TEMPLETON AMERICAN TRUST, INC.
500 East Broward Boulevard
Fort Lauderdale, FL 33394-3091
Dear Shareholder:
Enclosed is a Notice of Meeting for a Special Shareholders Meeting.
The Meeting has been called for March 19, 1999 at 10:00 a.m. EST, at the
offices of Templeton American Trust, Inc. ("American Trust") at 500 East
Broward Boulevard, Fort Lauderdale, Florida 33394-3091. The accompanying
Proxy Statement/Prospectus describes a proposal being presented for your
consideration and requests your prompt attention and vote via the enclosed
proxy card.
PLEASE TAKE A MOMENT TO FILL OUT, SIGN AND
RETURN THE ENCLOSED PROXY CARD!
This meeting is critically important. You are being asked to consider
and approve an Agreement and Plan of Reorganization which would result in
your shares of American Trust being exchanged for those of a fund called
Franklin Equity Fund. If shareholders approve the proposal, you will receive
Class A shares of Franklin Equity Fund equal in value to your investment in
Class I shares of American Trust or Class C shares of Franklin Equity Fund
equal in value to your investment in Class II shares of American Trust. You
will no longer be a shareholder of American Trust, and you will instead be a
shareholder of Franklin Equity Fund.
The transaction is being proposed because the projected growth in
assets of American Trust was not sufficient to continue to offer a fund with
competitive performance and high quality service to shareholders over the
long term. The combined proxy statement and prospectus compares the
investment objectives and investment policies of Franklin Equity Fund and
American Trust. Franklin Equity Fund is managed by Franklin Advisers, Inc.,
which is an affiliate of Templeton Investment Counsel, Inc., the current
investment adviser of American Trust.
Please take the time to review this document and vote now. To ensure
that your vote is counted, indicate your position on the enclosed proxy
card. Sign and return your card promptly. If you determine at a later date
that you wish to attend this meeting, you may revoke your proxy and vote in
person.
Thank you for your attention to this matter.
Sincerely,
Barbara J. Green
Secretary
TEMPLETON AMERICAN TRUST, INC.
500 East Broward Boulevard
Fort Lauderdale, FL 33394-3091
NOTICE OF SPECIAL SHAREHOLDERS MEETING
To Be Held on March 19, 1999
To the Shareholders:
NOTICE IS HEREBY GIVEN that a Special Shareholders Meeting of Templeton
American Trust, Inc. ("American Trust") will be held at the offices of
American Trust, 500 East Broward Boulevard, Fort Lauderdale, FL 33394-3091
on March 19, 1999 at 10:00 a.m. EST. The Meeting is being called for the
following reasons:
1. To approve or disapprove an Agreement and Plan of Reorganization
between American Trust and Franklin Equity Fund that provides for: (i) the
acquisition of substantially all of the assets of American Trust in exchange
for Class A and Class C shares of Franklin Equity Fund, (ii) the distribution
of Class A shares of Franklin Equity Fund to the shareholders of Class I
shares of American Trust, (iii) the distribution of Class C shares of
Franklin Equity Fund to shareholders of Class II shares of American Trust,
and (iv) the liquidation and dissolution of American Trust.
2. To vote upon any other business as may properly come before the
Meeting or any adjournment thereof.
The transaction contemplated by the Agreement and Plan of
Reorganization is described in the attached Prospectus/Proxy Statement. A
copy of the Agreement and Plan of Reorganization is attached as Exhibit A
thereto.
Shareholders of record as of the close of business on January 12, 1999
are entitled to notice of, and to vote at, the Meeting or any adjournment
thereof.
By Order of the Board of Directors,
Barbara J. Green
Secretary
February 1, 1999
IF YOU ATTEND THE MEETING, YOU MAY VOTE YOUR SHARES IN PERSON. IF YOU
DO NOT EXPECT TO ATTEND THE MEETING, THE BOARD OF DIRECTORS URGES YOU TO
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD(S) IN THE ENCLOSED
POSTAGE-PAID RETURN ENVELOPE. IT IS IMPORTANT THAT YOU RETURN YOUR SIGNED
PROXY PROMPTLY SO THAT A QUORUM MAY BE ENSURED.
COMBINED PROXY STATEMENT AND PROSPECTUS
When reading this Proxy/Prospectus Statement, you will see certain terms
beginning with capital letters. This means the term is explained in our
glossary section.
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TABLE OF CONTENTS
PAGE
COVER PAGE Cover
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SUMMARY 2
On what proposal am I being asked to vote? 2
What are the general tax consequences of the Transaction? 2
COMPARISONS OF SOME IMPORTANT FEATURES 3
How do the investment objectives and policies of the two funds compare? 3
Who manages the two funds? 3
What are the fees and expenses of each fund and what might they be after the
Transaction? 4
Where can I find more financial information about the two funds? 6
What are other key features of the two funds? 6
Transfer Agency, Custody and Administrative Services 6
Fees and Expenses 6
Distribution Services 6
Purchases and Redemptions 7
Dividends and Distributions 7
What are the risks of an investment in Franklin Equity Fund? 8
Smaller Companies Risk 8
Convertible Securities Risk 8
Interest Rate, Currency and Market Risk 8
Credit and Issuer Risk 9
Foreign Securities Risk 9
Derivative Securities Risk 9
Real Estate Investment Trusts ("REITs") 9
REASONS FOR THE TRANSACTION 10
INFORMATION ABOUT THE TRANSACTION 11
How will the Transaction be carried out? 11
Who will pay the expenses of the Transaction? 11
What are the tax consequences of the Transaction? 11
What should I know about Class A and Class C Shares of the
Franklin Equity Fund? 11
What are the capitalizations of the two funds and what might the capitalization
be after the Transaction? 12
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES 13
Are there any significant differences between the investment objectives and
strategies of the two funds? 13
How do the investment policies of the two funds compare? 13
What are the fundamental investment restrictions of the two funds? 15
VOTING INFORMATION 17
How many votes are necessary to approve the Agreement and Plan? 17
How do I ensure my vote is accurately recorded? 17
Can I revoke my proxy? 17
What other matters will be voted upon at the Meeting? 17
Who is entitled to vote? 17
What other solicitations will be made? 17
Are there dissenters' rights? 18
INFORMATION ABOUT FRANKLIN EQUITY FUND 18
INFORMATION ABOUT AMERICAN TRUST 18
PRINCIPAL STOCKHOLDERS 18
GLOSSARY 20
Useful Terms and Definitions 20
EXHIBITS TO COMBINED PROXY STATEMENT AND PROSPECTUS 22
EXHIBIT A - AGREEMENT AND PLAN OF REORGANIZATION A-1
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COMBINED PROXY STATEMENT AND PROSPECTUS
Dated January 15, 1999
Acquisition of the Assets of
TEMPLETON AMERICAN TRUST, INC.
By and in exchange for Class A and Class C Shares of
FRANKLIN EQUITY FUND
This Prospectus/Proxy Statement solicits proxies to be voted at a
Special Shareholders Meeting (the "Meeting") to approve or disapprove an
Agreement and Plan of Reorganization (the "Agreement and Plan"). If
shareholders vote to approve the Agreement and Plan, the net assets of
American Trust will be acquired by and in exchange for shares of Franklin
Equity Fund. The Meeting will be held at the principal offices of American
Trust at 500 East Broward Boulevard, Fort Lauderdale, FL 33394-3091 on March
19, 1999 at 10:00 a.m. EST. The Board of Directors of Templeton American
Trust, Inc. ( "American Trust") is soliciting these proxies. Franklin Equity
Fund's principal offices are located at 777 Mariners Island Boulevard, San
Mateo, CA 94404. This Prospectus/Proxy Statement will first be sent to
shareholders on or about February 1, 1999.
If the shareholders vote to approve the Agreement and Plan, you will
receive Class A shares of Franklin Equity Fund equal in value to your
investment in Class I shares of American Trust or Class C shares of Franklin
Equity Fund equal in value to your investment in Class II shares of American
Trust. American Trust will then be liquidated.
Like American Trust, Franklin Equity Fund is an open-end, diversified
management investment company. Franklin Equity Fund's principal investment
objective is capital appreciation. Its secondary objective is to provide
current income return through the receipt of dividends or interest from its
investments.
This Prospectus/Proxy Statement gives the information about the Class A
and Class C shares of Franklin Equity Fund that you should know before
investing. You should retain it for future reference. The prospectus of
Franklin Equity Fund dated November 1, 1998 is attached to, and considered a
part of, this Prospectus/Proxy Statement. You may find more information about
Franklin Equity Fund, American Trust and the proposed reorganization in the
following documents. You may request a free copy of these documents or other
information by calling 1-800/DIAL BEN(R) or by writing to the above
addresses.
o The Statement of Additional Information ("SAI") dated January 18,
1999, relating to this Prospectus/Proxy Statement,
o American Trust's Prospectus and its SAI dated May 1, 1998,
o American Trust's Annual Report for the fiscal year ended December 31,
1997 and its Semi-Annual Report for the period ended June 30, 1998,
o Franklin Equity Fund's SAI dated November 1, 1998, and
o Franklin Equity Fund's Annual Report for the fiscal year ended June
30, 1998
Each of these documents is on file with the Securities and Exchange Commission
("SEC") and is incorporated by reference herein.
Like all mutual funds, the SEC has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus/Proxy Statement. Any
representation to the contrary is a criminal offense.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER U.S. GOVERNMENT
AGENCY. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS
OF PRINCIPAL.
SUMMARY
This is only a summary of certain information contained in this
Prospectus/Proxy Statement. You should read the more complete information in
the rest of this Prospectus/Proxy Statement, including the Agreement and Plan
(attached as Exhibit A) and the Prospectus of Franklin Equity Fund (enclosed
as Exhibit B).
ON WHAT PROPOSAL AM I BEING ASKED TO VOTE?
The Board of Directors of American Trust approved the Agreement and
Plan (which is attached as Exhibit A) and recommended that shareholders of
American Trust vote to approve the Agreement and Plan. If shareholders vote
to approve the Agreement and Plan, American Trust's net assets will be
transferred to Franklin Equity Fund, in exchange for an equal value of shares
of Franklin Equity Fund. These shares of Franklin Equity Fund will then be
distributed to American Trust's shareholders and American Trust will be
liquidated. (The proposed transaction is referred to in this
Prospectus/Proxy Statement as the "Transaction").
This means that your shares of American Trust will be exchanged for an
equal value of shares of Franklin Equity Fund. You will receive Class A
shares of Franklin Equity Fund equal in value to your investment in Class I
shares of American Trust or Class C shares of Franklin Equity Fund equal in
value to your investment in Class II shares of American Trust. As a result of
this exchange, you will cease to be a shareholder of American Trust and will
become a shareholder of Franklin Equity Fund. This exchange will occur on the
Closing Date of the Transaction.
Franklin Equity Fund is a mutual fund in the Franklin Templeton Group
of Funds. It is managed by Franklin Advisers, Inc. It has investment
objectives and policies which are similar but not identical to those of
American Trust. The Class A and Class C shares of Franklin Equity Fund have
distribution and sales charges which are substantially similar to those of
the Class I and Class II shares, respectively, of American Trust. Before
January 1, 1999 Franklin Equity Fund's Class A shares were designated Class I
and its Class C shares were designated Class II.
For the reasons set forth below under "Reasons for the Transaction,"
the Board of Directors of American Trust has concluded that the Transaction
is in the best interests of the shareholders of American Trust. The Board of
Directors of American Trust and the Board of Directors of Franklin Equity
Fund concluded that no dilution in value would result to the shareholders of
American Trust or Franklin Equity Fund, respectively, as a result of the
Transaction.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE TO APPROVE
THE AGREEMENT AND PLAN
WHAT ARE THE GENERAL TAX CONSEQUENCES OF THE TRANSACTION?
It is expected that shareholders of American Trust will not recognize
any gain or loss for federal income tax purposes as a result of the exchange
of their shares of American Trust for shares of Franklin Equity Fund.
However, you should consult your tax advisor regarding the effect, if any, of
the Transaction in light of your individual circumstances. You should also
consult your tax advisor about state and local tax consequences, if any,
since the foregoing discussion only relates to the federal income tax
consequences. For further information about the tax consequences of the
Transaction, see "Information About the Transaction - Tax Considerations."
COMPARISONS OF SOME IMPORTANT FEATURES
HOW DO THE INVESTMENT OBJECTIVES AND POLICIES OF THE TWO FUNDS COMPARE?
While not identical, the investment goals of Franklin Equity Fund and
American Trust are similar. American Trust's investment goal of long-term
total return is a combination of capital growth and income. Franklin Equity
Fund's investment goal is capital appreciation, with a secondary goal to
provide current income through the receipt of dividends or interest from
investments. The difference between the two goals is one of emphasis on the
income component, with a heavier emphasis being placed on income by American
Trust.
Under normal circumstances, American Trust seeks to achieve its goal of
long-term total return (a combination of capital growth and income) by
investing at least 65% of its total assets in both equity and debt securities
of U.S. companies and the U.S. government, its agencies and
instrumentalities. Under normal circumstances, Franklin Equity Fund will
invest at least 65% of its assets in common stocks and securities convertible
into common stock which may be traded on a securities exchange or in the over
the counter market to satisfy its primary objective of capital appreciation.
The balance of its assets may be invested in other securities that in the
aggregate are consistent with its investment objective.
Franklin Equity Fund may invest in relatively new or unseasoned
companies that are in their early stages of development, or in new and
emerging industries where the opportunity for rapid growth is expected to be
above average. In general, the fund may invest in smaller companies with a
market capitalization of less than $1.5 billion at the time of the fund's
investment. The fund currently does not intend to invest more than 25% of its
total assets in securities of small capitalization companies.
There is no specific limitation on the percentage of Franklin Equity
Fund's assets that may be invested in foreign issuers but the fund presently
intends to limit its investments to no more than 15% of its total assets in
securities of companies of developed foreign nations. Franklin Equity Fund
will ordinarily buy foreign securities traded in the U.S. and through
depository receipts, although it may buy foreign securities directly in
foreign markets. American Trust may invest up to 35% of its total assets in
securities of issuers in any foreign country if they are listed on a stock
exchange and in American, European and Global Depositary Receipts. It may
invest up to 15% of its total assets in foreign securities not listed on a
recognized U.S. or foreign securities exchange. Thus, Franklin Equity Fund
could have a greater percentage of its assets committed to foreign securities.
For further information about the investment objectives and policies of
the two funds, see "Comparison Of Investment Objectives and Policies."
WHO MANAGES THE TWO FUNDS?
The management of the business and affairs of both funds are the
responsibility of their respective Boards of Directors. Franklin Equity Fund
is a California corporation, organized on August 30, 1984. American Trust is
a Maryland corporation, organized on October 31, 1990.
Franklin Advisers, Inc. ("Advisers") manages the assets of Franklin
Equity Fund. Templeton Investment Counsel, Inc. ("Investment Counsel")
manages the assets of American Trust. Advisers and Investment Counsel are
both wholly-owned subsidiaries of Franklin Resources, Inc. ("Resources").
Resources is a publicly owned company engaged in various aspects of the
financial services industry through its subsidiaries. Together, Advisers and
its affiliates serve as investment manager or administrator to 54 registered
investment companies, with approximately 166 U.S. based funds or series.
Together, they have over $222 billion in assets under management for
approximately 7 million U.S. based mutual fund shareholder and other
accounts. Resources is a publicly owned holding company. Its principal
shareholders are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 19% and 15%, respectively, of Resources' outstanding shares.
The team responsible for the day-to-day management of Franklin Equity
Fund's portfolio is: Conrad B. Herrmann and Canyon A. Chan since 1993, and
Serena Perin since 1996. Information regarding these individuals and their
business experience for the last five years is given in the accompanying
prospectus of Franklin Equity Fund, under the heading "Who Manages the Fund?"
The team responsible for the day-to-day management of American Trust
is: Peter A. Nori since 1996, and Gary R. Clemons and William T. Howard, Jr.
since 1993. Additional information regarding these individuals and their
business experience for the last five years is given in the prospectus of
American Trust, under the heading "Who Manages the Fund?"
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WHAT ARE THE FEES AND EXPENSES OF EACH FUND AND WHAT MIGHT THEY BE AFTER THE TRANSACTION?
PRO FORMA FEE TABLE FOR
AMERICAN TRUST AND FRANKLIN EQUITY FUND
BASED UPON THE HISTORICAL EXPENSES
FOR THE 12 MONTH PERIOD ENDED JUNE 30, 1998
ACTUAL
--------------------------
AMERICAN TRUST FRANKLIN EQUITY PRO FORMA CLASS A
CLASS I FUND AFTER TRANSACTION
(UNAUDITED) CLASS A (UNAUDITED)
SHAREHOLDER TRANSACTION EXPENSES*
- ---------------------------------
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Maximum Sales Charge (as a percentage of
Offering Price)......................... 5.75% 5.75% 5.75%
Paid at time of purchase 1.............. 5.75% 5.75% 5.75%
Paid at redemption 2.................... None None None
Exchange Fee (per transaction) 3........ None None None
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
(as percentage of average net assets)
Management Fees......................... 0.70% 0.50% 0.50%
Rule 12b-1 Fees 4....................... 0.29% 0.21% 0.21%
Other Expenses.......................... 0.43% 0.19% 0.19%
----- ----- -----
Total Fund Operating Expenses........... 1.42% 0.90% 0.90%
ACTUAL
----------------------------
AMERICAN TRUST FRANKLIN EQUITY PRO FORMA CLASS C
CLASS II FUND AFTER TRANSACTION
(UNAUDITED) CLASS C (UNAUDITED)
SHAREHOLDER TRANSACTION EXPENSES*
- ---------------------------------
Maximum Sales Charge (as a percentage of
Offering Price)......................... 1.99% 1.99% 1.99%
Paid at time of purchase 5.............. 1.00% 1.00% 1.00%
Paid at redemption 2.................... 0.99% 0.99% 0.99%
Exchange Fee (per transaction) 3........ None None None
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
(as percentage of average net assets)
Management Fees......................... 0.70% 0.50% 0.50%
Rule 12b-1 Fees 4....................... 1.00% 1.00% 1.00%
Other Expenses.......................... 0.43% 0.19% 0.19%
----- ----- -----
Total Fund Operating Expenses........... 2.13% 1.69% 1.69%
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* IF YOUR TRANSACTION IS PROCESSED THROUGH YOUR SECURITIES DEALER, YOU MAY BE
CHARGED A FEE BY YOUR SECURITIES DEALER FOR THIS SERVICE.
1 THERE IS NO FRONT-END SALES CHARGE IF YOU INVEST $1 MILLION OR MORE IN
CLASS A SHARES.
2 A CONTINGENT DEFERRED SALES CHARGE MAY APPLY TO CLASS II OR CLASS C
PURCHASES IF YOU SELL THE SHARES WITHIN 18 MONTHS AND TO CLASS I OR CLASS A
PURCHASES OF $1 MILLION OR MORE IF YOU SELL THE SHARES WITHIN ONE YEAR. A
CDSC MAY ALSO APPLY TO PURCHASES BY CERTAIN RETIREMENT PLANS THAT QUALIFY
TO BUY CLASS I OR CLASS A SHARES WITHOUT A FRONT-END SALES CHARGE. THE
CHARGE IS 1% OF THE VALUE OF THE SHARES SOLD OR THE NET ASSET VALUE AT THE
TIME OF PURCHASE, WHICHEVER IS LESS. THE NUMBER IN THE TABLE SHOWS THE
CHARGE AS A PERCENTAGE OF THE OFFERING PRICE. WHILE THE PERCENTAGE IS
DIFFERENT DEPENDING ON WHETHER THE CHARGE IS SHOWN BASED ON THE NET ASSET
VALUE OR THE OFFERING PRICE, THE DOLLAR AMOUNT PAID BY YOU WOULD BE THE
SAME. SEE "HOW DO I SELL SHARES? - CONTINGENT DEFERRED SALES CHARGE" IN
EACH FUND'S PROSPECTUS FOR DETAILS.
3 THERE IS A $5.00 FEE FOR BOTH FUNDS FOR EXCHANGES BY MARKET TIMERS AS
DEFINED IN THE GLOSSARY TO THIS PROXY STATEMENT. WE PROCESS ALL OTHER
EXCHANGES WITHOUT A FEE.
