the selling or buying principal
or market maker without incurring charges for the services of a broker on its
behalf, unless it is determined that a better price or execution may be
obtained by using the services of a broker. 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 prices. The fund seeks to obtain prompt execution of orders
at the most favorable net price. Transactions may be directed to dealers in
return for research and statistical information, as well as for special
services provided by the dealers in the execution of orders.
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 funds' 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 funds' 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 a 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 a 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 a 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 September 30, the Rising Dividends
Fund paid the following brokerage commissions:
BROKERAGE
COMMISSIONS ($)
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1998 478,453
1997 324,013
1996 235,013
During the fiscal years ended September 30, 1998, 1997 and 1996 the
Investment Grade Fund did not pay any brokerage commissions.
As of September 30, 1998, the funds did not own securities of their regular
broker-dealers.
DISTRIBUTIONS AND TAXES
The funds calculate dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in the distribution and service (Rule 12b-1) fees of
each class. The funds do not pay "interest" or guarantee any fixed rate of
return on an investment in their shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The funds receive income generally in
the form of dividends in the case of the Rising Dividends Fund and interest
on their investments. This income, less expenses incurred in the operation of
a fund, constitutes the fund's net investment income from which dividends may
be paid to you. Any distributions by a 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 funds may derive capital gains and losses
in connection with sales or other dispositions of their 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 a fund. Any net capital gains realized by a 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 funds.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by a
fund. Similarly, foreign exchange losses realized by a fund on the sale of
debt securities are generally treated as ordinary losses by the funds. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce a fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce a fund's
ordinary income distributions to you, and may cause some or all of a fund's
previously distributed income to be classified as a return of capital.
A fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of a fund's total assets at the end
of the fiscal year are invested in securities of foreign corporations, a fund
may elect to pass-through to you your pro rata share of foreign taxes paid by
the fund. If this election is made, the year-end statement you receive from
the fund will show more taxable income than was actually distributed to you.
However, you will be entitled to either deduct your share of such taxes in
computing your taxable income or (subject to limitations) claim a foreign tax
credit for such taxes against your U.S. federal income tax. A fund will
provide you with the information necessary to complete your individual income
tax return if it makes this election.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds 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 Each 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 regulated
investment companies, the funds generally pay no federal income tax on the
income and gains they distribute to shareholders. The board reserves the
right not to maintain the qualification of a fund as a regulated investment
company if it determines such course of action to be beneficial to you. In
such case, a 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 a fund to distribute to you by December 31 of
each year, at a minimum, the following amounts:
o 98% of its taxable ordinary income earned during the calendar year;
o 98% of its capital gain net income earned during the twelve month period
ending October 31; and
o 100% of any undistributed amounts from the prior year.
Each 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 such 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
differentFranklin 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 funds 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 a 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 youto report gain or loss on the redemption of your original
shares in a 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 100% of the dividends paid by the Rising
Dividends 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.
Because the Investment Grade Fund's income consists of interest rather than
dividends, no portion of its distributions will generally be eligible for the
intercorporate dividends-received deduction. None of the dividends paid by
the Investment Grade Fund for the most recent calendar year qualified for
such deduction, and it is anticipated that none of the current year's
dividends will so qualify.
INVESTMENT IN COMPLEX SECURITIES The funds 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 a fund are
treated as ordinary income or capital gain, accelerate the recognition of
income to a fund and/or defer a fund's ability to recognize losses and, in
limited cases, subject a 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 a fund.
ORGANIZATION, VOTING RIGHTS
AND PRINCIPAL HOLDERS
The Rising Dividends Fund and the Investment Grade Fund are diversified
series of Franklin Managed Trust, an open-end management investment company,
commonly called a mutual fund. The trust was organized as a Massachusetts
business trust on July 15, 1986, and is registered with the SEC.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations.
The Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the funds. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the fund's assets if you are held personally liable for
obligations of a fund. The Declaration of Trust provides that each fund
shall, upon request, assume the defense of any claim made against you for any
act or obligation of the fund and satisfy any judgment thereon. All such
rights are limited to the assets of the fund. The Declaration of Trust
further provides that the funds may maintain appropriate insurance (for
example, fidelity bonding and errors and omissions insurance) for the
protection of the funds, their shareholders, trustees, officers, employees
and agents to cover possible tort and other liabilities. Furthermore, the
activities of a fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
fund's total assets. Thus, the risk that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet
its obligations.