4 THESE FEES MAY NOT EXCEED 0.35% FOR AMERICAN TRUST'S CLASS I SHARES AND
0.25% FOR FRANKLIN EQUITY FUND'S CLASS A SHARES. THESE FEES MAY NOT EXCEED
1.00% FOR CLASS II OR CLASS C SHARES OF THE FUNDS. THE COMBINATION OF
FRONT-END SALES CHARGES AND RULE 12B-1 FEES COULD CAUSE LONG-TERM
SHAREHOLDERS TO PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE MAXIMUM
FRONT-END SALES CHARGES PERMITTED UNDER THE NASD'S RULES.
5 ALTHOUGH CLASS II AND CLASS C HAS A LOWER FRONT-END SALES CHARGE THAN CLASS
I AND CLASS A, THEIR RULE 12B-1 FEES ARE HIGHER. OVER TIME YOU MAY PAY
MORE FOR CLASS II AND CLASS C SHARES.
EXAMPLE:
Assume the annual return for each class is 5% and operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
CLASS I/CLASS A 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------- ------ ------- ------- --------
American Trust Class I $71** $100 $131 $218
Franklin Equity Fund Class A $66** $85 $104 $162
Pro Forma Franklin Equity Fund
Class A (after proposed
transaction) $66 $85 $104 $162
CLASS II/CLASS C
American Trust Class II $41*** $76 $123 $254
Franklin Equity Fund Class C $37*** $63 $101 $208
Pro Forma Franklin Equity Fund
Class C (after proposed
transaction) $37 $63 $101 $208
**Assumes a Contingent Deferred Sales Charge will not apply.
***For the same Class II or Class C investment, you would pay projected
expenses of $31 (American Trust) and $27 (Franklin Equity Fund) if you did
not sell your shares at the end of the first year. Your projected expenses
for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
Each fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.
WHERE CAN I FIND MORE FINANCIAL INFORMATION ABOUT THE TWO FUNDS?
The current prospectuses of American Trust and Franklin Equity Fund
each contain further financial information regarding per share income and
capital changes, under the heading "Financial Highlights."
WHAT ARE OTHER KEY FEATURES OF THE TWO FUNDS?
TRANSFER AGENCY, CUSTODY AND ADMINISTRATIVE SERVICES. Both funds
receive shareholder accounting and other clerical services from Franklin
Templeton Investor Services, Inc. ("Investor Services") in its capacity as
transfer agent and dividend paying agent. Investor Services is a
wholly-owned subsidiary of Resources.
Bank of New York is the custodian for the assets of Franklin Equity
Fund. The main office of the Bank of New York is 90 Washington Street, New
York, New York 10286. The Chase Manhattan Bank, N.A., MetroTech Center,
Brooklyn, New York 11245, serves as custodian of American Trust's assets.
FT Services provides certain administrative facilities and services to
both funds. These services include the preparation and maintenance of books
and records, preparation of tax returns and financial reports, and monitoring
compliance with regulatory requirements. FT Services receives a fee from
American Trust for the administration services described above. In the case
of Franklin Equity Fund, Advisers pays the administrative fee, at its own
expense, and it is not a separate expense of the Franklin Equity Fund.
FEES AND EXPENSES. Pursuant to its Investment Management Agreement
with Investment Counsel, American Trust pays Investment Counsel a monthly fee
equal on an annual basis to 0.70% of the average daily net assets of the
Fund. American Trust also pays FT Services a monthly fee for the
administration services described above. The monthly fee is equal on an
annual basis to 0.15% of the first $200,000,000 of American Trust's average
daily net assets, with certain reductions at higher asset amounts.
Under its Management Agreement with Advisers, Franklin Equity Fund pays
Advisers a management fee equal to a monthly rate of 5/96 of 1%
(approximately 5/8 of 1% per year) for the first $100 million of net assets
of the Fund; 1/24 of 1% (approximately 1/2 of 1% per year) of net assets of
the Fund in excess of $100 million up to $250 million; and 9/240 of 1%
(approximately 45/100 of 1% per year) of net assets of the Fund in excess of
$250 million. Given the present size of Franklin Equity Fund, Advisers is
entitled to receive a fee totaling approximately 1/2 of 1% per year of the
net assets of the Fund. Also, Advisers would pay FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average
daily net assets up to $200,000,000 with certain reductions at higher asset
amounts. This administration fee is paid by Advisers and is not a separate
expense of Franklin Equity Fund.
DISTRIBUTION SERVICES. Franklin/Templeton Distributors, Inc.
("Distributors") distributes the shares of both Franklin Equity Fund and
American Trust. The Boards of Directors of both Franklin Equity Fund and
American Trust have adopted Plans of Distribution pursuant to Rule 12b-1
under the 1940 Act. Franklin Equity Fund's Board has adopted a separate Plan
of Distribution for its Class A shares and its Class C shares. American
Trust's Board has adopted a separate Plan of Distribution for its Class I
shares and its Class II shares. The Distribution Plans of each fund provide
that the relevant Class of each fund may pay or reimburse Distributors or
others for activities primarily intended to sell shares of that Class. Such
expenses may include, but are not limited to, the printing of prospectuses
and reports used for sales purposes, preparing and distributing sales
literature and advertisements and a prorated portion of Distributors'
overhead expenses.
Payments by Franklin Equity Fund under its Class A Plan may not exceed
0.25% per year of the average daily net assets of its Class A shares.
Payments by American Trust under its Plan for Class I may not exceed 0.35%
per year of Class I's average daily net assets. With regard to both Franklin
Equity Fund and American Trust, the payments by each fund under its Plan for
Class II or Class C may not exceed 0.75% per year of the average daily net
assets of its Class II or Class C shares. Each fund may also pay a servicing
fee of up to 0.25% per year of its Class II's or Class C's average daily net
assets under its Class II or Class C plan.
The ratio of operating expenses to average net assets for Class A and
Class C of Franklin Equity Fund for its most recent fiscal year ended June
30, 1998 was 0.90% and 1.69%, respectively. The ratio of operating expenses
to average net assets for Class I and Class II of American Trust as of its
most recent fiscal year ended December 31, 1997 was 1.41% and 2.17%,
respectively. American Trust's annualized ratio of operating expenses based
on its semi-annual period ended June 30, 1998 was 1.50% and 2.15%,
respectively.
PURCHASES AND REDEMPTIONS. Both funds sell their shares on a
continuous basis at their respective current Offering Price. The current
Offering Price is equal to each fund's Net Asset Value plus any applicable
sales charge. For Class I and Class A shares, the sales charge is calculated
as a percentage of the dollar amount you invest. The maximum sales charge on
sales of Class I and Class A shares is 5.75% of the dollar amount you invest
(equivalent to 6.10% of the Net Asset Value of the purchase). This is
reduced on larger purchases of $50,000 or more. The current prospectus for
each fund contains a chart showing the reduced sales charges that would apply
to larger purchases of the respective funds. The sales charge for Class II
and Class C shares is 1%. Unlike Class I and Class A, the Class II and Class
C sales charge does not vary based on the size of your purchase.
Franklin Equity Fund requires a minimum initial investment of $1000 and
subsequent investments of at least $50. The minimum may be waived or reduced
when shares are purchased through retirement plans or plans providing for
regular periodic investments. American Trust requires a minimum investment
of $100 to open an account and $50 to add to an account. It may waive these
minimums for retirement plans.
Shares of both funds may be redeemed at their respective Net Asset
Value per share. However, redemptions of Class I or Class A shares of both
funds which were purchased in amounts of $1,000,000 or more are generally
subject to a Contingent Deferred Sales Charge of 1% for a period of 12 months
following the purchase. Franklin Equity Fund shares acquired by American
Trust shareholders as a result of this Transaction are subject to a
Contingent Deferred Sales Charge to the same extent that the American Trust
shares were subject to a Contingent Deferred Sales Charge. Shares of each
fund may be exchanged for shares of other Franklin Templeton Funds, subject
to certain limitations, as provided in the prospectuses of the respective
Franklin Templeton Fund.
Additional information and specific instructions explaining how to
purchase and redeem shares of Franklin Equity Fund and American Trust are
outlined in the current prospectus of each fund, under the heading "About
Your Account." The accompanying prospectus of Franklin Equity Fund also
lists phone numbers for you to call if you have any questions about your
account, under the heading "What If I Have Questions About My Account."
These phone numbers are the same for both funds.
DIVIDENDS AND DISTRIBUTIONS. Both funds distribute substantially all of
their net investment income and net capital gains to their shareholders.
Such distributions are normally taxable to shareholders as income or capital
gains. Each fund will notify its shareholders annually of the amount and
nature of such income or gains.
American Trust intends to pay a dividend at least annually representing
substantially all of its net investment income and any net realized capital
gains. Franklin Equity Fund intends to declare dividends semi-annually in
May and November to shareholders of record on the last business day of that
month and pay them on or about the 15th business day of the following month.
Franklin Equity Fund generally makes a capital gains distribution once a year
in December.
Both funds automatically reinvest dividend and capital gain
distributions in additional shares of the same class of that fund, unless you
select a different option. Specific instructions explaining how to select a
different option are outlined in the current prospectus of each fund, under
the Heading "What Distributions Might I Receive from the Fund?"
WHAT ARE THE RISKS OF AN INVESTMENT IN FRANKLIN EQUITY FUND?
As with most investments, investments in American Trust and Franklin
Equity Fund involve risks. There can be no guarantee against losses
resulting from an investment in either fund, nor can there be any assurance
that either fund will achieve its investment objective. The risks associated
with an investment in each fund are substantially similar, with any
differences outlined below. (For information about the investment objectives
and policies of the two funds, see "Comparison of Investment Objectives and
Policies.")
SMALLER COMPANIES RISK. Franklin Equity Fund may invest a substantial
portion of its assets in securities issued by smaller capitalization
companies. Historically, smaller companies have been more volatile in price
than larger company securities, especially over the short term. Among the
reasons for the greater price volatility are the less certain growth
prospects of smaller companies, the lower degree of liquidity in the markets
for such securities, and the greater sensitivity of smaller companies to
changing economic conditions.
In addition, smaller companies may lack depth of management, they may be
unable to generate funds necessary for growth or development, they may have
limited product lines, they may have a small share of the market for their
products or services, or they may be developing or marketing new products or
services for which markets are not yet established and may never become
established.
Therefore, while smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also involve
greater risks and should be considered speculative.
CONVERTIBLE SECURITIES RISK. American Trust and Franklin Equity Fund may
each invest a portion of their assets in convertible securities. A
convertible security has risk characteristics of both equity and debt
securities. Its value may rise and fall with the market value of the
underlying stock or, like a debt security, vary with changes in interest
rates and the credit quality of the issuer. A convertible security tends to
perform more like a stock when the underlying stock price is high (because it
is assumed it will be converted) and more like a debt security when the
underlying stock price is low (because it is assumed it will not be
converted). Because its value can be influenced by many different factors, a
convertible security is not as sensitive to interest rate changes as a
similar non-convertible debt security, and generally has less potential for
gain or loss than the underlying stock.
INTEREST RATE, CURRENCY AND MARKET RISK. Because both funds invest in
equity and debt securities, investments in each fund involve risks related to
changes in economic conditions, movements in the stock and bond markets, and
changes in interest rates, in any country where that fund has investments.
To the extent that each fund invests in debt securities, changes in interest
rates in any country where that fund invests will affect the value of each
fund's portfolio and its share price. Rising interest rates, which often
occur during times of inflation or a growing economy are likely to have a
negative effect on the value of each fund's shares. To the extent that each
fund invests in common stocks, a general market decline in any country where
that fund is invested may cause the value of what the fund owns, and thus the
fund's price, to decline. Changes in currency valuations may also affect the
price of a fund's shares. Individual and worldwide stock markets, interest
rates throughout the world, and currency valuations have increased and
decreased in the past. These changes are unpredictable.
CREDIT AND ISSUER RISK. The funds' investments in debt securities
involve the risk that the issuer will be unable to make principal and
interest payments in a timely manner and the debt security will go into
default. The purchase of defaulted debt securities involves significant
additional risks, such as the possibility of complete loss of the investment
in the event the issuer does not restructure or reorganize to enable it to
resume paying interest and principal to holders.
FOREIGN SECURITIES RISK. As discussed above, American Trust and
Franklin Equity Fund may each invest a substantial portion of their assets in
foreign equity securities, although Franklin Equity Fund could have a greater
percentage of its assets invested in foreign securities. Therefore, the
funds share certain risks that are inherent when investing in foreign
securities and that are not typically associated with investments in U.S.
securities. These risks include adverse currency fluctuations, political,
social or economic instability in the country of the issuer, or unfavorable
diplomatic developments which could affect investment in securities of
issuers in foreign nations. In addition, foreign investments may be affected
by expropriation, nationalization, extraordinary taxation, or other
governmental restrictions which might affect the amount and types of foreign
investments made or the payment of principal or interest on securities in the
investment portfolios of the funds.
In addition, there may be less publicly available information about
issuers and foreign companies may not be subject to auditing, accounting and
financial reporting standards comparable to those applicable to U.S.
companies. Foreign securities markets may have substantially lower trading
volumes than U.S. markets, resulting in less liquidity and more volatility
than experienced in the U.S. Transaction costs on foreign securities markets
are generally higher than in the U.S. The settlement practices may be
cumbersome and result in delays that may affect portfolio liquidity. A fund
may have greater difficulty voting proxies, exercising shareholder rights,
pursuing legal remedies and obtaining judgments with respect to foreign
investments in foreign courts than with respect to domestic issuers in U.S.
courts.
Some of the countries in which American Trust may invest include Russia
and certain Asian, Latin American and Eastern European countries all of which
are considered developing or emerging markets. Investments in these countries
are subject to all risks of foreign investing generally, and have additional
and heightened risks due to a lack of legal, business and social frameworks
to support securities markets.
Emerging markets involve additional significant risks, including
political and social uncertainty (for example, regional conflicts and risk of
war), currency exchange rate volatility, pervasiveness of corruption and
crime, delays in settling portfolio transactions and risk of loss arising out
of the system of share registration and custody.
DERIVATIVE SECURITIES RISK. Option transactions, foreign currency
exchange transactions and futures contracts are considered derivative
investments. To the extent that each of the funds enters into these
transactions, its success will depend upon its respective investment
adviser's ability to predict pertinent market movements and no assurance can
be given that its judgment will be correct. A liquid secondary market for
any particular option or future may not be available when an option or
futures position is sought to be closed and the inability to close a position
may have an adverse impact on the fund's ability to effectively hedge
securities. In addition, there may be an imperfect correlation between
movements in the securities on which the options or futures contract is based
and movements in the securities in a fund's portfolio.
REAL ESTATE INVESTMENT TRUSTS ("REITS"). Both funds are subject to the
risks associated with investing in REITs. The risks involved in REITs
include risks common to all real estate investing, such as declines in the
value of real estate, risks related to general and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, changes in zoning laws, casualty or condemnation losses,
variations in rental income, changes in neighborhood values, the appeal of
properties to tenants and increases in interest rates. REITs are also
subject to heavy cash flow dependency, defaults by borrowers,
self-liquidation and the possibility of failing to qualify for tax-free pass
through of income under the Internal Revenue Code of 1986, as amended, and to
maintain exemption from the 1940 Act. Each fund does not intend to invest
more than 10% of its total assets in REITs.
REASONS FOR THE TRANSACTION
The Board of Directors of American Trust has recommended the
Transaction in order to combine the fund with a larger fund. The larger fund
should be better able to diversify its investments and to obtain certain
savings in costs for American Trust and its shareholders. The Transaction
was also recommended in order to combine two similar funds within the
Franklin Templeton Group to eliminate duplication of expenses and internal
competition.
Because of the relatively low demand for American Trust, Investment
Counsel recommended to the Board of Directors that American Trust's assets be
merged with a larger fund that has similar investment objectives and policies.
The Agreement and Plan was presented to, and approved by, American
Trust's Board of Directors at a meeting held on December 1, 1998. At the
meeting the Board questioned management about the potential benefits and
costs to shareholders of American Trust. In deciding whether to recommend
approval of the Transaction to shareholders, the Board considered, among
other things: the expense ratio of American Trust and Franklin Equity Fund;
the comparative investment performance of American Trust and Franklin Equity
Fund; the compatibility of the investment objectives, policies, restrictions
and portfolios of American Trust with Franklin Equity Fund; the tax
consequences of the Transaction; and the significant experience of Advisers.
During the course of its deliberations, the Board of Directors also
considered that the expenses of the Transaction would be shared equally by
American Trust, Franklin Equity Fund, Advisers and Investment Counsel.
The Board of Directors concluded that the Transaction is in the best
interests of the shareholders of American Trust and that no dilution of value
would result to the shareholders of American Trust from the Transaction. It
then decided to approve the Agreement and Plan and to recommend that
shareholders of American Trust vote to approve the Transaction. (As required
by law, the Directors approving the Agreement and Plan included a majority of
the Directors who are not interested persons of American Trust.)
The Board's conclusion was based on a number of factors, including that
the Transaction would permit shareholders to pursue their investment goals in
a larger fund. A larger fund should have an enhanced ability to effect
portfolio transactions on more favorable terms and should have greater
investment flexibility. A fund with higher aggregate net assets may also be
able to reduce or eliminate certain duplicate costs and expenses. This may
result in lower overall expense ratios through the spreading of fixed costs
of fund operations over a larger asset base. However, variable expenses that
are based on the value of assets or the number of shareholder accounts, such
as custody and transfer agent fees, would be largely unaffected by the
Transaction. The Board of Directors of Franklin Equity Fund also determined
that the Transaction was in the best interests of Franklin Equity Fund and
its shareholders and that no dilution would result to such shareholders.
FOR THE REASONS DISCUSSED ABOVE, THE BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE FOR THE AGREEMENT AND PLAN. If the Agreement and Plan is not
approved, the Board of Directors will consider other possible courses of
action for American Trust, including dissolution and liquidation.
INFORMATION ABOUT THE TRANSACTION
This is only a summary of the Agreement and Plan. You should read the
actual Agreement and Plan. It is attached as Exhibit A.
HOW WILL THE TRANSACTION BE CARRIED OUT?
If the shareholders of American Trust approve the Agreement and Plan,
the Transaction will take place after the funds satisfy various conditions,
including the delivery of certain documents. Franklin Equity Fund and
American Trust will agree on a specific date for the actual Transaction to
take place. This is called the Closing Date. If the shareholders of
American Trust do not approve the Agreement and Plan, the Transaction will
not take place.
If the shareholders approve the Agreement and Plan, American Trust will
deliver to Franklin Equity Fund substantially all of its assets on the
Closing Date. In exchange, American Trust will receive Class A and Class C
Shares of Franklin Equity Fund which have a value equal to the dollar value
of the assets delivered to Franklin Equity Fund. The stock transfer books of
American Trust will be permanently closed as of 1:00 P.M. Pacific time on the
Closing Date. American Trust only will accept requests for redemption
received in proper form before 1:00 P.M. Pacific time on the Closing Date.
Requests received after that time will be considered requests to redeem
shares of Franklin Equity Fund.
To the extent permitted by law, the funds may agree to amend the
Agreement and Plan without shareholder approval. They may also agree to
terminate and abandon the Transaction at any time before or, to the extent
permitted by law, after the approval of shareholders of American Trust.
WHO WILL PAY THE EXPENSES OF THE TRANSACTION?
The expenses resulting from the Transaction will be split equally by
the following four parties: American Trust, Franklin Equity Fund, Advisers
and Investment Counsel. As described above, Advisers and Investment Counsel
are the investment advisers for the funds involved in the Transaction.
WHAT ARE THE TAX CONSEQUENCES OF THE TRANSACTION?
The Transaction is intended to qualify as a tax-free reorganization for
Federal income tax purposes under Section 368(a)(1) of the Internal Revenue
Code of 1986, as amended. Based on certain assumptions and representations
received from American Trust and Franklin Equity Fund, it is the opinion of
Stradley, Ronon, Stevens & Young, LLP, counsel to Franklin Equity Fund, that
shareholders of American Trust will not recognize any gain or loss for
federal income tax purposes as a result of the exchange of their shares of
American Trust for shares of Franklin Equity Fund or that Franklin Equity
Fund will recognize any gain or loss upon receipt of American Trust's assets.
You will continue to be responsible for tracking the purchase cost and
holding period of your shares and should consult your tax advisor regarding
the effect, if any, of the Transaction in light of your individual
circumstances. You should also consult your tax advisor as to state and
local tax consequences, if any, of the Transaction, because the above
discussion only relates to the federal income tax consequences.
WHAT SHOULD I KNOW ABOUT CLASS A AND CLASS C SHARES OF FRANKLIN EQUITY FUND?
Class A and Class C shares of Franklin Equity Fund will be distributed
to shareholders of American Trust's Class I and Class II shares,
respectively. Each share will be fully paid and nonassessable when issued
with no personal liability attaching to the ownership thereof, will have no
preemptive or conversion rights and will be transferable upon the books of
Franklin Equity Fund. The shares of Franklin Equity Fund will be recorded
electronically in each shareholder's account. Franklin Equity Fund will then
send a confirmation to each shareholder. As described in its prospectus,
Franklin Equity Fund does not issue share certificates unless requested.
Former shareholders of the American Trust whose shares are represented by
outstanding share certificates will not be allowed to redeem shares of the
Franklin Equity Fund until the certificates have been returned.
Unlike American Trust, the shares of Franklin Equity Fund have
cumulative voting rights. This gives shareholders a number of votes equal to
the number of shares owned times the number of directors to be elected. Each
shareholder may cast the whole number of votes for one candidate or spread
such votes among two or more candidates. American Trust has non-cumulative
voting rights. This gives the holders of more than 50% of the shares voting
the ability to elect 100% of the Directors.
Like American Trust, Franklin Equity Fund does not routinely hold
annual meetings of shareholders. With respect to both funds, shareholders
who hold at least 10% of that fund's outstanding shares may call a meeting.
Unlike American Trust, Franklin Equity Fund offers additional classes
of shares, Advisor Class and Class B. For matters that only affect a certain
class of a fund, only the shareholders of that class are entitled to vote.
Each class differs as to sales charges, expenses and services. Different
fees and expenses will affect performance.
WHAT ARE THE CAPITALIZATIONS OF THE TWO FUNDS AND WHAT MIGHT THE
CAPITALIZATION BE AFTER THE TRANSACTION?
The following table sets forth as of June 30, 1998 (i) the
capitalization of American Trust and each of its classes, (ii) the
capitalization of Franklin Equity Fund and its Class A and Class C; and (iii)
the pro forma capitalization of Franklin Equity Fund and its Class A and
Class C as adjusted to give effect to the proposed Transaction. The
capitalization of Franklin Equity Fund and the classes are likely to be
different when the Transaction is consummated.
AMERICAN TRUST FRANKLIN EQUITY Franklin Equity
FUND Fund Pro Forma
after Transaction
(UNAUDITED)
Net assets*...... $59,374,904 $666,463,026 $725,837,930
Total shares 3,314,675 60,643,186 66,080,960
outstanding*.....
Class I/Class A net $6,703,060 $613,835,217 $620,538,277
assets
Class I/Class A net $17.93 $10.99 $10.99
asset value per
share............
Class I/Class A 373,909 55,832,059 56,441,983
shares outstanding
Class II/Class C $17.91 $10.91 $10.91
net asset value per
share............
Class II/Class C $52,671,844 $35,716,958 $88,388,802
net assets
Class II/Class C 2,940,766 3,273,565 8,101,415
shares outstanding
* Unlike American Trust, Franklin Equity Fund offers two additional classes
of shares, Class B and Advisor Class. The information shown above for
Franklin Equity Fund and Franklin Equity Fund after Transaction includes the
Advisor Class only. Class B shares were not offered until January 1, 1999.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
This section describes key investment policies of Franklin Equity Fund
and American Trust and certain noteworthy differences between the investment
objectives and policies of the two funds. For a complete description of
Franklin Equity Fund's investment policies and risks you should read the
prospectus of Franklin Equity Fund dated November 1, 1998. It is attached to
this Prospectus/Proxy Statement.
ARE THERE ANY SIGNIFICANT DIFFERENCES BETWEEN THE INVESTMENT OBJECTIVES AND
STRATEGIES OF THE TWO FUNDS?
American Trust's investment goal is long-term total return, which is a
combination of capital growth and income. Franklin Equity Fund's investment
objective is capital appreciation, with a secondary goal to provide current
income through the receipt of dividends or interest from investments. The
difference between the two goals is one of emphasis on the income component,
with a heavier emphasis being placed on income by American Trust. The
investment goal of each fund is a fundamental policy, which means that it may
only be changed by approval of that fund's shareholders.
Under normal circumstances, American Trust seeks to achieve its
objective of long-term total return by investing at least 65% of its total
assets in both equity and debt securities of U.S. companies and the U.S.
government, its agencies and instrumentalities. Under normal circumstances,
Franklin Equity Fund will invest at least 65% of its assets in common stocks
and securities convertible into common stock which may be traded on a
securities exchange or in the over the counter market to satisfy its primary
objective of capital appreciation. The balance of its assets may be invested
in other securities that in the aggregate are consistent with its investment
goal.
When choosing equity securities for American Trust, Investment Counsel
concentrates primarily on the market price of a company's securities relative
to its view regarding the company's long-term earnings potential. Investment
Counsel does a company-by-company analysis, rather than focusing on a
specific industry or economic sector. It also considers a company's
historical value measures, including the ratio of a company's share price to
its earnings, its profit margins and liquidation value.
Franklin Equity Fund invests in securities of companies that Advisers
believes have strong future growth prospects and whose securities prices are
attractive relative to those growth prospects. Investments are made when the
securities, in the opinion of Advisers, are trading at attractive valuation
ratios relative to their industry. These investments may be more volatile
than other types of investments and, therefore, may be subject to a greater
degree of risk. The payment of dividends may be considered when securities
are purchased.
When selecting securities for Franklin Equity Fund, Advisors, like
Investment Counsel, uses a traditional fundamental analysis of individual
companies in which it invests. However, Advisers also uses disciplined,
quantitative models. Advisers use these quantitative models (formulas that
compare financial data of many companies) and other measures to discover
attractive investment candidates. Advisers also evaluates these companies
based on fundamental factors, including quality of earnings, strength of
management, market position and potential growth.
HOW DO THE INVESTMENT POLICIES OF THE TWO FUNDS COMPARE?
In seeking to achieve their investment objectives, both Franklin Equity
Fund and American Trust invest a substantial percentage of their assets in
equity securities. Such securities include common stocks, preferred stock
and securities convertible into common stock. Both funds may invest in debt
securities, which may include bonds, notes, debentures, commercial paper,
time deposits, bankers acceptances and structured investments.
There is no specific limitation on the percentage of Franklin Equity
Fund's assets that may be invested in foreign issuers, but the fund presently
intends to limit its investments to no more than 15% of its total assets in
securities of companies of developed foreign nations. Franklin Equity Fund
will ordinarily buy foreign securities traded in the U.S. and through
depositary receipts, although it may buy foreign securities directly in
foreign markets. American Trust may only invest up to 35% of its total
assets in securities of issuers in any foreign country if they are listed on
a stock exchange and in American, European and Global Depositary Receipts.
It may invest up to 15% of its total assets in foreign securities not listed
on a recognized U.S. or foreign securities exchange. It will only invest up
to 35% of its total assets in emerging markets, including 5% of its total
assets in Russian securities. Thus, Franklin Equity Fund potentially could
have a greater percentage of its assets committed to foreign securities.
Both funds may invest in both rated and unrated debt securities.
Presently, each fund intends to invest no more than 5% of its total assets in
securities rated below investment grade (rated lower than BBB by S&P or Baa
by Moody's) or in unrated debt which it determines to be of comparable
quality. As a fundamental policy, American Trust may not invest more than
10% of its total assets in defaulted debt securities.
For temporary defensive purposes, both funds may invest up to 100% of
their assets in money market securities. Money market securities include
securities of the U.S. government and its agencies, commercial paper and
various bank debt instruments. With regard to American Trust, the money
market securities may be denominated in the currency of any nation and may
include securities issued or guaranteed by a foreign government, its agencies
or instrumentalities. Also, American Trust may invest only up to 25% of its
total assets in obligations of banks and will invest only up to 10% of its
total assets in time deposits that are subject to an early withdrawal
penalty. Both funds may also enter into repurchase agreements.
Both funds may invest in relatively new or unseasoned companies where
the opportunity for rapid growth is expected to be above average. However,
investment in the securities of issuers which have been in continuous
operation for less than three years is limited to no more than 5% of the
value of each fund's total assets. For both funds, this may not be changed
except upon a shareholder vote.
Both funds may also invest in companies that qualify as real estate
investment trusts ("REITs"). Franklin Equity Fund does not intend to invest
more than 10% of its total assets in REITs. As for American Trust, no
percentage restriction has been stated for its investment in REITs.
Both funds may invest in convertible securities. A convertible security
generally is a preferred stock or debt security that pays dividends or
interest and may be converted into common stock. Franklin Equity Fund does
not intend to invest more than 10% of its total assets in convertible
securities.
To generate additional income, American Trust may lend its portfolio
securities in an amount up to 33 1/3% of the value of its total assets at the
time of the most recent loan. Franklin Equity Fund may lend its portfolio
securities if such loans do not exceed 10% of the value of the fund's total
assets at the time of the most recent loan.
Although it currently has no intention of doing so, American Trust may
purchase options and write covered options, in order to increase its return
or to hedge its portfolio investments. Although it currently has no intention
of doing so, Franklin Equity Fund may purchase options and write covered
options in order to hedge its portfolio securities and securities it intends
to buy and to accommodate cash flows. For hedging purposes only, both funds
may buy and sell financial futures contracts, index futures contracts,
foreign currency futures and options thereon. Franklin Equity Fund may only
enter into options transactions if the total premiums it paid for such
options is 5% or less of its total assets. Each fund may not commit more than
5% of its total assets to initial deposits and premiums on futures contracts
and related options, except for closing transactions. With respect to
American Trust, the value of the securities on which the futures contracts
are based will not exceed 25% of its total assets. Options, futures, options
on futures and forward contracts are generally considered "derivative
securities."
To help protect its portfolio against adverse changes in foreign
currency exchange rates, American Trust may (1) buy and sell foreign currency
at the prevailing rate in the foreign currency exchange market; (2) enter
into forward foreign currency contracts which are agreements to buy or sell a
specific currency at a set price on a future date (generally within one
year). It may only commit up to 20% of its total assets to these contracts;
and (3) buy and sell put and call options on foreign currencies.
Both funds may invest up to 10% of their total 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.
Neither fund emphasizes short-term trading profits. However, in the
past, the portfolio turnover rate of Franklin Equity Fund generally has been
higher than American Trust. The portfolio turnover rate for American Trust
for its last three fiscal years ended December 31, 1997, 1996 and 1995 was
41.06%, 15.93% and 4.44%, respectively. The portfolio turnover rate for
Franklin Equity Fund during its last three fiscal years ended June 30, 1998,
1997 and 1996 was 38.00%, 53.67% and 59.86%, respectively.
WHAT ARE THE FUNDAMENTAL INVESTMENT RESTRICTIONS OF THE TWO FUNDS?
Both funds have adopted certain investment restrictions governing their
activities. Unless otherwise noted, these restrictions cannot be changed
without shareholder approval. Many of the restrictions are the same for both
funds, although there are differences as described below.
Both funds are limited in the extent to which they may purchase the
securities of any single issuer. Franklin Equity Fund may not purchase the
securities of any one issuer (other than obligations of the U.S.) if as a
result it would have invested more than 5% of the value of its total assets
in the securities of the issuer or hold more than 10% of any or all classes
of the securities of any one issuer. American Trust with respect to 75% of
its total assets, may not purchase more than 5% of any class of securities of
a single company, including more than 10% of its outstanding voting
securities. As a non-fundamental policy, which may be changed without
shareholder approval, with respect to all its assets, American Trust will not
purchase more than 10% of any company's outstanding voting securities. In
addition, with respect to 75% of its total assets, it will not invest more
than 5% of its total assets in securities issued by any one company or
government, except for U.S. government securities. Additionally, both funds
are restricted from investing in securities for the purpose of exercising
management or control.
Neither American Trust nor Franklin Equity Fund may invest more than
25% of its assets in any single industry.
American Trust is restricted from purchasing or retaining securities of
any company in which Directors or officers of American Trust or of Investment
Counsel, individually own more than 1/2 of 1% of the securities of such
company, or, in the aggregate, own more than 5% of the securities of such
company. Franklin Equity Fund may not purchase or retain a security if any
officer, director or security holder of the issuer is at the same time an
officer, director or employee of Franklin Equity Fund or of Advisers and such
person owns beneficially more than 1/2 of 1% of the securities, and if all such
persons owning more than 1/2 of 1% own more than 5% of the outstanding
securities of the issuer.
In addition, both funds are restricted from acting as an underwriter.
Furthermore, Franklin Equity Fund may not acquire securities which, at the
time of the acquisition, could be disposed of publicly by Franklin Equity
Fund only after registration under the Securities Act of 1933.
American Trust has adopted a restriction under which it may not engage
on a joint or joint and several basis in trading accounts in securities.
Franklin Equity Fund is also restricted from engaging in joint or joint and
several trading accounts in securities (except with respect to short-term
investments of cash), except that an order to purchase or sell may be
combined with orders from persons to obtain lower brokerage commissions,
although this policy may be changed without shareholder approval.
Neither fund may lend money, except to the extent that they each may
(i) purchase publicly distributed bonds, debentures, notes and other evidence
of indebtedness, (ii) enter into repurchase transactions, and (iii) lend
portfolio securities.
American Trust may not issue senior securities (except to the extent
that it may borrow from banks), purchase securities on margin or sell
securities short, except to the extent it makes margin payments in connection
with futures, options and forward contracts. Franklin Equity Fund is
restricted from maintaining a margin account with a securities dealer and is
restricted from selling securities short, unless at the time it already owns
securities equivalent in kind and amount to those sold. However, Franklin
Equity Fund does not currently intend to enter into short sales.
Neither fund may invest in real estate, although each fund is permitted
to invest in real estate investment trusts.
American Trust may not invest in other open-end investment companies
except as permitted under the 1940 Act. Franklin Equity Fund may not invest
in securities of other investment companies except: (a) where there is no
commission other than the customary brokerage commission; (b) where
securities of another open-end investment company may be acquired pursuant to
a plan or reorganization, merger, consolidation or acquisition; and (c) to
the extent that the fund invests its uninvested daily cash balances in shares
of money market funds in the Franklin Group of Funds subject to certain
limitations.
American Trust is restricted from investing in interests (other than
debentures or equity stock interests) in oil, gas or other mineral
explorations or development programs; or purchasing or selling commodity
contracts (except to the extent that it may invest in futures). Franklin
Equity Fund also may not invest in commodities and commodities contracts, but
it is not limited from investing in interests in oil, gas or other mineral
exploration or development programs, however, Franklin Equity Fund does not
currently intend to invest in oil, gas or other mineral exploration or
development programs.
American Trust may not invest more than 5% of its total assets in
warrants, whether or not listed on the New York Stock Exchange or the
American Stock Exchange, including no more than 2% of its total assets which
may be invested in warrants that are not listed on those exchanges. Warrants
acquired by the fund in units or attached to securities are not included in
this restriction. Franklin Equity Fund has no stated restriction with
respect to warrants.
Finally with respect to borrowing money, American Trust is restricted
from borrowing money, except that it may borrow money from banks in an amount
not exceeding 331/3% of the value of its total assets (including the amount
borrowed). Franklin Equity Fund may only borrow money for temporary or
emergency (not investment) purposes, and then only from banks in an amount up
to 5% of its assets.
If a bankruptcy or other extraordinary event occurs concerning a
particular security owned by a fund, each fund may receive stock, real
estate, or other investments that the fund would not, or could not, buy. In
this case, each fund intends to dispose of the investment 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.
In addition, American Trust may exercise subscription rights to
purchase securities which would exceed certain limitations described above,
if, prior to the receipt of such securities, it has sold at least as many
securities of the same class and value as it would receive upon exercise of
such subscription.
VOTING INFORMATION
HOW MANY VOTES ARE NECESSARY TO APPROVE THE AGREEMENT AND PLAN?
The affirmative vote of the holders of a majority of the total number
of shares of American Trust outstanding and entitled to vote is necessary to
approve the Agreement and Plan. Each shareholder will be entitled to one
vote for each full share, and a fractional vote for each fractional share, of
American Trust held on the Record Date. If sufficient votes to approve the
proposal are not received by the date of the Meeting, the Meeting may be
adjourned to permit further solicitations of proxies. The holders of a
majority of shares entitled to vote at the Meeting and present in person or
by proxy (whether or not sufficient to constitute quorum) or any officer
present entitled to preside or act as Secretary of the Meeting may adjourn
the Meeting.
HOW DO I ENSURE MY VOTE IS ACCURATELY RECORDED?
You can vote in any one of three ways:
o By mail, with the enclosed proxy card.
o In person at the Meeting.
o Through Shareholder Communications Corporation ("SCC"), a proxy solicitor,
by calling 1-800/733-8481, ext. 466.
IF YOU SIMPLY SIGN AND DATE THE PROXY BUT GIVE NO VOTING INSTRUCTIONS, YOUR
SHARES WILL BE VOTED IN FAVOR OF THE AGREEMENT AND PLAN AND IN ACCORDANCE WITH
THE VIEWS OF MANAGEMENT UPON ANY UNEXPECTED MATTERS THAT COME BEFORE THE MEETING
OR ADJOURNMENT OF THE MEETING.
CAN I REVOKE MY PROXY?
You may revoke your proxy at any time before it is voted by sending a
written notice to American Trust expressly revoking your proxy, by signing and
forwarding to American Trust a later-dated proxy, or by attending the Meeting
and voting in person.
WHAT OTHER MATTERS WILL BE VOTED UPON AT THE MEETING?
The Board of Directors of American Trust does not intend to bring any
matters before the Meeting other than described in this proxy. It is not aware
of any other matters to be brought before the Meeting by others. If any other
matter legally comes before the Meeting, proxies for which discretion has been
granted will be voted in accordance with the views of management.
WHO IS ENTITLED TO VOTE?
Shareholders of record of American Trust at the close of business on
January 12, 1999 (the "Record Date") will be entitled to vote at the Meeting.
Each share is entitled to one vote. On the Record Date, there were 347,974.042
outstanding shares of Class I, and 2,509,894.104 outstanding shares of Class II.
Under relevant state law and American Trust's corporate documents, abstentions
and broker non-votes will be included for purposes of determining whether a
quorum is present at the Meeting, but will be treated as votes not cast and,
therefore, will not be counted for purposes of determining whether the matters
to be voted upon at the Meeting have been approved.
WHAT OTHER SOLICITATIONS WILL BE MADE?
American Trust will request broker-dealer firms, custodians, nominees and
fiduciaries to forward proxy material to the beneficial owners of the shares of
record. American Trust may reimburse broker-dealer firms, custodians, nominees
and fiduciaries for their reasonable expenses incurred in connection with such
proxy solicitation. In addition to solicitations by mail, officers and employees
of American Trust and Franklin Equity Fund, without extra pay, may conduct
additional solicitations by telephone, telegraph and personal interviews.
American Trust has engaged Shareholder Communications Corporation to solicit
proxies from brokers, banks, other institutional holders and individual
shareholders for an approximate fee, including out-of-pocket expenses ranging
between $16,293 and $20,475.
The costs of any such additional solicitation and of any adjourned session
will be shared equally by American Trust, Franklin Equity Fund, Investment
Counsel and Advisers.
ARE THERE DISSENTERS' RIGHTS?
It is the position of the Division of Investment Management of the SEC that
shareholders of American Trust will not be entitled to any "dissenters' rights"
since the proposed Transaction involves two open-end investment companies
registered under the 1940 Act (commonly called mutual funds). Although no
dissenters' rights may be available, you have the right to redeem your shares at
Net Asset Value until the Closing Date. After the Closing Date, you may redeem
your Franklin Equity Fund shares or exchange them into shares of certain other
funds in the Franklin Templeton Funds, subject to the terms of the prospectus of
the fund being acquired.
INFORMATION ABOUT FRANKLIN EQUITY FUND
Information about Franklin Equity Fund is included in its current
Prospectus dated November 1, 1998, which is attached to, and considered a part
of, this Prospectus/Proxy Statement. Additional information about Franklin
Equity Fund is included in its SAI, dated November 1, 1998, which has been filed
with the SEC and is incorporated by reference herein. You may request a free
copy of the Fund's SAI and other information by calling 1-800/DIAL BEN or by
writing to the Fund at 777 Mariners Island Blvd., San Mateo, CA 94403-7777.