The Rising Dividends Fund currently offers three classes of shares, Class A,
Class B, and Class C. The Investment Grade Fund currently offers two classes
of shares, Class A and Advisor Class. Before January 1, 1999, Class A shares
were designated Class I and Class C shares were designated Class II. The
Rising Dividends Fund began offering Class B shares on January 1, 1999. The
funds may offer additional classes of shares in the future. The full title of
each class is:
o Franklin Rising Dividends Fund - Class A
o Franklin Rising Dividends Fund - Class B
o Franklin Rising Dividends Fund - Class C
o Franklin Investment Grade Income Fund - Class A
o Franklin Investment Grade Income Fund - Advisor Class
Shares of each class represent proportionate interests in a fund's assets. On
matters that affect a fund as a whole, each class has the same voting and
other rights and preferences as any other class. On matters that affect only
one class, only shareholders of that class may vote. Each class votes
separately on matters affecting only that class, or expressly required to be
voted on separately by state or federal law. Shares of each class of a series
have the same voting and other rights and preferences as the other classes
and series of the trust for matters that affect the trust as a whole.
Additional series may be offered in the future.
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 or a
series of 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 7, 1998, the principal shareholder of the Investment Grade
Fund, beneficial or of record, was:
SHARE PERCENTAGE
NAME AND ADDRESS CLASS (%)
INVESTMENT
GRADE FUND
Franklin Templeton Advisor 96.60%
Fund Allocator
Conservative Target Fund
1810 Gateway 3rd Floor
San Mateo, CA 94404-2470
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. To the best knowledge of the Rising Dividends Fund, no other
person holds beneficially or of record more than 5% of the outstanding shares
of any class.
As of December 7, 1998, the officers and board members, as a group, owned of
record and beneficially 1.27% of the Investment Grade Fund - Advisor Class
and less than 1% of the outstanding shares of the other funds and classes.
BUYING AND SELLING SHARES
The funds continuously offer their 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 funds. This reference is for convenience only
and does not indicate a legal conclusion of capacity. Banks and financial
institutions that sell shares of the funds 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 a 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 a 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 Investment Grade Fund's maximum initial sales
charge is 4.25%. The Rising Dividends Fund's maximum initial sales charge is
5.75% for Class A and 1% for Class C. There is no initial sales charge for
Class B. The initial sales charge for Class A shares may be reduced for
certain large purchases, as described in the prospectus. We offer several
ways for you to combine your purchases in the Franklin Templeton Funds to
take advantage of the lower sales charges for large purchases. The Franklin
Templeton Funds include the U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable
Products Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You 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 Class A shares at a reduced sales charge
by completing the letter of intent section of your account application. A
letter of intent is a commitment by you to invest a specified dollar amount
during a 13 month period. The amount you agree to invest determines the sales
charge you pay. By completing the letter of intent section of the
application, you acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase
in Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the
sales charge applicable to the amount specified in your LOI. Sales charge
reductions based on purchases in more than one Franklin Templeton Fund will
be effective only after notification to Distributors that the investment
qualifies for a discount. Any Class A purchases you made within 90 days
before you filed your LOI 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 Class
A shares at a reduced sales charge that applies to the group as a whole. The
sales charge is based on the combined dollar value of the group members'
existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions, although any such plan that purchased the fund's
Class A shares at a reduced sales charge under the group purchase privilege
before February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be
purchased without an initial sales charge or contingent deferred sales charge
(CDSC) by investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same share class.
Certain exceptions apply, however, to Class C shareholders who chose to
reinvest their distributions in Class A shares of the fund before November
17, 1997, and to Advisor Class or Class Z shareholders of a Franklin
Templeton Fund who may reinvest their distributions in the fund's Class A
shares. This waiver category also applies to Class B and C shares.
o Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option
the Franklin Valuemark Funds or the Templeton Variable Products Series
Fund. You should contact your tax advisor for information on any tax
consequences that may apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or
a Franklin Templeton money fund, you may reinvest them as described above.
The proceeds must be reinvested within 365 days from the date the CD
matures, including any rollover, or the date you redeem your money fund
shares.
o Redemption proceeds from the sale of Class A shares of any of the Templeton
Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund shares
and the CDSC holding period will begin again. We will, however, credit your
fund account with additional shares based on the CDSC you previously paid
and the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Class A shares 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 a 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 Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting distributions
from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
In addition, effective January 1, 2000, Class C shares may be purchased
without an initial sales charge by any investor who buys Class C shares
through an omnibus account with Merrill Lynch Pierce Fenner & Smith, Inc. A
CDSC may apply, however, if the shares are sold within 18 months of purchase.