Franklin Equity Fund files proxy materials, reports and other information with
the SEC in accordance with the informational requirements of the Securities
Exchange Act of 1934 and the Investment Company Act of 1940. These materials can
be inspected and copied at: the Public Reference Facilities maintained by the
SEC at 450 Fifth Street NW, Washington, DC 20549, and at the Regional Office of
the SEC at 5670 Wilshire Boulevard, 11th Floor, Los Angeles, CA 90036. Also,
copies of such material can be obtained from the Public Reference Branch, Office
of Consumer Affairs and Information Services, SEC, Washington, DC 20549, at
prescribed rates.
INFORMATION ABOUT AMERICAN TRUST
Information about American Trust is included in its current Prospectus and
SAI dated May 1, 1998. These documents have been filed with the SEC and are
incorporated by reference herein. You may request free copies of these documents
and other information by calling 1-800/DIAL BEN or by writing to 777 Mariners
Island Blvd., San Mateo, CA 94403-7777. Reports and other information filed by
American Trust can be inspected and copied at: the Public Reference Facilities
maintained by the SEC at 450 Fifth Street NW, Washington, DC 20549, and at the
Regional Office of the SEC at 1401 Brickell Avenue, Suite 200, Miami, FL 33131.
Also, copies of such material can be obtained from the Public Reference Branch,
Office of Consumer Affairs and Information Services, SEC, Washington, DC 20549,
at prescribed rates.
PRINCIPAL STOCKHOLDERS
As of the Record Date, the officers and Directors of American Trust, as a
group, owned less than 1% of the outstanding voting shares of American Trust.
The officers and Directors of Franklin Equity Fund, as a group, owned less than
1% of the outstanding Class A, Class B and Class C shares of the Fund and 8.14%
of its Advisor Class shares. No person owned (beneficially or of record) 5% or
more of the outstanding shares of any class of American Trust. As of the record
date, the principal shareholders of Franklin Equity Fund (beneficial or of
record) were:
- --------------------------------------------------------------------------------
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- --------------------------------------------------------------------------------
ADVISOR CLASS 135,063.222 5.48%
FTTC Trust Operations
R. Martin Wiskemann IRA
P.O. Box 7519
San Mateo, CA 94403-7519
- --------------------------------------------------------------------------------
Franklin Templeton 606,631.484 24.60%
Fund Allocator Moderate
Target Fund
c/o Fund Accounting Department
1810 Gateway 3rd Floor
San Mateo, CA 99404-2470
- --------------------------------------------------------------------------------
Franklin Templeton 1,130,730.299 45.84%
Fund Allocator Growth
Target Fund
c/o Fund Accounting Department
1810 Gateway 3rd Floor
San Mateo, CA 94404-2470
- --------------------------------------------------------------------------------
FTTC Trustee For 262,647.473 10.65%
ValuSelect Franklin
Resources PSP
Attn: Trading
P.O. Box 2438
Rancho Cordova, CA 95741
- --------------------------------------------------------------------------------
CLASS B 1,924.928 85.22%
Franklin Resources, Inc.
Attn: Michael Corcoran
555 Airport Blvd. 4th Floor
Burlingame, CA 94010
- --------------------------------------------------------------------------------
FTTC Cust. for the SIMPLE IRA 158.603 7.02%
of Fairfield Pest Control,
Inc.
FBO Thomas E. Grey
3203 W. Madison Ave.
Fairfield, IA 52556
- --------------------------------------------------------------------------------
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., 777 Mariners Island Boulevard, San Mateo,
CA 94403-7777, Franklin Equity Fund's investment manager
BOARD - The Board of Directors of each fund
CLASS I AND CLASS II; CLASS A AND CLASS C - The funds in the Franklin Templeton
Funds offer multiple classes of shares. American Trust offers classes of shares
designated as "Class I" and Class II." Franklin Equity Fund offers classes of
shares designated as "Class A" and "Class C." Franklin Equity Fund also offers
two additional classes of shares designated as "Class B" and "Advisor Class."
The different classes have proportionate interests in the same portfolio of
investment securities. They differ, however, primarily in their sales charge
structures and Rule 12b-1 plans.
CONTINGENCY PERIOD - For Class I and Class A shares, the 12 month period during
which a Contingent Deferred Sales Charge may apply. For Class II and Class C
shares, the contingency period is 18 months. The holding period begins on the
day you buy your shares. For example, if you buy shares on the 18th of the
month, they will age one month on the 18th day of the next month and each
following month.
CONTINGENT DEFERRED SALES CHARGE - A sales charge of 1% that may apply if you
sell your shares within the Contingency Period
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the principal underwriter
of American Trust and Franklin Equity Fund, located at 777 Mariners Island
Boulevard, San Mateo, CA 94403-7777
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products
Series Fund
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the administrator to American
Trust and Franklin Equity Fund, located at 777 Mariners Island Boulevard, San
Mateo, CA 94403-7777
INVESTMENT COUNSEL - Templeton Investment Counsel, Inc., 500 Broward Boulevard,
Fort Lauderdale, FL 33394-3091, investment manager to American Trust
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the shareholder
servicing and transfer agent to American Trust and Franklin Equity Fund, located
at 777 Mariners Island Boulevard, San Mateo, CA 94403-7777
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE - 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.
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge, if applicable. The
maximum front-end sales charge is 5.75% for Class I and Class A and 1% for Class
II and Class C.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Franklin Equity Fund, American Trust and/or Investor Services,
Distributors, or other wholly owned subsidiaries of Resources
EXHIBITS TO COMBINED PROXY
STATEMENT AND PROSPECTUS
EXHIBIT
A Agreement and Plan of Reorganization between Templeton American
Trust, Inc. and Franklin Equity Fund (attached)
B Prospectus dated November 1, 1998 of Franklin Equity Fund as
supplemented January 1, 1999 (enclosed)
C Annual Report of Franklin Equity Fund for the fiscal year ended
June 30, 1998 (enclosed)
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement"), made as of this
22nd day of January, 1999 by and between Franklin Equity Fund ("Franklin
Equity Fund"), a corporation organized under the laws of the State of
California in 1984, with its principal place of business at 777 Mariners
Island Boulevard, San Mateo, California 94404 and Templeton American Trust,
Inc. ("Templeton American Trust"), a corporation organized under the laws of
the State of Maryland in 1990, with its principal place of business at 500
East Broward Boulevard, Fort Lauderdale, Florida 33394.
PLAN OF REORGANIZATION
The reorganization (hereinafter referred to as the "Plan of
Reorganization") will consist of (i) the acquisition by Franklin Equity Fund
of substantially all of the property, assets and goodwill of Templeton
American Trust in exchange solely for shares of common stock, no par value,
of Franklin Equity Fund - Class A ("Franklin Equity Class A Shares") and
shares of common stock, no par value, of Franklin Equity Fund - Class C
("Franklin Equity Class C Shares") (collectively, "Franklin Equity Shares"),
(ii) the distribution of (a) Franklin Equity Class A Shares to the
shareholders of Class I shares of common stock of Templeton American Trust;
and (b) Franklin Equity Class C Shares to the shareholders of Class II shares
of common stock of Templeton American Trust, according to their respective
interests, and (iii) the subsequent dissolution of Templeton American Trust
as soon as practicable after the closing (as defined in Section 3,
hereinafter called the "Closing"), all upon and subject to the terms and
conditions of this Agreement hereinafter set forth.
AGREEMENT
In order to consummate the Plan of Reorganization and in consideration
of the premises and of the covenants and agreements hereinafter set forth,
and intending to be legally bound, the parties hereto covenant and agree as
follows:
1. SALE AND TRANSFER OF ASSETS, LIQUIDATION AND DISSOLUTION OF TEMPLETON
AMERICAN TRUST.
(a) Subject to the terms and conditions of this Agreement, and in
reliance on the representations and warranties of Franklin Equity Fund herein
contained, and in consideration of the delivery by Franklin Equity Fund of
the number of its Franklin Equity Class A Shares and Franklin Equity Class C
Shares hereinafter provided, Templeton American Trust agrees that it will
convey, transfer and deliver to Franklin Equity Fund at the Closing all of
its then existing assets free and clear of all liens, encumbrances, and
claims whatsoever (other than shareholders' rights of redemption) except for
cash, bank deposits, or cash equivalent securities in an estimated amount
necessary (i) to pay the costs and expenses of carrying out this Agreement
(including, but not limited to, fees of counsel and accountants, and expenses
of its liquidation and dissolution contemplated hereunder), which costs and
expenses shall be established on Templeton American Trust's books as
liability reserves; (ii) to discharge its unpaid liabilities on its books at
the closing date (as defined in Section 3, hereinafter called the "Closing
Date"), including, but not limited to, its income dividends and capital gains
distributions, if any, payable for the period prior to, and through, the
Closing Date; and (iii) to pay such contingent liabilities as its Board of
Directors shall reasonably deem to exist against Templeton American Trust, if
any, at the Closing Date, for which contingent and other appropriate
liability reserves shall be established on Templeton American Trust's books
(hereinafter "Net Assets"). Templeton American Trust shall also retain any
and all rights that it may have over and against any person that may have
accrued up to and including the close of business on the Closing Date.
(b) Subject to the terms and conditions of this Agreement, and in
reliance on the representations and warranties of Templeton American Trust
herein contained, and in consideration of such sale, conveyance, transfer,
and delivery, Franklin Equity Fund agrees at the Closing to deliver to
Templeton American Trust (i) the number of Franklin Equity Class A Shares
determined by dividing the net asset value per share of Templeton American
Trust Class I Shares by the net asset value per share of Franklin Equity
Class A Shares, and multiplying the result thereof by the number of
outstanding Templeton American Trust Class I Shares on the Closing Date; and
(ii) the number of Franklin Equity Class C Shares determined by dividing the
net asset value per share of the Templeton American Trust Class II Shares by
the net asset value per share of Franklin Equity Class C Shares, and
multiplying the result thereof by the number of outstanding Templeton
American Trust Class II Shares on the Closing Date. All such values shall be
determined in the manner and as of the time set forth in Section 2 hereof.
(c) Immediately following the Closing, Templeton American Trust shall
dissolve and distribute pro rata to its shareholders of record as of the
close of business on the Closing Date Franklin Equity Class A Shares and
Franklin Equity Class C Shares received by Templeton American Trust pursuant
to this Section 1. Such liquidation and distribution shall be accomplished
by the establishment of accounts on the share records of Franklin Equity Fund
of the type and in the amounts due such shareholders based on their
respective holdings as of the close of business on the Closing Date.
Fractional Franklin Equity Shares shall be carried to the third decimal
place. As promptly as practicable after the Closing, each holder of any
outstanding certificate or certificates representing shares of common stock
of the Templeton American Trust shall be entitled to surrender the same to
the transfer agent for the Franklin Equity Fund in exchange for the number of
Franklin Equity Shares into which the shares of the Templeton American Trust
theretofore represented by the certificate or certificates so surrendered
shall have been converted. Certificates for Franklin Equity Shares shall not
be issued, unless specifically requested by the shareholders. Until so
surrendered, each outstanding certificate which, prior to the Closing,
represented shares of common stock of the American Trust shall be deemed for
all the Franklin Equity Fund's purposes to evidence ownership of the number
of Franklin Equity Shares of the class into which the shares of common stock
of the Templeton American Trust (which prior to the Closing were represented
thereby) have been converted.
2. VALUATION.
(a) The value of Templeton American Trust's Net Assets to be acquired
by Franklin Equity Fund hereunder shall be computed as of 1:00 P.M. Pacific
time on the Closing Date using the valuation procedures set forth in
Templeton American Trust's currently effective prospectus.
(b) The net asset value of a share of Franklin Equity Class A Shares
and Franklin Equity Class C Shares shall be determined to the nearest full
cent as of 1:00 P.M. Pacific time on the Closing Date, using the valuation
procedures set forth in Franklin Equity Fund's currently effective prospectus.
(c) The net asset value of a share of common stock of the Class I and
Class II shares of Templeton American Trust shall be determined to the
nearest full cent as of 1:00 P.M. Pacific time on the Closing Date, using the
valuation procedures set forth in Templeton American Trust's currently
effective prospectus.
3. CLOSING AND CLOSING DATE.
The Closing Date shall be April 15, 1999 or such later date as the
parties may mutually agree. The Closing shall take place at the principal
office of Franklin Equity Fund at 2:00 P.M. Pacific time on the Closing
Date. Templeton American Trust shall have provided for delivery as of the
Closing of those Net Assets to be transferred to Franklin Equity Fund's
Custodian, the Bank of New York, Mutual Funds Division, 90 Washington Street,
New York, NY 10286. Also, Templeton American Trust shall deliver at the
Closing a list of names and addresses of the shareholders of record of its
Class I and Class II shares and the number of shares of common stock of such
classes owned by each such shareholder, indicating thereon which such shares
are represented by outstanding certificates and which by book-entry accounts,
all as of 1:00 P.M. Pacific time on the Closing Date, certified by its
transfer agent or by its President to the best of their knowledge and belief.
Franklin Equity Fund shall issue and deliver a certificate or certificates
evidencing the shares of common stock of the appropriate classes to be
delivered to said transfer agent registered in such manner as Templeton
American Trust may request, or provide evidence satisfactory to Templeton
American Trust that such Franklin Equity Shares have been registered in an
account on the books of Franklin Equity Fund in such manner as Templeton
American Trust may request.
4. REPRESENTATIONS AND WARRANTIES BY TEMPLETON AMERICAN TRUST.
Templeton American Trust represents and warrants to Franklin Equity
Fund that:
(a) Templeton American Trust is a corporation created under the laws
of the State of Maryland on October 31, 1990, by Articles of Incorporation,
and is validly existing and in good standing under the laws of that state.
Templeton American Trust is duly registered under the Investment Company Act
of 1940, as amended (the "1940 Act"), as a diversified, open-end, management
investment company and all its shares sold were sold pursuant to an effective
registration statement filed under the Securities Act of 1933, as amended
(the "1933 Act"), except for those shares sold pursuant to the private
offering exemption for the purpose of raising the required initial capital.
(b) Templeton American Trust is authorized to issue two hundred
million (200,000,000) shares of common stock, par value $0.01 per share, each
outstanding share of which is fully paid, non-assessable, fully transferable
and has full voting rights.
(c) The financial statements appearing in Templeton American Trust's
Annual Report to Shareholders for the fiscal year ended December 31, 1997
audited by McGladrey & Pullen, L.L.P. and its Semi-Annual Report to
Shareholders (unaudited) for the period ended June 30, 1998, copies of which
have been delivered to Franklin Equity Fund, fairly present the financial
position of Templeton American Trust as of the respective dates indicated, in
conformity with generally accepted accounting principles applied on a
consistent basis.
(d) The books and records of Templeton American Trust made available
to Franklin Equity Fund and/or its counsel accurately summarize the
accounting data represented and contain no material omissions with respect to
the business and operations of Templeton American Trust.
(e) Templeton American Trust has the necessary power and authority to
conduct its business as such business is now being conducted.
(f) Templeton American Trust is not a party to or obligated under any
provision of its Articles of Incorporation, bylaws, or any contract or any
other commitment or obligation, and is not subject to any order or decree,
which would be violated by its execution of or performance under this
Agreement.
(g) Templeton American Trust has elected to be treated as a regulated
investment company ("RIC") for federal income tax purposes under Part I of
Subchapter M of the Code, has qualified as a RIC for each taxable year since
its inception, and will qualify as a RIC as of the Closing Date.
5. REPRESENTATIONS AND WARRANTIES BY FRANKLIN EQUITY FUND.
Franklin Equity Fund represents and warrants to Templeton American
Trust that:
(a) Franklin Equity Fund is a corporation organized under the laws of
the State of California on August 30, 1984, and is validly existing and in
good standing under the laws of that state. Franklin Equity Fund is duly
registered under the 1940 Act, as a diversified, open-end, management
investment company and all its shares sold have been sold pursuant to an
effective Registration Statement filed under the 1933 Act, as amended, except
for those shares sold pursuant to the private offering exemption for the
purpose of raising the required initial capital.
(b) Franklin Equity Fund is authorized to issue five billion
(5,000,000,000) shares of common stock, no par value. The shares are offered
in four classes. Of the total authorized capital, two billion
(2,000,000,000) shares are allocated to Franklin Equity Fund - Class A and
one billion nine hundred million (1,900,000,000) shares are allocated to
Franklin Equity Fund - Class C. Each outstanding share is fully paid,
non-assessable, fully transferable, and has full voting rights. Franklin
Equity Shares to be issued pursuant to this Agreement and Plan of
Reorganization will be fully paid, non-assessable, freely transferable and
have full voting rights.
(c) At the Closing, the Franklin Equity Shares will be duly qualified
for offering to the public in all states of the United States in which
qualification of such shares is required in order for the transaction
contemplated under this Agreement to take place, and there are a sufficient
number of Franklin Equity Shares registered under the 1933 Act, to permit the
transfers contemplated by this Agreement to be consummated.
(d) The financial statements appearing in Franklin Equity Fund's
Annual Report to Shareholders for the fiscal year ended June 30, 1998,
audited by PricewaterhouseCoopers, LLP, copies of which have been delivered
to Templeton American Trust, fairly present the financial position of
Franklin Equity Fund as of the respective dates indicated and the results of
its operations for the periods indicated in conformity with generally
accepted accounting principles applied on a consistent basis.
(e) Franklin Equity Fund has the necessary power and authority to
conduct its business as such business is now being conducted.
(f) Franklin Equity Fund is not a party to or obligated under any
provision of its Articles of Incorporation, bylaws, or any contract or any
other commitment or obligation, and is not subject to any order or decree,
which would be violated by its execution of or performance under this
Agreement.
(g) Franklin Equity Fund has elected to be treated as a regulated
investment company ("RIC") for federal income tax purposes under Part I of
Subchapter M of the Code, has qualified as a RIC for each taxable year since
its inception, and will qualify as a RIC as of the Closing Date.
6. REPRESENTATIONS AND WARRANTIES BY TEMPLETON AMERICAN TRUST AND FRANKLIN
EQUITY FUND.
Templeton American Trust and Franklin Equity Fund each represents and
warrants to the other that:
(a) The statement of assets and liabilities to be furnished by it, as
of 1:00 P.M. Pacific time on the Closing Date, for the purpose of determining
the number of Franklin Equity Class A Shares and Franklin Equity Class C
Shares to be issued pursuant to Section 1 of this Agreement will accurately
reflect its Net Assets in the case of Templeton American Trust and its net
assets in the case of Franklin Equity Fund, and outstanding shares of common
stock, as of such date in conformity with generally accepted accounting
principles applied on a consistent basis.
(b) At the Closing it will have good and marketable title to all of
the securities and other assets shown on the statement of assets and
liabilities referred to in "(a)" above, free and clear of all liens or
encumbrances of any nature whatever except such imperfections of title or
encumbrances as do not materially detract from the value or use of the assets
subject thereto, or materially affect title thereto.
(c) Except as disclosed in its currently effective prospectus, there
is no material suit, judicial action, or legal or administrative proceeding
pending or threatened against it.
(d) There are no known actual or proposed deficiency assessments with
respect to any taxes payable by it.
(e) The execution, delivery and performance of this Agreement have
been duly authorized by all necessary action of its Board of Directors, and
this Agreement constitutes its valid and binding obligation enforceable in
accordance with its terms.
(f) It anticipates that consummation of this Agreement will not cause
Templeton American Trust and Franklin Equity Fund to fail to conform to the
requirements of Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), for Federal income taxation as a regulated investment company
at the end of its fiscal year.
(g) It has the necessary power and authority to conduct its business
as such business is now being conducted.
7. COVENANTS OF TEMPLETON AMERICAN TRUST AND FRANKLIN EQUITY FUND.
(a) Templeton American Trust and Franklin Equity Fund each covenant
to operate their respective businesses as presently conducted between the
date hereof and the Closing.
(b) Templeton American Trust undertakes that it will not acquire the
Franklin Equity Shares for the purpose of making distributions thereof other
than to Templeton American Trust's shareholders.
(c) Templeton American Trust undertakes that if this Agreement is
consummated, it will file an application pursuant to Section 8(f) of the
Investment Company Act of 1940, as amended, for an order declaring that it
has ceased to be an investment company.
(d) Templeton American Trust and Franklin Equity Fund each agree that
by the Closing, all of its Federal and other tax returns and reports required
by law to be filed on or before such date shall have been filed and all
Federal and other taxes shown as due on said returns shall have either been
paid or adequate liability reserves shall have been provided for the payment
of such taxes.
(e) Templeton American Trust will at the Closing provide Franklin
Equity Fund with a copy of the shareholder ledger accounts for all the
shareholders of record of its Class I shares and Class II shares as of 1:00
P.M. Pacific time on the Closing Date, who are to become shareholders of
Franklin Equity Fund as a result of the transfer of assets which is the
subject of this Agreement, certified by its transfer agent or its President
to the best of their knowledge and belief.
(f) Templeton American Trust agrees to mail to each shareholder of
record entitled to vote at the meeting of its shareholders at which action on
this Agreement is to be considered, in sufficient time to comply with
requirements as to notice thereof, a Combined Proxy Statement and Prospectus
which complies in all material respects with the applicable provisions of
Section 14(a) of the Securities Exchange Act of 1934, as amended, and Section
20(a) of the 1940 Act and the rules and regulations, respectively, thereunder.
(g) Franklin Equity Fund will file with the Securities and Exchange
Commission a Registration Statement on Form N-14 under the 1933 Act
("Registration Statement") relating to the Franklin Equity Shares issuable
hereunder, and will use its best efforts to provide that the Registration
Statement becomes effective as promptly as practicable. At the time the
Registration Statement becomes effective, it (i) will comply in all material
respects with the applicable provisions of the 1933 Act, and the rules and
regulations promulgated thereunder; and (ii) will not contain any untrue
statement of material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading; at
the time the Registration Statement becomes effective, at the time of
Templeton American Trust's shareholders' meeting, and at the Closing Date,
the prospectus and statement of additional information included therein will
not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
8. CONDITIONS PRECEDENT TO BE FULFILLED BY TEMPLETON AMERICAN TRUST AND
FRANKLIN EQUITY FUND.
The obligations of Templeton American Trust and Franklin Equity Fund to
effectuate this Agreement and the Plan of Reorganization hereunder shall be
subject to the following respective conditions:
(a) That (1) all the representations and warranties of the other
party contained herein shall be true and correct as of the Closing with the
same effect as though made as of and at such date; (2) the other party shall
have performed all obligations required by this Agreement to be performed by
it prior to the Closing; and (3) the other party shall have delivered to such
party a certificate signed by the President and by the Secretary or
equivalent officer to the foregoing effect.
(b) That the other party shall have delivered to such party a copy of
the resolutions approving this Agreement adopted by the other party's Board
of Directors certified by the Secretary or equivalent officer.
(c) That the U.S. Securities and Exchange Commission shall not have
issued an unfavorable management report under Section 25(b) of the 1940 Act
nor instituted nor threatened to institute any proceeding seeking to enjoin
consummation of the Plan of Reorganization under Section 25(c) of the 1940
Act and no other legal, administrative or other proceeding shall be
instituted or threatened which would materially affect the financial
condition of either party or would prohibit the transactions contemplated
hereby.
(d) That the holders of at least a majority of the total number of
shares of common stock of Templeton American Trust outstanding and entitled
to vote shall have affirmatively voted in favor of the adoption of this
Agreement and the Plan of Reorganization contemplated hereby at an annual or
special meeting.
(e) That each party shall have declared a distribution or
distributions prior to the Closing Date which, together with all previous
distributions, shall have the effect of distributing to its shareholders (i)
all of its net investment income and all of its net realized capital gains,
if any, for the period from the close of its last fiscal year to 1:00 P.M.
Pacific time on the Closing Date, and (ii) any undistributed net investment
income and net realized capital gains from any period to the extent not
otherwise declared for distribution.
(f) That there shall be delivered to Templeton American Trust and
Franklin Equity Fund an opinion from Messrs. Stradley, Ronon, Stevens &
Young, LLP, counsel to Franklin Equity Fund, to the effect that provided the
acquisition contemplated hereby is carried out in accordance with this
Agreement:
(1) Provided the acquisition is carried out in accordance with
the applicable state laws, the acquisition by Franklin Equity Fund of
substantially all the assets of Templeton American Trust as provided for
herein in exchange for the Franklin Equity Shares will qualify as a
reorganization within the meaning of Section 368(a)(1) of the Code, and
Templeton American Trust and Franklin Equity Fund will each be a party to the
respective reorganization within the meaning of Section 368(b) of the Code;
(2) No gain or loss will be recognized by Templeton American
Trust upon the transfer of substantially all of its assets to Franklin Equity
Fund in exchange solely for voting shares of Franklin Equity Fund (Sections
361(a) and 357(a));
(3) No gain or loss will be recognized by Franklin Equity Fund
upon the receipt of substantially all of the assets of Templeton American
Trust in exchange solely for voting shares of Franklin Equity Fund (Section
1032(a)). No opinion, however, will be expressed as to whether any accrued
market discount will be required to be recognized as ordinary income pursuant
to Section 1276);
(4) The basis of the assets of Templeton American Trust
received by Franklin Equity Fund will be the same as the basis of such assets
to Templeton American Trust immediately prior to the exchange (Section
362(b));
(5) The holding period of the assets of Templeton American
Trust received by Franklin Equity Fund will include the period during which
such assets were held by Templeton American Trust (Section 1223(2));
(6) No gain or loss will be recognized to the shareholders of
Templeton American Trust upon the exchange of their shares in Templeton
American Trust for voting shares of Franklin Equity Fund (Section 354(a));
(7) The basis of the classes of Franklin Equity Shares received
by Templeton American Trust's shareholders shall be the same as the basis of
the shares of Templeton American Trust exchanged therefor (Section 358(a)(1));
(8) The holding period of classes of Franklin Equity Shares
received by Templeton American Trust's shareholders will include the holding
period of Templeton American Trust's shares surrendered in exchange therefor,
provided that Templeton American Trust's shares were held as a capital asset
on the date of the exchange (Section 1223(1)); and
(9) Franklin Equity Fund will succeed to and take into account
as of the date of the proposed transfer (as defined in Section 1.381(b)-1(b)
of the Income Tax Regulations) the items of Templeton American Trust
described in Section 381(c) of the Code, subject to the conditions and
limitations specified in Sections 381(b) and (c), 382, 383 and 384 of the
Code and the Income Tax Regulations thereunder.
(g) That Franklin Equity Fund shall have received an opinion in form
and substance satisfactory to it from Messrs. Dechert, Price & Rhoads, LLP,
counsel to Templeton American Trust, to the effect that, subject in all
respects to the effects of bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance, and other laws now or hereafter affecting
generally the enforcement of creditors' rights:
(1) Templeton American Trust was organized under the laws of
the State of Maryland by Articles of Incorporation dated October 31, 1990,
and is validly existing as a corporation and in good standing under the laws
of the State of Maryland;
(2) Templeton American Trust is authorized to issue two hundred
million (200,000,000) shares of common stock, par value $0.01 per share.
Assuming that the initial shares of common stock were issued in accordance
with the 1940 Act and the Articles of Incorporation and bylaws of Templeton
American Trust, and that all other outstanding shares of Templeton American
Trust were sold, issued and paid for in accordance with the terms of
Templeton American Trust's prospectus in effect at the time of such sales,
each such outstanding share is fully paid, non-assessable, fully transferable
and has full voting rights;
(3) Templeton American Trust is an open-end, diversified
investment company of the management type registered as such under the 1940
Act;
(4) Except as disclosed in Templeton American Trust's current
prospectus, such counsel does not know of any material suit, action, or legal
or administrative proceeding pending or threatened against Templeton American
Trust, the unfavorable outcome of which would materially and adversely affect
Templeton American Trust;
(5) All actions required to be taken by Templeton American
Trust to authorize this Agreement and to effect the Plan of Reorganization
contemplated hereby have been duly authorized by all necessary action on the
part of Templeton American Trust; and
(6) This Agreement is the legal, valid and binding obligation
of Templeton American Trust and is enforceable against Templeton American
Trust in accordance with its terms.
In giving the opinions set forth above, this counsel may state that it
is relying on certificates of the officers of Templeton American Trust with
regard to matters of fact and certain certifications and written statements
of governmental officials with respect to the good standing of Templeton
American Trust.
(h) That Templeton American Trust shall have received an opinion in
form and substance satisfactory to it from Messrs. Stradley, Ronon, Stevens &
Young, LLP, counsel to Franklin Equity Fund, to the effect that, subject in
all respects to the effects of bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance and other laws now or hereafter affecting
generally the enforcement of creditors' rights:
(1) Franklin Equity Fund was organized under the laws of the
State of California on August 30, 1984, and is validly existing and in good
standing under the laws of that state;
(2) Franklin Equity Fund is authorized to issue five billion
(5,000,000,000) shares of common stock, no par value, and is subdivided into
four classes of shares. Assuming that the initial capital shares of Franklin
Equity Fund were issued in accordance with the 1940 Act, as amended, and its
Articles of Incorporation and that all other shares were sold, issued and
paid for in accordance with the terms of Franklin Equity Fund's prospectus in
effect at the time of such sales, each such outstanding share of Franklin
Equity Fund is fully paid, non-assessable, freely transferable and has full
voting rights;
(3) Franklin Equity Fund is an open-end, diversified investment
company of the management type registered as such under the 1940 Act, as
amended;
(4) Except as disclosed in Franklin Equity Fund's currently
effective prospectus, such counsel does not know of any material suit,
action, or legal or administrative proceeding pending or threatened against
Franklin Equity Fund, the unfavorable outcome of which would materially and
adversely affect Franklin Equity Fund;
(5) Franklin Equity Shares to be issued pursuant to the terms
of this Agreement have been duly authorized and, when issued and delivered as
provided in this Agreement, will have been validly issued and fully paid and
will be non-assessable by Franklin Equity Fund;
(6) All corporate actions required to be taken by Franklin
Equity Fund to authorize this Agreement and to effect the Plan of
Reorganization have been duly authorized by all necessary corporate action on
the part of Franklin Equity Fund;
(7) Neither the execution, delivery nor performance of this
Agreement by Franklin Equity Fund violates any provision of its Articles of
Incorporation, its bylaws, or the provisions of any agreement or other
instrument, known to such counsel to which Franklin Equity Fund is a party or
by which Franklin Equity Fund is otherwise bound; this Agreement is the
legal, valid and binding obligation of Franklin Equity Fund and is
enforceable against Franklin Equity Fund in accordance with its terms; and
(8) The Registration Statement of the Prospectus of Franklin
Equity Fund, dated November 1, 1998 (the "Prospectus"), is, at the time of
the signing of this Agreement, effective under the 1933 Act, and to the best
knowledge of such counsel, no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for such purpose
have been instituted or are pending before or threatened by the Securities
and Exchange Commission under the 1933 Act, and nothing has come to its
attention which causes it to believe that at the time the Prospectus became
effective, or at the time of the signing of this Agreement, or at the
Closing, such Prospectus (except for the financial statements and other
financial and statistical data included therein, as to which counsel need
express no opinion), contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading; and such counsel know of no
legal or government proceedings required to be described in the Prospectus or
of any contract or document of a character required to be described in the
Prospectus that is not described as required.
In giving the opinions set forth above, this counsel may state that it
is relying on certificates of the officers of Franklin Equity Fund with
regard to matters of fact and certain certifications and written statements
of governmental officials with respect to the good standing of Franklin
Equity Fund.
(i) That Templeton American Trust shall have received a certificate
from the President and Secretary of Franklin Equity Fund to the effect that
the statements contained in Franklin Equity Fund's Prospectus, at the time
the Prospectus became effective, at the date of the signing of this Agreement
and at the Closing, did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading; and
(j) That Franklin Equity Fund's Registration Statement with respect
to Franklin Equity Class A Shares and Franklin Equity Class C Shares to be
delivered to Templeton American Trust shareholders in accordance with this
Agreement shall have become effective, and no stop order suspending the
effectiveness of the Registration Statement or any amendment or supplement
thereto, shall have been issued prior to the Closing Date or shall be in
effect at Closing, and no proceedings for the issuance of such an order shall
be pending or threatened on that date.
(k) That the Franklin Equity Class A Shares and Franklin Equity Class
C Shares to be delivered hereunder shall have filed a notice or been
registered with each state commission or agency with which such notice or
registration is required in order to permit the shares lawfully to be
delivered to each Templeton American Trust shareholder.
(l) That at the Closing, Templeton American Trust transfers to
Franklin Equity Fund aggregate Net Assets of Templeton American Trust
comprising at least 90% in fair market value of the total net assets and 70%
of the fair market value of the total gross assets recorded on the books of
Templeton American Trust on the Closing Date.
9. BROKERAGE FEES AND EXPENSES.
(a) Templeton American Trust and Franklin Equity Fund each represents
and warrants to the other that there are no broker or finders fees payable by
it in connection with the transactions provided for herein.
(b) The expenses of entering into and carrying out the provisions of
this Agreement shall be borne one-quarter by Templeton American Trust, one
quarter by Franklin Equity Fund, one quarter by Franklin Advisers, Inc. and
one-quarter by Templeton Investment Counsel, Inc.
10. TERMINATION; POSTPONEMENT; WAIVER; ORDER.
(a) Anything contained in this Agreement to the contrary
notwithstanding, this Agreement may be terminated and the Plan of
Reorganization abandoned at any time (whether before or after adoption
thereof by the shareholders of Templeton American Trust) prior to the Closing
or the Closing may be postponed as follows:
(1) by mutual consent of Templeton American Trust and Franklin
Equity Fund;
(2) by Franklin Equity Fund if any condition of its obligations
set forth in Section 8 has not been fulfilled or waived; and
(3) by Templeton American Trust if any condition of its
obligations set forth in Section 8 has not been fulfilled or waived.
An election by Templeton American Trust or Franklin Equity Fund to
terminate this Agreement and to abandon the Plan of Reorganization shall be
exercised respectively by the Board of Directors of either Templeton American
Trust or Franklin Equity Fund.
(b) If the transactions contemplated by this Agreement have not been
consummated by June 30, 1999, the Agreement shall automatically terminate on
that date, unless a later date is agreed to by both Franklin Equity Fund and
Templeton American Trust.
(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall become void and have no further effect, and
there shall not be any liability on the part of either Templeton American
Trust or Franklin Equity Fund or persons who are their directors, officers,
agents or shareholders in respect of this Agreement.
(d) At any time prior to the Closing, any of the terms or conditions
of this Agreement may be waived by either Templeton American Trust or
Franklin Equity Fund, respectively (whichever is entitled to the benefit
thereof), by action taken by their respective Boards of Directors, if, in the
judgment of such Board of Directors, such action or waiver will not have a
material adverse affect on the benefits intended under this Agreement to the
holders of shares of Templeton American Trust or Franklin Equity Fund, on
behalf of which such action is taken.
(e) The respective representations and warranties contained in
Sections 4 to 6 hereof shall expire with, and be terminated by, the Plan of
Reorganization, and neither Templeton American Trust nor Franklin Equity Fund
nor any of their officers, directors, agents or shareholders shall have any
liability with respect to such representations or warranties after the
Closing. This provision shall not protect any officer, director, agent or
shareholder of Templeton American Trust or Franklin Equity Fund against any
liability to the entity for which that officer, director, agent or
shareholder so acts or to its shareholders to which that officer, director,
agent or shareholder would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
in the conduct of such office.
(f) If any order or orders of the U.S. Securities and Exchange
Commission with respect to this Agreement shall be issued prior to the
Closing and shall impose any terms or conditions which are determined by
action of the Board of Directors of Templeton American Trust or Franklin
Equity Fund to be acceptable, such terms and conditions shall be binding as
if a part of this Agreement without further vote or approval of the
shareholders of Templeton American Trust, unless such terms and conditions
shall result in a change in the method of computing the number of Franklin
Equity Shares to be issued to Templeton American Trust in which event, unless
such terms and conditions shall have been included in the proxy solicitation
material furnished to the shareholders of Templeton American Trust prior to
the meeting at which the transactions contemplated by this Agreement shall
have been approved, this Agreement shall not be consummated and shall
terminate unless Templeton American Trust shall promptly call a special
meeting of shareholders at which such conditions so imposed shall be
submitted for approval.
11. ENTIRE AGREEMENT AND AMENDMENTS.
This Agreement embodies the entire Agreement between the parties and
there are no agreements, understandings, restrictions, or warranties between
the parties other than those set forth herein or herein provided for. This
Agreement may be amended only by mutual consent of the parties in writing.
Neither this Agreement nor any interest herein may be assigned without the
prior written consent of the other party.
12. COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but all such counterparts together
shall constitute but one instrument.
13. NOTICES.
Any notice, report, or demand required or permitted by any provision of
this Agreement shall be in writing and shall be deemed to have been given if
delivered or mailed, first class postage prepaid, addressed to Franklin
Equity Fund at 777 Mariners Island Boulevard, P. O. Box 7777, San Mateo, CA
94403-7777, Attention: Secretary, or Templeton American Trust, Inc., at 500
East Broward Boulevard, Fort Lauderdale, Florida 33394, Attention: Secretary,
as the case may be.
14. GOVERNING LAW.
This Agreement shall be governed by and carried out in accordance with
the laws of the State of Maryland.
IN WITNESS WHEREOF, Franklin Equity Fund and Templeton American Trust,
Inc. have each caused this Agreement and Plan of Reorganization to be
executed on its behalf by its duly authorized officers, all as of the date
and year first-above written.
TEMPLETON AMERICAN TRUST, INC.
Attest:
/S/ LARRY L. GREENE By: /S/ DEBORAH R. GATZEK
Assistant Secretary Deborah R. Gatzek
Vice President
FRANKLIN EQUITY FUND
Attest:
/S/ LARRY L. GREENE By: /S/ DEBORAH R. GATZEK
Assistant Secretary Deborah R. Gatzek
Vice President
SUPPLEMENT DATED JANUARY 1, 1999
TO THE PROSPECTUS OF
FRANKLIN EQUITY FUND
DATED NOVEMBER 1, 1998
The prospectus is amended as follows:
I. As of January 1, 1999, the fund offers four classes of shares: Class A,
Class B, Class C and Advisor Class. Before January 1, 1999, Class A shares
were designated Class I and Class C shares were designated Class II. All
references in the prospectus to Class I shares are replaced with Class A,
and all references to Class II shares are replaced with Class C.
II. The second paragraph on the cover of the prospectus is replaced with the
following:
This prospectus describes the fund's Class A, B and C shares. The fund
currently offers another share class with a different sales charge and
expense structure, which affects performance.
III. The section "Expense Summary" is replaced with the following:
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
fund. It is based on the fund's historical expenses for the fiscal year
ended June 30, 1998. The fund's actual expenses may vary.
CLASS A1 CLASS B2 CLASS C1
--------------------------------------------------------------------------
A. SHAREHOLDER TRANSACTION EXPENSES3
Maximum Sales Charge
(as a percentage of Offering Price) 5.75% 4.00% 1.99%
Paid at time of purchase4 5.75% None 1.00%
Paid at redemption5 None 4.00% 0.99%
Exchange Fee (per transaction)6 None None None
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)
Management Fees 0.50% 0.50% 0.50%
Rule 12b-1 Fees7 0.21% 1.00% 1.00%
Other Expenses 0.19% 0.19% 0.19%
--------------------------------
Total Fund Operating Expenses 0.90% 1.69% 1.69%
--------------------------------
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $10,000 that you invest
in the fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------------------------------------
CLASS A $6628 $845 $1,045 $1,619
CLASS B
Assuming you sold your
shares at the end of the
period $572 $833 $1,118 $1,788 9
Assuming you stayed in the
fund $172 $533 $ 918 $1,788 9
CLASS C $368 10 $627 $1,009 $2,078
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES
OR RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE
SHOWN. The fund pays its operating expenses. The effects of these
expenses are reflected in the Net Asset Value or dividends of each class
and are not directly charged to your account.
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended June 30, 1998. The Rule 12b-1 fees are based on the maximum fees
allowed under Class B's Rule 12b-1 plan.
3. If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
4. There is no front-end sales charge if you invest $1 million or more in Class
A shares. Although Class B and C have a lower front-end sales charge than Class
A, their Rule 12b-1 fees are higher. Over time you may pay more for Class B and
C shares. Please see "How Do I Buy Shares? - Choosing a Share Class."