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without an initial sales
charge. Retirement plans that are not qualified retirement plans (employer
sponsored pension or profit-sharing plans that qualify under section 401 of
the Internal Revenue Code, including 401(k), money purchase pension, profit
sharing and defined benefit plans), SIMPLEs (savings incentive match plans
for employees) or SEPs (employer sponsored simplified employee pension plans
established under section 408(k) of the Internal Revenue Code) must also meet
the group purchase requirements described above to be able to buy Class A
shares without an initial sales charge. We may enter into a special
arrangement with a securities dealer, based on criteria established by the
funds, 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 funds' 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 funds' Class A shares may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class A
shares may be offered with the following schedule of sales charges:
Rising Dividends Fund
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE (%)
Under $30,000 3.0
$30,000 but less than $50,000 2.5
$50,000 but less than $100,000 2.0
$100,000 but less than $200,000 1.5
$200,000 but less than $400,000 1.0
$400,000 or more 0
Investment Grade Fund
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE (%)
Under $30,000 3.0
$30,000 but less than $100,000 2.0
$100,000 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 each fund's prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
shares of $1 million or more: 1% for the Rising Dividends Fund and 0.75% for
the Investment Grade Fund on sales of $1 million to $2 million, plus 0.80%
for the Rising Dividends Fund and 0.60% for the Investment Grade Fund on
sales over $2 million to $3 million, plus 0.50% on sales over $3 million to
$50 million, plus 0.25% on sales over $50 million to $100 million, plus 0.15%
on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts,
out of its own resources, to securities dealers who initiate and are
responsible for purchases of Class A shares by certain retirement plans
without an initial sales charge: 1% on sales of $500,000 to $2 million, plus
0.80% on sales over $2 million to $3 million, plus 0.50% on sales over $3
million to $50 million, plus 0.25% on sales over $50 million to $100 million,
plus 0.15% on sales over $100 million. Distributors may make these payments
in the form of contingent advance payments, which may be recovered from the
securities dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the securities dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
securities dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a securities dealer's sales and marketing
efforts in the Franklin Templeton Group of Funds; a securities dealer's
support of, and participation in, Distributors' marketing programs; a
securities dealer's compensation programs for its registered representatives;
and the extent of a securities dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to securities dealers
may be made by payments from Distributors' resources, from Distributors'
retention of underwriting concessions and, in the case of funds that have
Rule 12b-1 plans, from payments to Distributors under such plans. In
addition, certain securities dealers may receive brokerage commissions
generated by fund portfolio transactions in accordance with the rules of the
National Association of Securities Dealers, Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity
discount or letter of intent programs, a CDSC may apply on any shares you
sell within 12 months of purchase. For Class C shares, a CDSC may apply if
you sell your shares within 18 months of purchase. The CDSC is 1% of the
value of the shares sold or the net asset value at the time of purchase,
whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class A shares without an initial sales charge 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.
For Class B shares, there is a CDSC if you sell your shares within six years,
as described in the table below. The charge is based on the value of the
shares sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B THIS % IS DEDUCTED
SHARES WITHIN THIS MANY FROM YOUR PROCEEDS
YEARS AFTER BUYING THEM AS A CDSC
- --------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
CDSC WAIVERS. The CDSC for any share class will generally be waived for:
o Account fees
o Sales of Class A shares purchased without an initial sales charge by
certain retirement plan accounts if (i) the account was opened before May
1, 1997, or (ii) the securities dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the securities dealer of
record has entered into a supplemental agreement with Distributors
o Redemptions 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) (not applicable to Class
B)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy (for
Class B, this applies to all retirement plan accounts, not only IRAs)
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 (not applicable to Class B)
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 funds' 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 each 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. Each 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 Each 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 funds do 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 a 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 funds
nor their affiliates will be liable for any loss caused by your failure to
cash such checks. The funds are 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 funds are not bound
to meet any redemption request in less than the seven day period prescribed
by law. Neither the funds nor their 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 funds
on behalf of numerous beneficial owners for recordkeeping operations
performed with respect to such owners. For each beneficial owner in the
omnibus account, the funds 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, each 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 funds calculate the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The funds do 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, each 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 funds value 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 funds value 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 funds value them according to the broadest and most
representative market as determined by the manager.