5. A Contingent Deferred Sales Charge of 1% may apply to Class A purchases of $1
million or more if you sell the shares within one year and to any Class C
purchase if you sell the shares within 18 months. A Contingent Deferred Sales
Charge of up to 4% may apply to any Class B purchase if you sell the shares
within six years. A Contingent Deferred Sales Charge may also apply to purchases
by certain retirement plans that qualify to buy Class A shares without a
front-end sales charge. The charge is based on the value of the shares sold or
the Net Asset Value at the time of purchase, whichever is less. The number in
the table shows the charge as a percentage of Offering Price. While the
percentage for Class C is different depending on whether the charge is shown
based on the Net Asset Value or the Offering Price, the dollar amount you would
pay is the same. See "How Do I Sell Shares? - Contingent Deferred Sales Charge"
for details.
6. There is a $5 fee for exchanges by Market Timers.
7. These fees may not exceed 0.25% for Class A and 1.00% for Class B and C. The
combination of front-end sales charges and Rule 12b-1 fees could cause long-term
shareholders to pay more than the economic equivalent of the maximum front-end
sales charge permitted under the NASD's rules.
8. Assumes a Contingent Deferred Sales Charge will not apply.
9. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
10. For the same Class C investment, you would pay projected expenses of $270 if
you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same.
IV. The following paragraph is added under "What Are the Risks of Investing in
the Fund?":
YEAR 2000. When evaluating current and potential portfolio positions, Year
2000 is one of the factors the manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S. may not be required to make the same level of disclosure about Year
2000 readiness as is required in the U.S. The manager, of course, cannot
audit each company and its major suppliers to verify their Year 2000
readiness.
If a company in which the fund is invested is adversely affected by Year
2000 problems, it is likely that the price of its security will also be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the price of the fund's
shares. Please see "Year 2000 Problem" under "Who Manages the Fund?" for
more information.
V. In the section "Who Manages the Fund?",
(a) the section "Year 2000 Issue" is replaced with the following:
YEAR 2000 PROBLEM. The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market
links. Many of the systems currently use a two digit date field to
represent the date, and unless these systems are changed or modified, they
may not be able to distinguish the Year 1900 from the Year 2000 (commonly
referred to as the Year 2000 problem). In addition, the fact that the Year
2000 is a non-standard leap year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely
affected if the computer systems used by the manager, its service providers
and other third parties it does business with are not Year 2000 ready. For
example, the fund's portfolio and operational areas could be impacted,
including securities trade processing, interest and dividend payments,
securities pricing, shareholder account services, reporting, custody
functions and others. The fund could experience difficulties in effecting
transactions if any of its foreign subcustodians, or if foreign
broker-dealers or foreign markets are not ready for Year 2000.
The manager and its affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their
Year 2000 problems. Of course, the fund's ability to reduce the effects of
the Year 2000 problem is also very much dependent upon the efforts of third
parties over which the fund and the manager may have no control.
(b) the first sentence under "The Rule 12b-1 Plans" is replaced with the
following:
Each class has a separate distribution or "Rule 12b-1" plan under which the
fund shall pay or may reimburse Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class.
(c) and the following paragraphs are added to the section "The Rule 12b-1
Plans":
Under the Class B plan, the fund pays Distributors up to 0.75% per year of
Class B's average daily net assets to pay Distributors for providing
distribution and related services and bearing certain Class B expenses. All
distribution expenses over this amount will be borne by those who have
incurred them. Securities Dealers are not eligible to receive this portion
of the Rule 12b-1 fees associated with the purchase.
The fund may also pay a servicing fee of up to 0.25% per year of Class B's
average daily net assets under the Class B plan. 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. Securities Dealers may be
eligible to receive this portion of the Rule 12b-1 fees from the date of
purchase. After 8 years, Class B shares convert to Class A shares and
Securities Dealers may then receive the Rule 12b-1 fees applicable to Class
A.
The expenses relating to the Class B plan are also used to pay Distributors
for advancing the commission costs to Securities Dealers with respect to
the initial sale of Class B 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.
VI. Under "How Is the Fund Organized?",
(a) the first paragraph is replaced with the following:
The fund is a diversified, open-end management investment company, commonly
called a mutual fund. It was organized as a California corporation on
August 30, 1984, and is registered with the SEC. The fund offers four
classes of shares: Franklin Equity Fund - Class A, Franklin Equity Fund -
Class B, Franklin Equity Fund - Class C and Franklin Equity Fund - Advisor
Class. Additional classes of shares may be offered in the future.
(b) and the following sentence is added:
As of December 7, 1998, Franklin Templeton Growth Target Fund owned of
record and beneficially more than 25% of the outstanding Advisor Class
shares of the fund.
VII. The sections "Choosing a Share Class" and "Purchase Price of Fund Shares,"
found under "How Do I Buy Shares?", are replaced with the following:
CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. Your investment
representative can help you decide.
CLASS A* CLASS B* CLASS C*
- --------------------------------------------------------------------------------
o Front-end sales o No front-end sales o Front-end sales
charge of 5.75% charge charge of 1%
or less
o Contingent o Contingent Deferred o Contingent Deferred
Deferred Sales Sales Charge of 4% or Sales Charge of 1%
Charge of 1% on less on shares you on shares you sell
purchases of $1 sell within six years within 18 months
million or more
sold within one
year
o Lower annual o Higher annual o Higher annual
expenses than expenses than Class A expenses than Class A
Class B or C due (same as Class C) due (same as Class B) due
to lower Rule to higher Rule 12b-1 to higher Rule 12b-1
12b-1 fees fees. Automatic fees. No conversion to
conversion to Class A Class A shares, so
shares after eight annual expenses do not
years, reducing future decrease.
annual expenses.
o No maximum o Maximum purchase o Maximum purchase
purchase amount amount of $249,999. We amount of $999,999.
invest any investment of We invest any
$250,000 or more in investment of $1
Class A shares, since million or more in
a reduced front-end sales Class A shares, since
charge is available there is no front-end
and Class A's annual sales charge available
expenses are lower. and Class A's annual
expenses are lower.
*Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II. The fund began offering Class B shares on
January 1, 1999. Class B shares are not available to all retirement plans.
Class B shares are only available to IRAs (of any type), Trust Company
403(b) plans, and Trust Company qualified plans with participant or
earmarked accounts.
PURCHASE PRICE OF FUND SHARES
For Class A shares, the sales charge you pay depends on the dollar amount
you invest, as shown in the table below. The sales charge for Class C
shares is 1% and, unlike Class A, does not vary based on the size of your
purchase. There is no front-end sales charge for Class B shares.
TOTAL SALES CHARGE AMOUNT PAID TO
AS A PERCENTAGE OF DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
--------------------------------------------------------------------------
CLASS A
Under $50,000 5.75% 6.10% 5.00%
$50,000 but less than
$100,000 4.50% 4.71% 3.75%
$100,000 but less than 3.50% 3.63% 2.80%
$250,000
$250,000 but less than 2.50% 2.56% 2.00%
$500,000
$500,000 but less than 2.00% 2.04% 1.60%
$1,000,000
$1,000,000 or more* None None None
CLASS B* None None None
CLASS C
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class A purchases of
$1 million or more and any Class C purchase. A Contingent Deferred Sales
Charge of up to 4% may apply to any Class B purchase. Please see "How Do I
Sell Shares? - Contingent Deferred Sales Charge." Please also see "Other
Payments to Securities Dealers" below for a discussion of payments
Distributors may make out of its own resources to Securities Dealers for
certain purchases.
VIII.In the section "Sales Charge Waivers," found under "How Do I Buy Shares? -
Sales Charge Reductions and Waivers,"
(a) the first paragraph is replaced with the following:
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies
to you or your purchase of fund shares, you may buy shares of the fund
without a front-end sales charge or a Contingent Deferred Sales Charge. All
of the sales charge waivers listed below apply to purchases of Class A
shares only, except for items 1 and 2 which also apply to Class B and C
purchases.
(b) and the second waiver category is replaced with the following:
2. Redemption proceeds from the sale of shares of any Franklin Templeton
Fund. The proceeds must be reinvested in the same class of shares,
except proceeds from the sale of Class B shares will be reinvested in
Class A shares.
If you paid a Contingent Deferred Sales Charge when you sold your
Class A or C shares, we will credit your account with the amount of
the Contingent Deferred Sales Charge paid but a new Contingent
Deferred Sales Charge will apply. For Class B shares reinvested in
Class A, a new Contingent Deferred Sales Charge will not apply,
although your account will not be credited with the amount of any
Contingent Deferred Sales Charge paid when you sold your Class B
shares. If you own both Class A and B shares and you later sell your
shares, we will sell your Class A shares first, unless otherwise
instructed.
Proceeds immediately placed in a Franklin Bank CD also may be
reinvested without a front-end sales charge if you reinvest them
within 365 days from the date the CD matures, including any rollover.
This waiver does not apply to shares you buy and sell under our
exchange program. Shares purchased with proceeds from a money fund
may be subject to a sales charge.
IX. The section "How Do I Buy Shares in Connection with Retirement Plans?",
found under "How Do I Buy Shares?", is replaced with the following:
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the
fund. Plan documents are required for all retirement plans. Trust Company
can provide the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important
information about its plans. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before
choosing a retirement plan. Your investment representative or advisor can
help you make investment decisions within your plan.
X. The section "How Do I Buy Shares? - Other Payments to Securities Dealers"
is replaced with the following:
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate
and are responsible for Class B and C purchases and certain Class A
purchases made without a sales charge. The payments are subject to the sole
discretion of Distributors, and are paid by Distributors or one of its
affiliates and not by the fund or its shareholders.
1. Class A purchases of $1 million or more - up to 1% of the amount
invested.
2. Class B purchases - up to 4% of the amount invested.
3. Class C purchases - up to 1% of the purchase price.
4. Class A purchases made without a front-end sales charge by certain
retirement plans described under "Sales Charge Reductions and Waivers
Retirement Plans" above - up to 1% of the amount invested.
5. Class A purchases by trust companies and bank trust departments,
Eligible Governmental Authorities, and broker-dealers or others on
behalf of clients participating in comprehensive fee programs - up to
0.25% of the amount invested.
6. Class A purchases by Chilean retirement plans - up to 1% of the
amount invested.
A Securities Dealer may receive only one of these payments for each
qualifying purchase. Securities Dealers who receive payments in connection
with investments described in paragraphs 1, 3 or 6 above or a payment of up
to 1% for investments described in paragraph 4 will be eligible to receive
the Rule 12b-1 fee associated with the purchase starting in the thirteenth
calendar month after the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES,
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI.
XI. The second and third paragraphs under "May I Exchange Shares for Shares of
Another Fund?" are replaced with the following:
If you own Class A shares, you may exchange into any of our money funds
except Franklin Templeton Money Fund. Franklin Templeton Money Fund is the
only money fund exchange option available to Class B and C shareholders.
Unlike our other money funds, shares of Franklin Templeton Money Fund may
not be purchased directly and no drafts (checks) may be written on Franklin
Templeton Money Fund accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment goal
and policies, and its rules and requirements for exchanges. For example,
some Franklin Templeton Funds do not accept exchanges and others may have
different investment minimums. Some Franklin Templeton Funds do not offer
Class B or C shares.
XII. In the section "Contingent Deferred Sales Charge," found under "May I
Exchange Shares for Shares of Another Fund? - Will Sales Charges Apply to
My Exchange?",
(a) the following sentence is added to the end of the first paragraph:
The purchase price for determining a Contingent Deferred Sales Charge on
exchanged shares will be the price you paid for the original shares.
(b) and the third paragraph is replaced with the following:
If you exchange Class A shares into one of our money funds, the time your
shares are held in that fund will not count towards the completion of any
Contingency Period. If you exchange your Class B or C shares for the same
class of shares of Franklin Templeton Money Fund, however, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
XIII.The second and third items in the section "Exchange Restrictions," found
under "May I Exchange Shares for Shares of Another Fund?", are replaced
with the following:
You may only exchange shares within the same class, except as noted
below. If you exchange your Class B shares for the same class of shares
of another Franklin Templeton Fund, the time your shares are held in
that fund will count towards the eight year period for automatic
conversion to Class A shares.
Generally exchanges may only be made between identically registered
accounts, unless you send written instructions with a signature
guarantee. You may, however, exchange shares from a fund account
requiring two or more signatures into an identically registered money
fund account requiring only one signature for all transactions. PLEASE
NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON
YOUR ACCOUNT. Additional procedures may apply. Please see "Transaction
Procedures and Special Requirements."
XIV. In the "By Phone" section of the chart under "How Do I Sell Shares?",
(a) the first bulleted item is replaced with the following:
If the request is $100,000 or less. Institutional accounts may exceed
$100,000 by completing a separate agreement. Call Institutional Services to
receive a copy.
(b) and the third bulleted item is deleted.
XV. In the section "Contingent Deferred Sales Charge," found under "How Do I
Sell Shares?",
(a) the following is added after the second paragraph:
For Class B shares, there is a Contingent Deferred Sales Charge 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.
THIS % IS DEDUCTED FROM YOUR
IF YOU SELL YOUR CLASS B SHARES PROCEEDS AS A CONTINGENT
WITHIN THIS MANY YEARS AFTER BUYING THEM DEFERRED SALES CHARGE
------------------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
(b) and the section "Waivers" is replaced with the following:
WAIVERS. We waive the Contingent Deferred Sales Charge for:
Account fees
Sales of Class A shares purchased without a front-end sales charge by
certain retirement plan accounts if (i) the account was opened before May
1, 1997, or (ii) the Securities Dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the Securities Dealer of
record has entered into a supplemental agreement with Distributors
Redemptions by the fund when an account falls below the minimum required
account size
Redemptions following the death of the shareholder or beneficial owner
Redemptions through a systematic withdrawal plan set up before February 1,
1995
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
Redemptions by Trust Company employee benefit plans or employee benefit
plans serviced by ValuSelect(R) (not applicable to Class B)
Distributions from 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)
Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans (not applicable to Class B)
XVI. The third paragraph under "What Distributions Might I Receive From the
Fund?" is replaced with the following:
Dividends and capital gains are calculated and distributed the same way for
each class. The amount of any income dividends per share will differ,
however, generally due to the difference in the Rule 12b-1 fees of each
class.
XVII.The paragraph following distribution option 3 in the section "What
Distributions Might I Receive From the Fund? - Distribution Options" is
replaced with the following: Distributions may be reinvested only in the
same class of shares, except as follows: (i) Class C shareholders who chose
to reinvest their distributions in Class A shares of the fund or another
Franklin Templeton Fund before November 17, 1997, may continue to do so;
and (ii) Class B and C shareholders may reinvest their distributions in
shares of any Franklin Templeton money fund.
XVIII. Under "Transaction Procedures and Special Requirements,"
(a) the section "Joint Accounts" is replaced with the following:
JOINT ACCOUNTS. For accounts with more than one registered owner, the fund
accepts written instructions signed by only one owner for transactions and
account changes that could otherwise be made by phone. For all other
transactions and changes, all registered owners must sign the instructions.
Please keep in mind that if you have previously told us that you do not
want telephone exchange or redemption privileges on your account, then we
can only accept written instructions to exchange or redeem shares if they
are signed by all registered owners on the account.
(b) the reference to $50,000 in the section "Signature Guarantees" is
replaced with $100,000.
(c) and the section "Trust Company Retirement Plan Accounts," found under
"Telephone Transactions," is deleted.
XIX. In the section "Services to Help You Manage Your Account - TeleFACTS(R),"
(a) the third bulleted item is replaced with the following:
exchange shares (within the same class) between identically registered
Franklin Templeton Class A, B or C accounts; and
(b) and the last sentence is replaced with the following:
The code number is 134 for Class A, 334 for Class B and 234 for Class C.
XX. In the "Useful Terms and Definitions" section,
(a) the definition of "Class I, Class II and Advisor Class" is replaced
with the following:
CLASS A, CLASS B, CLASS C AND ADVISOR CLASS - The fund offers four classes
of shares, designated "Class A," "Class B," "Class C" and "Advisor Class."
The four classes have proportionate interests in the fund's portfolio. They
differ, however, primarily in their sales charge and expense structures.
(b) and the following definitions are revised:
CONTINGENCY PERIOD - For Class A shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. The contingency period is six
years for Class B shares and 18 months for Class C shares. The holding
period begins on the day you buy your shares. For example, if you buy
shares on the 18th of the month, they will age one month on the 18th day of
the next month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may
apply if you sell your Class A or C shares within the Contingency Period.
For Class B, the maximum CDSC is 4% and declines to 0% after six years.
OFFERING PRICE - The public offering price is based on the Net Asset Value
per share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 5.75% for Class A and 1% for Class C. There is no
front-end sales charge for Class B. We calculate the offering price to two
decimal places using standard rounding criteria.
Please keep this supplement for future reference.
PROSPECTUS & APPLICATION
FRANKLIN
EQUITY FUND
INVESTMENT STRATEGY
GROWTH
NOVEMBER 1, 1998
Please read this prospectus before investing, and keep it for future
reference. It contains important information, including how the fund invests
and the services available to shareholders.
This prospectus describes the fund's Class I and Class II shares. The fund
currently offers another share class with a different sales charge and
expense structure, which affects performance.
To learn more about the fund and its policies, you may request a copy of the
fund's Statement of Additional Information ("SAI"), dated November 1, 1998,
which we may amend from time to time. We have filed the SAI with the SEC and
have incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus, or
to receive a free copy of the prospectus for the fund's other share class,
contact your investment representative or call 1-800/DIAL BEN.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
FRANKLIN EQUITY FUND
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO
SALES REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary .................................................. 2
Financial Highlights ............................................. 4
How Does the Fund Invest Its Assets? ............................. 5
What Are the Risks of Investing in the Fund? ..................... 8
Who Manages the Fund? ............................................ 11
How Taxation Affects the Fund and Its Shareholders ............... 13
How Is the Fund Organized? ....................................... 16
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ............................................. 17
May I Exchange Shares for Shares of Another Fund? ................ 25
How Do I Sell Shares? ............................................ 28
What Distributions Might I Receive From the Fund? ................ 31
Transaction Procedures and Special Requirements .................. 32
Services to Help You Manage Your Account ......................... 36
What If I Have Questions About My Account? ....................... 39
GLOSSARY
Useful Terms and Definitions ..................................... 39
FRANKLIN
EQUITY FUND
NOVEMBER 1, 1998
When reading this prospectus, you will see certain terms beginning with
capital letters. This means the term is explained in our glossary section
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
fund. It is based on the historical expenses of each class for the fiscal
year ended June 30, 1998. The fund's actual expenses may vary.
CLASS I CLASS II
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge
(as a percentage of Offering Price) ............... 5.75% 1.99%
Paid at time of purchase ......................... 5.75%++ 1.00%+++
Paid at redemption++++ ........................... None 0.99%
Exchange Fee (per transaction) .................... None* None*
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees ................................... 0.50% 0.50%
Rule 12b-1 Fees ................................... 0.21%** 1.00%**
Other Expenses .................................... 0.19% 0.19%
-----------------
Total Fund Operating Expenses ..................... 0.90% 1.69%
=================
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------
CLASS I .......... $66*** $85 $104 $162
CLASS II ......... $37 $63 $101 $208
For the same Class II investment, you would pay projected expenses of $27 if
you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in
Class I shares.
+++Although Class II has a lower front-end sales charge than Class I, its
Rule 12b-1 fees are higher. Over time you may pay more for Class II shares.
Please see "How Do I Buy Shares? - Choosing a Share Class."
++++A Contingent Deferred Sales Charge may apply to any Class II purchase if
you sell the shares within 18 months and to Class I purchases of $1 million
or more if you sell the shares within one year. A Contingent Deferred Sales
Charge may also apply to purchases by certain retirement plans that qualify
to buy Class I shares without a front-end sales charge. The charge is 1% of
the value of the shares sold or the Net Asset Value at the time of purchase,
whichever is less. The number in the table shows the charge as a percentage
of Offering Price. While the percentage is different depending on whether the
charge is shown based on the Net Asset Value or the Offering Price, the
dollar amount you would pay is the same. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*There is a $5.00 fee for exchanges by Market Timers.
**These fees may not exceed 0.25% for Class I and 1.00% for Class II. The
combination of front-end sales charges and Rule 12b-1 fees could cause
long-term shareholders to pay more than the economic equivalent of the
maximum front-end sales charge permitted under the rules of the National
Association of Securities Dealers, Inc.
***Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the fund's financial history. The information has been
audited by PricewaterhouseCoopers LLP, the fund's independent auditor. The
audit report covering each of the most recent five years appears in the
fund's Annual Report to Shareholders for the fiscal year ended June 30, 1998.
The Annual Report to Shareholders also includes more information about the
fund's performance. For a free copy, please call Fund Information.