The Investment Grade 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 funds determine 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 funds may use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the funds' 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. Each 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 funds' 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
September 30:
AMOUNT RECEIVED
TOTAL IN CONNECTION
COMMISSIONS AMOUNT RETAINED BY WITH
RECEIVED ($) DISTRIBUTORS ($) REDEMPTIONS AND
REPURCHASES ($)
- ----------------------------------------------------------------------
1998
Rising Dividends 1,956,311 187,279 20,936
Fund
Investment Grade 253,894 17,824 184
Fund
1997
Rising Dividends 796,459 80,759 2,425
Fund
Investment Grade 240,446 15,287 0
Fund
1996
Rising Dividends 502,383 53,786 758
Fund
Investment Grade 125,138 8,042 0
Fund
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the funds for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each class has a separate distribution
or "Rule 12b-1" plan. Under each plan, each fund shall pay or may reimburse
Distributors or others for the expenses of activities that are primarily
intended to sell shares of the class. These expenses may include, among
others, distribution or service fees paid to securities dealers or others who
have executed a servicing agreement with the funds, Distributors or its
affiliates; a prorated portion of Distributors' overhead expenses; and the
expenses of printing prospectuses and reports used for sales purposes, and
preparing and distributing sales literature and advertisements.
The distribution and service (12b-1) fees charged to each class are based
only on the fees attributable to that particular class.
THE CLASS A PLAN. Payments by each fund under its Class A plan may not exceed
0.50% in the case of the Rising Dividends Fund or 0.25% in the case of the
Investment Grade Fund per year of Class A's average daily net assets, payable
quarterly. Of this amount, the Rising Dividends Fund may pay up to 0.25% to
Distributors or others as a service fee to reimburse Distributors or others
for personal services provided to shareholders of the fund and/or the
maintenance of shareholder accounts. All distribution expenses over these
amounts will be borne by those who have incurred them.
The Class A plans do not permit unreimbursed expenses incurred in a
particular year to be carried over to or reimbursed in later years.
THE CLASS B AND C PLANS. Under the Class B and C plans, the Rising Dividends
Fund pays Distributors up to 0.75% per year of the class's average daily net
assets, payable quarterly, to pay Distributors or others for providing
distribution and related services and bearing certain expenses. All
distribution expenses over this amount will be borne by those who have
incurred them. The Rising Dividends Fund may also pay a servicing fee of up
to 0.25% per year of the class's average daily net assets, payable quarterly.
This fee may be used to pay securities dealers or others for, among other
things, helping to establish and maintain customer accounts and records,
helping with requests to buy and sell shares, receiving and answering
correspondence, monitoring dividend payments from the fund on behalf of
customers, and similar servicing and account maintenance activities.
The expenses relating to each of the Class B and C plans are also used to pay
Distributors for advancing the commission costs to securities dealers with
respect to the initial sale of Class B and C shares. Further, the expenses
relating to the Class B plan may be used by Distributors to pay third party
financing entities that have provided financing to Distributors in connection
with advancing commission costs to securities dealers.
THE CLASS A, B AND C PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent a fund, the manager or Distributors or other parties on behalf of the
fund, the manager or Distributors make payments that are deemed to be for the
financing of any activity primarily intended to result in the sale of fund
shares within the context of Rule 12b-1 under the Investment Company Act of
1940, as amended, then such payments shall be deemed to have been made
pursuant to the plan. The terms and provisions of each plan relating to
required reports, term, and approval are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the National Association of Securities Dealers, Inc.
To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks will not be entitled to participate in the plans as a result of
applicable federal law prohibiting certain banks from engaging in the
distribution of mutual fund shares. These banking institutions, however, are
permitted to receive fees under the plans for administrative servicing or for
agency transactions. If you are a customer of a bank that is prohibited from
providing these services, you would be permitted to remain a shareholder of
the fund, and alternate means for continuing the servicing would be sought.
In this event, changes in the services provided might occur and you might no
longer be able to avail yourself of any automatic investment or other
services then being provided by the bank. It is not expected that you would
suffer any adverse financial consequences as a result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1.
The plans are renewable annually by a vote of the board, including a majority
vote of the board members who are not interested persons of the funds and who
have no direct or indirect financial interest in the operation of the plans,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such board members be done by the
noninterested members of the funds' board. The plans and any related
agreement may be terminated at any time, without penalty, by vote of a
majority of the noninterested board members on not more than 60 days' written
notice, by Distributors on not more than 60 days' written notice, by any act
that constitutes an assignment of the management agreement with the manager
or by vote of a majority of the outstanding shares of the class. Each Class A
plan may also be terminated by any act that constitutes an assignment of the
underwriting agreement with Distributors. Distributors or any dealer or other
firm may also terminate their respective distribution or service agreement at
any time upon written notice.