<TABLE>
<CAPTION>
Class I
------------------------------------------------------------------------------------
Year Ended June 30,
------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value,
beginning of year $10.16 $8.26 $7.24 $6.53 $7.25 $7.12 $7.36 $7.17 $7.21 $6.67
-------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .05 .05 .06 .08 .10 .12 .14 .15 .17 .19
Net realized and
unrealized gains 2.08 2.34 1.48 1.33 .11 .56 .09 .19 .34 .56
-------------------------------------------------------------------------------------
Total from investment
operations 2.13 2.39 1.54 1.41 .21 .68 .23 .34 .51 .75
-------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.05) (.06) (.06) (.08) (.10) (.12) (.14) (.15) (.29) (.11)
Net realized gains (1.25) (.43) (.46) (.62) (.83) (.43) (.33) - (.26) (.10)
-------------------------------------------------------------------------------------
Total distributions (1.30) (.49) (.52) (.70) (.93) (.55) (.47) (.15) (.55) (.21)
-------------------------------------------------------------------------------------
Net asset value, end of year $10.99 $10.16 $8.26 $7.24 $6.53 $7.25 $7.12 $7.36 $7.17 $7.21
=====================================================================================
Total return* 22.43% 29.75% 22.16% 23.78% 2.32% 9.53% 3.36% 4.87% 7.00% 11.54%
Ratios/supplemental data
Net assets, end of
year (000's) $613,835 $462,972 $366,602 $317,463 $279,880 $345,755 $364,826 $374,993 $419,422 $370,705
Ratios to average net assets:
Expenses .90% .91% .95% .95% .79% .69% .70% .69% .69% .70%
Net investment income .48% .61% .72% 1.21% 1.27% 1.67% 1.86% 2.29% 2.51% 2.82%
Portfolio turnover rate 38.00% 53.67% 59.86% 86.20% 95.18% 51.12% 49.19% 56.76% 42.71% 51.17%
</TABLE>
Class II
--------------------------------
Year Ended June 30,
--------------------------------
1998 1997 1996 1995+
--------------------------------
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ....... $10.12 $8.23 $7.24 $6.65
--------------------------------
Income from investment operations:
Net investment income (loss) ............ (.01) (.02) .02 .01
Net realized and unrealized gains ....... 2.05 2.34 1.45 .62
--------------------------------
Total from investment operations ......... 2.04 2.32 1.47 .63
--------------------------------
Less distributions from:
Net investment income ................... - - (.02) (.04)
Net realized gains ...................... (1.25) (.43) (.46) -
--------------------------------
Total distributions ...................... (1.25) (.43) (.48) (.04)
--------------------------------
Net asset value, end of year ............. $10.91 $10.12 $8.23 $7.24
================================
Total return* ............................ 21.47% 28.93% 20.94% 9.42%
Ratios/supplemental data
Net assets, end of year (000's) .......... $35,717 $9,554 $4,208 $342
Ratios to average net assets:
Expenses ................................ 1.69% 1.72% 1.77% 1.77%**
Net investment income (loss) ............ (.28%) (.22%) (.10%) .74%**
Portfolio turnover rate .................. 38.00% 53.67% 59.86% 86.20%
*TOTAL RETURN DOES NOT REFLECT SALES COMMISSIONS OR THE CONTINGENT DEFERRED
SALES CHARGE, AND IS NOT ANNUALIZED. PRIOR TO MAY 1, 1994, DIVIDENDS FROM NET
INVESTMENT INCOME WERE REINVESTED AT THE OFFERING PRICE.
**ANNUALIZED.
+FOR THE PERIOD MAY 1, 1995 (EFFECTIVE DATE) TO JUNE 30, 1995.
HOW DOES THE FUND INVEST ITS ASSETS?
WHAT ARE THE FUND'S GOALS?
The principal investment goal of the fund is capital appreciation. The fund's
secondary goal is to provide current income return through the receipt of
dividends or interest from its investments. These goals are fundamental,
which means that they may not be changed without shareholder approval.
WHAT IS THE FUND'S INVESTMENT STRATEGY?
The fund's investment strategy is generally to invest in companies that the
manager believes have strong future growth prospects and whose securities are
undervalued relative to those growth prospects. The fund uses traditional
fundamental analysis and continuous active management along with disciplined,
quantitative models to identify what the manager believes are potentially
rewarding investments that may provide enhanced value to shareholders over
the long term.
WHAT KINDS OF SECURITIES DOES THE FUND BUY?
The fund tries to achieve its investment goals by investing at least 65% of
its assets in equity securities which may be traded on a securities exchange
or in the over-the-counter market. The fund may invest up to 35% of its
assets in other securities that are consistent with the fund's goals.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. These include common stock, preferred stock, and
convertible securities. The fund's primary investments are in common stock.
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; and commercial paper.
The fund may buy both rated and unrated debt securities. Independent rating
organizations rate debt securities based upon their assessment of the
financial soundness of the issuer. Generally, a lower rating indicates higher
risk. The fund may buy debt securities which are rated Baa by Moody's or BBB
by S&P or better; or unrated debt which it determines to be of comparable
quality. At present, the fund does not intend to invest more than 5% of its
total assets in non-investment grade securities (rated lower than BBB by S&P
or Baa by Moody's). Please see the SAI for more details on the risks
associated with lower-rated securities.
SMALLER COMPANIES. The fund may invest in relatively new or unseasoned
companies that are in their early stages of development, or in new and
emerging industries where the opportunity for rapid growth is expected to be
above average. In general, the fund may invest in smaller companies with a
market capitalization of less than $1.5 billion at the time of the fund's
investment. Market capitalization is the total market value of a company's
outstanding common stock. The securities of small capitalization companies
are traded on most U.S. national securities exchanges including the NYSE and
the American Stock Exchange and in the over-the-counter market. The fund
currently does not intend to invest more than 25% of its total assets in
securities of small capitalization companies.
FOREIGN SECURITIES AND DEPOSITARY RECEIPTS. The fund will ordinarily buy
foreign securities traded in the U.S. It may buy the securities directly in
foreign markets. The fund may buy American, European, and Global Depositary
Receipts. Depositary Receipts are certificates typically issued by a bank or
trust company that give their holders the right to receive securities issued
by a foreign or domestic corporation.
Although the fund may invest without limit in foreign securities, it
presently intends to limit its investments to no more than 15% of its total
assets in securities of companies of developed foreign nations.
CONVERTIBLE SECURITIES. A convertible security generally is a preferred stock
or debt security that pays dividends or interest and may be converted into
common stock. The fund does not intend to invest more than 10% of its total
assets in convertible securities.
REITS. The fund may invest in real estate investment trusts ("REITs"). A REIT
is a pooled investment vehicle which typically invests directly in real
estate and/or in mortgages and loans collateralized by real estate. The
pooled vehicle, typically a trust, then issues shares whose value and
investment performance are dependent upon the investment experience of the
underlying real estate related investments. The fund does not intend to
invest more than 10% of its total assets in REITs.
Please see the SAI for more details on the types of securities in which the
fund invests.
WHAT ARE SOME OF THE FUND'S OTHER INVESTMENT STRATEGIES AND PRACTICES?
TEMPORARY INVESTMENTS. When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the fund's
portfolio in a temporary defensive manner. Under such circumstances, the fund
may invest up to 100% of its assets in securities of the U.S. government and
its agencies, commercial paper, or various bank debt instruments such as
bankers' acceptances and CDs.
REPURCHASE AGREEMENTS. The fund will generally have a portion of its assets
in cash or cash equivalents for a variety of reasons including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, the fund may enter into repurchase agreements
with certain banks and broker-dealers. Under a repurchase agreement, the fund
agrees to buy a U.S. government security from one of these issuers and then
to sell the security back to the issuer after a short period of time
(generally, less than seven days) at a higher price. The bank or
broker-dealer must transfer to the fund's custodian securities with an
initial value of at least 102% of the dollar amount invested by the fund in
each repurchase agreement.
OPTIONS AND FINANCIAL FUTURES. The fund may sell covered put and call options
and buy put and call options on securities and securities indices that trade
on securities exchanges and in the over-the-counter market. The fund may buy
and sell financial futures with respect to securities, securities indices and
currencies. The fund may invest in options and financial futures only to
hedge against changes in the values of its securities or currencies or those
that it intends to buy. The fund may only enter option transactions if the
total premiums it paid for such options is 5% or less of its total assets.
The fund may only enter into futures contracts or related options if its
initial margin deposits and premiums are 5% or less of its total assets.
SECURITIES LENDING. To generate additional income, the fund may lend its
portfolio securities to qualified securities dealers or other institutional
investors. Such loans may not exceed 10% of the value of the fund's total
assets measured at the time of the most recent loan. For each loan the fund
must receive in return collateral with a value at least equal to 100% of the
current market value of the loaned securities.
ILLIQUID INVESTMENTS. The fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally
securities that cannot be sold within seven days in the normal course of
business at approximately the amount at which the fund has valued them.
OTHER POLICIES AND RESTRICTIONS. The fund has a number of additional
investment policies and restrictions that govern its activities. Those that
are identified as "fundamental" may only be changed with shareholder
approval. The others may be changed by the Board alone. For a list of these
restrictions and more information about the fund's investment policies,
including those described above, please see "How Does the Fund Invest Its
Assets?" and "Investment Restrictions" in the SAI.
Generally, the policies and restrictions discussed in this prospectus and in
the SAI apply when the fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security
no longer meets one or more of the fund's policies or restrictions.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
There is no assurance that the fund will meet its investment goals.
Investments in securities that have potential to increase in value may be
subject to a greater degree of risk and may be more volatile than other types
of investments.
The value of your shares will increase as the value of the securities owned
by the fund increases and will decrease as the value of the fund's
investments decrease. In this way, you participate in any change in the value
of the securities owned by the fund. In addition to the factors that affect
the value of any particular security that the fund owns, the value of fund
shares may also change with movements in the stock and bond markets as a
whole.
SMALLER COMPANIES RISK. Historically, smaller companies have been more
volatile in price than larger company securities, especially over the short
term. Among the reasons for the greater price volatility are the less certain
growth prospects of smaller companies, the lower degree of liquidity in the
markets for such securities, and the greater sensitivity of smaller companies
to changing economic conditions.
In addition, smaller companies may lack depth of management, they may be
unable to generate funds necessary for growth or development, they may have
limited product lines, they may have a small share of the market for their
products or services, or they may be developing or marketing new products or
services for which markets are not yet established and may never become
established.
Therefore, while smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also involve
greater risks and should be considered speculative.
FOREIGN SECURITIES RISK. The value of foreign (and U.S.) securities is
affected by general economic conditions and individual company and industry
earnings prospects. While foreign securities may offer significant
opportunities for gain, they also involve additional risks that can increase
the potential for losses in the fund. Investments in Depositary
Receipts also involve some or all of the risks described below.
The political, economic, and social structures of some countries in which the
fund invests may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, expropriation, restrictions on removal of
currency or other assets, nationalization of assets, and punitive taxes.
There may be less publicly available information about a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing, and financial reporting standards and may have less government
supervision of financial markets. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs
on foreign securities markets are generally higher than in the U.S. The
settlement practices may be cumbersome and result in delays that may affect
portfolio liquidity. The 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.
CONVERTIBLE SECURITIES RISK. A convertible security has risk characteristics
of both equity and debt securities. Its value may rise and fall with the
market value of the underlying stock or, like a debt security, vary with
changes in interest rates and the credit quality of the issuer. A convertible
security tends to perform more like a stock when the underlying stock price
is high (because it is assumed it will be converted) and more like a debt
security when the underlying stock price is low (because it is assumed it
will not be converted). Because its value can be influenced by many different
factors, a convertible security is not as sensitive to interest rate changes
as a similar non-convertible debt security, and generally has less potential
for gain or loss than the underlying stock.
DERIVATIVE SECURITIES RISK. Derivative investments are those whose values are
dependent upon the performance of one or more other securities or investments
or indices; in contrast to common stock, for example, whose value is
dependent upon the operations of the issuer. Option transactions and futures
contracts are considered derivative investments. To the extent the fund
enters into these transactions, their success will depend upon the manager's
ability to predict pertinent market movements.
REITS RISK. The fund's investments in REITs are subject to certain risks
related to the real estate industry in general. Increases in property taxes
and operating expenses, changes in zoning laws and neighborhood values,
casualty or construction losses, and overbuilding and increased competition
could have a negative impact on the value of REITs. General and local
economic conditions and real estate values can affect REITs. Rising interest
rates, which may increase mortgage and financing costs, can restrain
construction and buying and selling activity which could negatively affect
REITs. REITs are also subject to the risk that a borrower may be unable to
make interest and principal payments on a loan made by a REIT.
Loss of status as a qualified REIT or changes in the treatment of REITs under
the Code could adversely affect the value of a particular REIT or the market
for REITs as a whole and the fund's performance.
CREDIT AND ISSUER RISK. The fund's investments in debt securities involve
credit risk. This is the risk that the issuer of a debt security will be
unable to make principal and interest payments in a timely manner and the
debt security will go into default.
INTEREST RATE, MARKET AND CURRENCY RISK. To the extent the fund invests in
debt securities, changes in interest rates in any country where the fund is
invested will affect the value of the fund's portfolio and its share price.
Rising interest rates, which often occur during times of inflation or a
growing economy, are likely to have a negative effect on the value of the
fund's shares. To the extent the fund invests in common stocks, a general
market decline in any country where the fund is invested may cause the value
of what the fund owns, and thus the fund's share price, to decline. Changes
in currency valuations may also affect the price of fund shares. The value of
stock markets, currency valuations and interest rates throughout the world
have increased and decreased in the past. These changes are unpredictable.
TAX CONSIDERATIONS. The fund's investments in options, futures, foreign
securities and other complex securities are subject to special tax rules that
may affect the amount, timing or character of the income earned by the fund
and distributed to you. The fund may also be subject to withholding taxes on
earnings from certain of its foreign securities. These special tax rules are
discussed in the "Additional Information on Distributions and Taxes" section
of the SAI.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the fund and elects its
officers. The officers are responsible for the fund's day-to-day operations.
The Board also monitors the fund to ensure no material conflicts exist among
the fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Franklin Advisers, Inc. manages the fund's assets and
makes its investment decisions. The manager also performs similar services
for other funds. It is wholly owned by Resources, a publicly owned company
engaged in the financial services industry through its subsidiaries. Charles
B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources. Together, the manager and its affiliates manage over $207 billion
in assets. Please see "Investment Management and Other Services" and
"Miscellaneous Information" in the SAI for information on securities
transactions and a summary of the fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
fund's portfolio is: Conrad B. Herrmann and Canyon A. Chan since 1993, and
Serena Perin since 1996.
Conrad B. Herrmann, CFA
Senior Vice President of Franklin Advisers, Inc.
Mr. Herrmann is a Chartered Financial Analyst and holds a Master of Business
Administration degree from Harvard University. He earned a Bachelor of Arts
degree from Brown University. Mr. Herrmann has been with the Franklin
Templeton Group since 1989 and is a member of several securities
industry-related associations.
Canyon A. Chan, CFA
Vice President of Franklin Advisers, Inc.
Mr. Chan is a Chartered Financial Analyst and holds a Bachelor of Arts degree
in Quantitative Economics from Stanford University. He has been with the
Franklin Templeton Group since 1991. He is a member of several securities
industry-related associations.
Serena Perin, CFA
Vice President of Franklin Advisers, Inc.
Ms. Perin is a Chartered Financial Analyst and holds a Bachelor of Arts
degree in Business Economics from Brown University. She has been with the
Franklin Templeton Group since 1991. Ms. Perin is a member of several
securities industry-related associations.
MANAGEMENT FEES. During the fiscal year ended June 30, 1998, management fees
totaling 0.50% of the average monthly net assets of the fund were paid to the
manager. Total expenses, including fees paid to the manager, were 0.90% for
Class I and 1.69% for Class II.
PORTFOLIO TRANSACTIONS. The manager tries to obtain the best execution on all
transactions. If the manager believes more than one broker or dealer can
provide the best execution, it may consider research and related services and
the sale of fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, when selecting a broker or dealer. Please see "How
Does the Fund Buy Securities for Its Portfolio?" in the SAI for more
information.
ADMINISTRATIVE SERVICES. Under an agreement with the manager, FT Services
provides certain administrative services and facilities for the fund. During
the fiscal year ended June 30, 1998, administration fees totaling 0.14% of
the average daily net assets of the fund were paid to FT Services. These fees
are paid by the manager. They are not a separate expense of the fund. Please
see "Investment Management and Other Services" in the SAI for more
information.
YEAR 2000 ISSUE. Like other mutual funds, the fund could be adversely
affected if the computer systems used by the manager and other service
providers do not properly process date-related information on or after
January 1, 2000 ("Year 2000 Issue"). The Year 2000 Issue, and in particular
foreign service providers' responsiveness to the issue, could affect
portfolio and operational areas including securities trade processing,
interest and dividend payments, securities pricing, shareholder account
services, reporting, custody functions, and others. While there can be no
assurance that the fund will not be adversely affected, the manager and its
affiliated service providers are taking steps that they believe are
reasonably designed to address the Year 2000 Issue, including seeking
reasonable assurances from the fund's other major service providers.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for the expenses
of activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by the fund under the Class I plan may not exceed 0.25% per year of
Class I's average daily net assets. All distribution expenses over this
amount will be borne by those who have incurred them. During the first year
after certain Class I purchases made without a sales charge, Securities
Dealers may not be eligible to receive the Rule 12b-1 fees associated with
the purchase.
Under the Class II plan, the fund may pay Distributors up to 0.75% per year
of Class II's average daily net assets to pay Distributors or others for
providing distribution and related services and bearing certain Class II
expenses. All distribution expenses over this amount will be borne by those
who have incurred them. During the first year after a purchase of Class II
shares, Securities Dealers may not be eligible to receive this portion of the
Rule 12b-1 fees associated with the purchase.
The fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. 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 Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
TAXATION OF THE FUND'S INVESTMENTS. ---------------------------------------
The fund invests your money in the HOW DOES THE FUND EARN
stocks, bonds and other securities INCOME AND GAINS?
that are described in the section "How ---------------------------------------
Does the Fund Invest Its Assets?"
Special tax rules may apply in The fund earns dividends and interest
determining the income and gains that (the fund's "income") on its
the fund earns on its investments. investments. When the fund sells a
These rules may, in turn, affect the security for a price that is higher
amount of distributions that the fund than it paid, it has a gain. When the
pays to you. These special tax rules fund sells a security for a price that
are discussed in the SAI. is lower than it paid, it has a loss.
If the fund has held the security for
TAXATION OF THE FUND. As a regulated more than one year, the gain or loss
investment company, the fund generally will be a long-term capital gain or
pays no federal income tax on the loss. If the fund has held the
income and gains that it distributes security for one year or less, the
to you. gain or loss will be a short-term
capital gain or loss. The fund's gains
FOREIGN TAXES. Foreign governments may and losses are netted together, and,
impose taxes on the income and gains if the fund has a net gain (the fund's
from the fund's investments in foreign "gains"), that gain will generally be
stocks and bonds. These taxes will distributed to you.
reduce the amount of the fund's
distributions to you.
TAXATION OF SHAREHOLDERS
Distributions. Distributions from the fund, whether you receive them in cash
or in additional shares, are generally subject to income tax. The fund will
send you a statement in January of the current year that reflects the amount
of ordinary dividends, capital gain distributions and non-taxable
distributions you received from the fund in the prior year. This statement
will include distributions declared in December and paid to you in January of
the current year, but which are taxable as if paid on December 31 of the prior
year. The IRS requires you to report these amounts on your income tax return
for the prior year.
DISTRIBUTIONS TO RETIREMENT PLANS. ---------------------------------------
Fund distributions received by your WHAT IS A DISTRIBUTION?
qualified retirement plan, such as a ---------------------------------------
section 401(k) plan or IRA, are
generally tax-deferred; this means As a shareholder, you will receive
that you are not required to report your share of the fund's income and
fund distributions on your income tax gains on its investments in stocks,
return when paid to your plan, but, bonds and other securities. The fund's
rather, when your plan makes payments income and short-term capital gains
to you. Special rules apply to payouts are paid to you as ordinary dividends.
from Roth and Education IRAs. The fund's long-term capital gains are
paid to you as capital gain
DIVIDENDS-RECEIVED DEDUCTION. distributions. If the fund pays you an
Corporate investors may be entitled to amount in excess of its income and
a dividends-received deduction on a gains, this excess will generally be
portion of the ordinary dividends they treated as a non-taxable distribution.
receive from the fund. These amounts, taken together, are
what we call the fund's distributions
to you.