The plans and any related agreements may not be amended to increase
materially the amount to be spent for distribution expenses without approval
by a majority of the outstanding shares of the class, and all material
amendments to the plans or any related agreements shall be approved by a vote
of the noninterested board members, cast in person at a meeting called for
the purpose of voting on any such amendment.
Distributors is required to report in writing to the board at least quarterly
on the amounts and purpose of any payment made under the plans and any
related agreements, as well as to furnish the board with such other
information as may reasonably be requested in order to enable the board to
make an informed determination of whether the plans should be continued.
For the fiscal year ended September 30, 1998, Distributors eligible
expenditures for advertising, printing, and payments to underwriters and
broker-dealers pursuant to the plans and the amounts each fund paid
Distributors under the plans were:
DISTRIBUTORS' AMOUNT PAID
ELIGIBLE EXPENSES ($) BY THE FUND ($)
- ----------------------------------------------------------------------
Rising Dividends Fund - 2,203,900 2,017,988
Class A
Rising Dividends Fund - 505,175 270,090
Class C
Investment Grade Fund - 130,037 137,511
Class A
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 funds be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return and current yield quotations used by the
funds 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 funds 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 funds.
The average annual total returns for the indicated periods ended September
30, 1998, were:
1 YEAR 5 YEARS 10 YEARS
- ------------------------------------------------------------------
Rising Dividends Fund - Class A -14.27% 11.09% 11.32%
Investment Grade Fund - Class A 2.00% 3.78% 6.62%
SINCE
1 YEAR INCEPTION
(5/1/95)
- ------------------------------------------------------------------
Rising Dividends Fund - Class C -11.17% 16.77%
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 September 30, 1998, were:
1 YEAR 5 YEARS 10 YEARS
- ------------------------------------------------------------------
Rising Dividends Fund - Class A -14.27% 69.20% 192.17%
Investment Grade Fund - Class A 2.00% 20.36% 89.81%
SINCE
1 YEAR INCEPTION (5/1/95)
- ------------------------------------------------------------------
Rising Dividends Fund - Class C -11.17% 69.83%
Current yield Current yield shows the income per share earned by the funds.
It is calculated by dividing the net investment income per share earned
during a 30-day base period by the applicable maximum offering price per
share on the last day of the period and annualizing the result. Expenses
accrued for the period include any fees charged to all shareholders of the
class during the base period. The yields for the 30-day period ended
September 30, 1998 are:
CLASS A CLASS C
- ------------------------------------------------------
Franklin Rising Dividends Fund 0.80% 0.31%
Franklin Investment Grade Fund 4.08% N/A
These figures were 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 by a class
during a certain period and dividing that amount by the current maximum
offering price. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing
and short-term capital gains, and is calculated over a different period of
time. The current distribution rates for the 30-day period ended September
30, 1998, were:
CLASS A CLASS C
- ------------------------------------------------------
Franklin Rising Dividends Fund 0.81% 0.03%
Franklin Investment Grade Fund 4.11% N/A
Volatility Occasionally statistics may be used to show the funds' volatility
or risk. Measures of volatility or risk are generally used to compare the
funds' 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 funds invest. 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 funds 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 a 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.
Each 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 a fund may
satisfy your investment goal, advertisements and other materials about the
funds 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.
o Salomon Brothers Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate and mortgage
bonds.
o Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
o Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
o Bond Buyer 20 Index - an index of municipal bond yields based upon yields
of 20 general obligation bonds maturing in 20 years.
o Bond Buyer 40 Index - an index composed of the yield to maturity of 40
bonds. The index attempts to track the new-issue market as closely as
possible, so it changes bonds twice a month, adding all new bonds that meet
certain requirements and deleting an equivalent number according to their
secondary market trading activity. As a result, the average par call date,
average maturity date, and average coupon rate can and have changed over
time. The average maturity generally has been about 29-30 years.
o Salomon Brothers Composite High Yield Index or its component indices -
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
From time to time, advertisements or information for a 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 each fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in a 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 a 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 a fund's shares can be expected to increase. CDs are frequently
insured by an agency of the U.S. government. An investment in a 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 a 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 a fund will continue its performance
as compared to these other averages.
MISCELLANEOUS INFORMATION
The funds 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 a fund
cannot guarantee that these goals will be met.
Each 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 $222 billion in assets under management for approximately 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. Each
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 funds 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 funds and their 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.