REDEMPTIONS AND EXCHANGES. If you ---------------------------------------
redeem your shares or if you exchange WHAT IS A REDEMPTION?
your shares in the fund for shares in ---------------------------------------
another Franklin Templeton Fund, you
will generally have a gain or loss A redemption is a sale by you to the
that the IRS requires you to report on fund of some or all of your shares in
your income tax return. If you the fund. The price per share you
exchange fund shares held for 90 days receive when you redeem fund shares
or less and pay no sales charge, or a may be more or less than the price at
reduced sales charge, for the new which you purchased those shares. An
shares, all or a portion of the sales exchange of shares in the fund for
charge you paid on the purchase of the shares of another Franklin Templeton
shares you exchanged is not included Fund is treated as a redemption of
in their cost for purposes of fund shares and then a purchase of
computing gain or loss on the shares of the other fund. When you
exchange. If you hold your shares for redeem or exchange your shares, you
six months or less, any loss you have will generally have a gain or loss,
will be treated as a long-term capital depending upon whether the amount you
loss to the extent of any capital gain receive for your shares is more or
distributions received by you from the less than your cost or other basis in
fund. All or a portion of any loss on the shares. Please call Fund
the redemption or exchange of your Information for a free shareholder Tax
shares will be disallowed by the IRS Information Handbook if you need more
if you purchase other shares in the information in calculating the gain or
fund within 30 days before or after loss on the redemption or exchange of
your redemption or exchange. your shares.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S.
income tax withholding. Your home country may also tax ordinary dividends,
capital gain distributions and gains arising from redemptions or exchanges of
your fund shares. Fund shares held by the estate of a non-U.S. investor may be
subject to U.S. estate tax. You may wish to contact your tax advisor to
determine the U.S. and non-U.S. tax consequences of your investment in the
fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you
receive from the fund, and gains arising from redemptions or exchanges of your
fund shares will generally be subject to state and local income tax. The
holding of fund shares may also be subject to state and local intangibles
taxes. You may wish to contact your tax advisor to determine the state and
local tax consequences of your investment in the fund.
BACKUP WITHHOLDING. When you open an ---------------------------------------
account, IRS regulations require that WHAT IS A BACKUP
you provide your taxpayer ---------------------------------------
identification number ("TIN"), certify WITHHOLDING?
that it is correct, and certify that
you are not subject to backup Backup withholding occurs when the
withholding under IRS rules. If you fund is required to withhold and pay
fail to provide a correct TIN or the over to the IRS 31% of your
proper tax certifications, the fund is distributions and redemption proceeds.
required to withhold 31% of all You can avoid backup withholding by
taxable distributions (including providing the fund with your TIN, and
ordinary dividends and capital gain by completing the tax certifications
distributions), and redemption on your shareholder application that
proceeds paid to you. The fund is also you were asked to sign when you opened
required to begin backup withholding your account. However, if the IRS
on your account if the IRS instructs instructs the fund to begin backup
the fund to do so. The fund reserves withholding, it is required to do so
the right not to open your account, even if you provided the fund with
or, alternatively, to redeem your your TIN and these tax certifications,
shares at the current Net Asset Value, and backup withholding will remain in
less any taxes withheld, if you fail place until the fund is instructed by
to provide a correct TIN, fail to the IRS that it is no longer required.
provide the proper tax certifications,
or the IRS instructs the fund to begin
backup withholding on your account.
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND. A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS IS CONTAINED IN THE SECTION
ENTITLED "ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI. THE
TAX TREATMENT TO YOU OF DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS, FOREIGN TAXES
PAID AND INCOME TAXES WITHHELD IS ALSO DISCUSSED IN A FREE FRANKLIN TEMPLETON
TAX INFORMATION HANDBOOK, WHICH YOU MAY REQUEST BY CONTACTING FUND
INFORMATION.
HOW IS THE FUND ORGANIZED?
The fund is a diversified open-end management investment company, commonly
called a mutual fund. It was organized as a California corporation on August
30, 1984, and is registered with the SEC. As of January 2, 1997, the fund
began offering a new class of shares designated Franklin Equity Fund -
Advisor Class. All shares outstanding before the offering of Advisor Class
shares have been designated Franklin Equity Fund - Class I and Franklin
Equity Fund - Class II. Additional classes of shares may be offered in the
future.
Shares of each class represent proportionate interests in the assets of the
fund and have the same voting and other rights and preferences as any other
class of the fund for matters that affect the fund as a whole. For matters
that only affect one class, however, only shareholders of that class may
vote. Each class will vote separately on matters affecting only that class,
or expressly required to be voted on separately by state or federal law.
The fund has cumulative voting rights. This gives each shareholder a number
of votes equal to the number of shares owned times the number of Board
members to be elected. You may cast all of your votes for one candidate or
distribute your votes between two or more candidates.
The fund does not intend to hold annual shareholder meetings. It may hold
special meetings, however, for matters requiring shareholder approval. A
meeting may also be called by the Board in its discretion or by shareholders
holding at least 10% of the outstanding shares. In certain circumstances, we
are required to help you communicate with other shareholders about the
removal of a Board member.
As of August 4, 1998, Franklin Templeton Fund Allocator Growth Target Fund
owned of record and beneficially more than 25% of the outstanding shares of
the Advisor Class of the fund.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, please follow the steps below. This will help avoid any
delays in processing your request.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The fund's minimum
investments are:
To open a regular, non-retirement account ........... $1,000
To open an IRA, IRA Rollover,
Roth IRA, or Education IRA ......................... $ 250*
To open a custodial account for a minor
(an UGMA/UTMA account) ............................ $ 100
To open an account with an
automatic investment plan .......................... $ 50**
To add to an account ................................ $ 50***
*For all other retirement accounts, there is no minimum investment
requirement.
**$25 for an Education IRA.
***For all retirement accounts except IRAs, IRA Rollovers, Roth IRAs, or
Education IRAs, there is no minimum to add to an account.
We reserve the right to change the amount of these minimums from time to
time or to waive or lower these minimums for certain purchases. We also
reserve the right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to
send an additional application to add privileges later. PLEASE ALSO
INDICATE WHICH CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT SPECIFY A
CLASS, WE WILL AUTOMATICALLY INVEST YOUR PURCHASE IN CLASS I SHARES. It
is important that we receive a signed application since we will not be
able to process any redemptions from your account until we receive your
signed application.
4. Make your investment using the table below.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the fund with your
check made payable to the fund.
For additional investments:
Send a check made payable to the fund. Please
include your account number on the check.
- --------------------------------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that number is
busy, call 1-650/312-2000 collect, to receive a
wire control number and wire instructions. You
need a new wire control number every time you
wire money into your account. If you do not have
a currently effective wire control number, we
will return the money to the bank, and we will
not credit the purchase to your account.
2. For an initial investment you must also return
your signed shareholder application to the fund.
IMPORTANT DEADLINES: If we receive your call before
1:00 p.m. Pacific time and the bank receives the
wired funds and reports the receipt of wired funds
to the fund by 3:00 p.m. Pacific time, we will
credit the purchase to your account that day.
If we receive your call after 1:00 p.m. or the bank
receives the wire after 3:00 p.m., we will credit
the purchase to your account the following business
day.
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. The class that may be best
for you depends on a number of factors, including the amount and length of
time you expect to invest. Generally, Class I shares may be more attractive
for long-term investors or investors who qualify to buy Class I shares at a
reduced sales charge. Your financial representative can help you decide.
CLASS I CLASS II
- --------------------------------------------------------------------------------
o Higher front-end sales charges o Lower front-end sales charges than
than Class II shares. There are Class I shares
several ways to reduce these
charges, as described below. There
is no front-end sales charge for
purchases of $1 million or more.*
o Contingent Deferred Sales Charge o Contingent Deferred Sales Charge
on purchases of $1 million or more on purchases sold within 18 months
sold within one year
o Lower annual expenses than Class o Higher annual expenses than Class
II shares I shares
*If you are investing $1 million or more, it is generally more beneficial for
you to buy Class I shares because there is no front-end sales charge and the
annual expenses are lower. Therefore, ANY PURCHASE OF $1 MILLION OR MORE IS
AUTOMATICALLY INVESTED IN CLASS I SHARES. You may accumulate more than $1
million in Class II shares through purchases over time. If you plan to do
this, however, you should determine if it would be better for you to buy
Class I shares through a Letter of Intent.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is
1% and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- ------------------------------------------------------------------------------
CLASS I
Under $50,000 ...................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000 ..... 4.50% 4.71% 3.75%
$100,000 but less than $250,000 .... 3.50% 3.63% 2.80%
$250,000 but less than $500,000 .... 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000 .. 2.00% 2.04% 1.60%
$1,000,000 or more* ................ None None None
CLASS II
Under $1,000,000* .................. 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of
$1 million or more and any Class II purchase. Please see "How Do I Sell
Shares? - Contingent Deferred Sales Charge." Please also see "Other Payments
to Securities Dealers" below for a discussion of payments Distributors may
make out of its own resources to Securities Dealers for certain purchases.
Purchases of Class II shares are limited to purchases below $1 million.
Please see "Choosing a Share Class."
SALES CHARGE REDUCTIONS AND WAIVERS
- - IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't
include this statement, we cannot guarantee that you will receive the
sales charge reduction or waiver.
CUMULATIVE QUANTITY DISCOUNTS - CLASS I ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in
the Franklin Templeton Funds, as well as those of your spouse, children under
the age of 21 and grandchildren under the age of 21. If you are the sole
owner of a company, you may also add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
LETTER OF INTENT - Class I Only. You may buy Class I shares at a reduced
sales charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION,
YOU ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase
in Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on
the reserved shares as you direct. Our policy of reserving shares does not
apply to certain retirement plans.
If you would like more information about the Letter of Intent privilege,
please see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in
the SAI or call Shareholder Services.
GROUP PURCHASES - CLASS I ONLY. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as
a whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions. 403(b) plans that only allow salary deferral
contributions and that purchased Class I shares of the fund at a reduced
sales charge under the group purchase privilege before February 1, 1998,
however, may continue to do so.
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies to
you or your purchase of fund shares, you may buy shares of the fund without a
front-end sales charge or a Contingent Deferred Sales Charge. All of the
sales charge waivers listed below apply to purchases of Class I shares only,
except for items 1 and 2 which also apply to Class II purchases.
Certain distributions, payments or redemption proceeds that you receive may
be used to buy shares of the fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the same class
of shares. Certain exceptions apply, however, to Class II shareholders
who chose to reinvest their distributions in Class I 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
Class I shares of the fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton
Fund if you reinvest the money in the same class of shares. This waiver
does not apply to exchanges. Shares purchased with proceeds from a money
fund may be subject to a sales charge.
If you paid a Contingent Deferred Sales Charge when you redeemed your
shares from a Franklin Templeton Fund, a Contingent Deferred Sales
Charge will apply to your purchase of fund shares and a new Contingency
Period will begin. We will, however, credit your fund account with
additional shares based on the Contingent Deferred Sales Charge you paid
and the amount of redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Bank
CD, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date the CD matures, including any
rollover.
3. Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
4. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any
tax consequences that may apply.
5. 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.
6. 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 contingent deferred sales charge when you redeemed your
Class A shares from a Templeton Global Strategy Fund, a Contingent
Deferred Sales Charge will apply to your purchase of fund shares and a
new Contingency Period will begin. We will, however, credit your fund
account with additional shares based on the contingent deferred sales
charge you paid and the amount of 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.
7. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
Various individuals and institutions also may buy Class I shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. Trust companies and bank trust departments agreeing to invest in
Franklin Templeton Funds over a 13 month period at least $1 million of
assets held in a fiduciary, agency, advisory, custodial or similar
capacity and over which the trust companies and bank trust departments
or other plan fiduciaries or participants, in the case of certain
retirement plans, have full or shared investment discretion. We will
accept orders for these accounts by mail accompanied by a check or by
telephone or other means of electronic data transfer directly from the
bank or trust company, with payment by federal funds received by the
close of business on the next business day following the order.
2. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the fund is
permissible and suitable for you and the effect, if any, of payments by
the fund on arbitrage rebate calculations.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs. The minimum initial
investment is $250.
4. Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
5. Registered Securities Dealers and their affiliates, for their investment
accounts only
6. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
7. 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. The minimum initial
investment is $100.
8. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
9. Accounts managed by the Franklin Templeton Group
10. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
11. Group annuity separate accounts offered to retirement plans
12. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class I shares without a front-end sales
charge. Retirement plans that are not Qualified Retirement Plans, SIMPLEs or
SEPs must also meet the requirements described under "Group Purchases - Class
I Only" above to be able to buy Class I shares without a front-end sales
charge. We may enter into a special arrangement with a Securities Dealer,
based on criteria established by the fund, to add together certain small
Qualified Retirement Plan accounts for the purpose of meeting these
requirements.
For retirement plan accounts opened on or after May 1, 1997, a Contingent
Deferred Sales Charge may apply if the retirement plan is transferred out of
the Franklin Templeton Funds or terminated within 365 days of the retirement
plan account's initial purchase in the Franklin Templeton Funds. Please see
"How Do I Sell Shares? - Contingent Deferred Sales Charge" for details.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the fund.
Plan documents are required for all retirement plans. Trust Company can
provide the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need
an application other than the one included in this prospectus. For a
retirement plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing
a retirement plan. Your investment representative or advisor can help you
make investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate
and are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not
by the fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 1% of the amount
invested.
3. Class I purchases made without a front-end sales charge by certain
retirement plans described under "Sales Charge Reductions and Waivers -
Retirement Plans" above - up to 1% of the amount invested.
4. Class I purchases by trust companies and bank trust departments,
Eligible Governmental Authorities, and broker-dealers or others on
behalf of clients participating in comprehensive fee programs - up to
0.25% of the amount invested.
5. Class I purchases by Chilean retirement plans - up to 1% of the amount
invested.
A Securities Dealer may receive only one of these payments for each
qualifying purchase. Securities Dealers who receive payments in connection
with investments described in paragraphs 1, 2 or 5 above or a payment of up
to 1% for investments described in paragraph 3 will be eligible to receive
the Rule 12b-1 fee associated with the purchase starting in the thirteenth
calendar month after the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES,
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI.
FOR INVESTORS OUTSIDE THE U.S.
The distribution of this prospectus and the offering of fund shares may be
limited in many jurisdictions. An investor who wishes to buy shares of the
fund should determine, or have a broker-dealer determine, the applicable laws
and regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and
a purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds
except Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is
the only money fund exchange option available to Class II shareholders.
Unlike our other money funds, shares of Money Fund II may not be purchased
directly and no drafts (checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment goal
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have
different investment minimums. Some Franklin Templeton Funds do not offer
Class II shares.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for
the shares you want to exchange
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by
phone to apply to your account, please let us
know.
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable
sales charge of the new fund, if the difference is more than 0.25%. If you
have never paid a sales charge on your shares because, for example, they have
always been held in a money fund, you will pay the fund's applicable sales
charge no matter how long you have held your shares. These charges may not
apply if you qualify to buy shares without a sales charge.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred
Sales Charge when you exchange shares. Any shares subject to a Contingent
Deferred Sales Charge at the time of exchange, however, will remain so in the
new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, we
will first exchange any shares in your account that are not subject to the
charge. If there are not enough of these to meet your exchange request, we
will exchange shares subject to the charge in the order they were purchased.
If you exchange Class I shares into one of our money funds, the time your
shares are held in that fund will not count towards the completion of any
Contingency Period. If you exchange your Class II shares for shares of Money
Fund II, however, the time your shares are held in that fund will count
towards the completion of any Contingency Period.
For more information about the Contingent Deferred Sales Charge, please see
"How Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You must meet the applicable minimum investment amount of the fund you
are exchanging into, or exchange 100% of your fund shares.
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. Please notify us in writing if you do not want this
option to be available on your account. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares
as described above. Restrictions may apply to other types of retirement
plans. Please contact Retirement Plan Services for information on
exchanges within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the fund more than twice in a calendar
quarter, or (iii) exchanged shares equal to at least $5 million, or more
than 1% of the fund's net assets. Shares under common ownership or control
are combined for these limits. If you have exchanged shares as described
in this paragraph, you will be considered a Market Timer. Each exchange by
a Market Timer, if accepted, will be charged $5.00. Some of our funds do
not allow investments by Market Timers.
Because excessive trading can hurt fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the fund
would be harmed or unable to invest effectively, or (ii) the fund receives or
anticipates simultaneous orders that may significantly affect the fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the fund, such as "Class Z" shares. Certain shareholders of Class
Z shares of Franklin Mutual Series Fund Inc. may exchange their Class Z
shares for Class I shares of the fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions. If you would like
your redemption proceeds wired to a bank account, your
instructions should include:
o The name, address and telephone number of the bank
where you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union,
the name of the corresponding bank and the account
number
2. Include any outstanding share certificates for the
shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to
send additional documents. Accounts under court
jurisdiction may have other requirements.
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your redemption
proceeds wired to a bank account, other than an escrow
account, you must first sign up for the wire feature. To sign
up, send us written instructions, with a signature guarantee.
To avoid any delay in processing, the instructions should
include the items listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional
accounts may exceed $50,000 by completing a separate
agreement. Call Institutional Services to receive a
copy.
o If there are no share certificates issued for the
shares you want to sell or you have already returned
them to the fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed by
phone within the last 15 days
- If you do not want the ability to redeem by phone to
apply to your account, please let us know.
- --------------------------------------------------------------------------------
THROUGH
YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or pay
out cash in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds until your check or draft has cleared, which may
take seven business days or more. A certified or cashier's check may clear in
less time.
Under unusual circumstances, we may suspend redemptions or postpone payment
for more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under
age 59 1/2, unless the distribution meets an exception stated in the Code. To
obtain the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
For Class I purchases, if you did not pay a front-end sales charge because
you invested $1 million or more or agreed to invest $1 million or more under
a Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell
all or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make
without a sales charge may also be subject to a Contingent Deferred Sales
Charge if they are sold within the Contingency Period. For any Class II
purchase, a Contingent Deferred Sales Charge may apply if you sell the shares
within the Contingency Period. The charge is 1% of the value of the shares
sold or the Net Asset Value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class I shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge if the retirement plan is
transferred out of the Franklin Templeton Funds or terminated within 365 days
of the account's initial purchase in the Franklin Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT,
we will redeem additional shares to cover any Contingent Deferred Sales
Charge. For requests to sell a stated NUMBER OF SHARES, we will deduct the
amount of the Contingent Deferred Sales Charge, if any, from the sale
proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Account fees
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997,
or (ii) the Securities Dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the Securities Dealer of
record has entered into a supplemental agreement with Distributors
o Redemptions by the fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February
1, 1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, at a rate of up to 1% a month of an account's Net Asset
Value. For example, if you maintain an annual balance of $1 million in
Class I shares, you can redeem up to $120,000 annually through a
systematic withdrawal plan free of charge. Likewise, if you maintain an
annual balance of $10,000 in Class II shares, $1,200 may be redeemed
annually free of charge.
o Distributions from IRAs due to death or disability or upon periodic
distributions based on life expectancy
o Returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee benefit
plans serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The fund declares dividends from its net investment income semi-annually in
May and November to shareholders of record on the last business day of that
month and pays them on or about the 15th day of the next month.
Capital gains, if any, may be distributed annually, usually in December.
Dividends and capital gains are calculated and distributed the same way for
each class. The amount of any income dividends per share will differ,
however, generally due to the difference in the Rule 12b-1 fees of Class I
and Class II.
Dividend payments are not guaranteed, are subject to the Board's discretion
and may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE
ANY FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will then receive a portion of the price you paid
back in the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the
fund (without a sales charge or imposition of a Contingent Deferred Sales
Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. This is a convenient way to accumulate additional
shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy shares of another Franklin Templeton Fund (without a
sales charge or imposition of a Contingent Deferred Sales Charge). Many
shareholders find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both
dividend and capital gain distributions in cash. If you have the money sent
to another person or to a checking or savings account, you may need a
signature guarantee. If you send the money to a checking or savings account,
please see "Electronic Fund Transfers" under "Services to Help You Manage
Your Account."
Distributions may be reinvested only in the same class of shares, except as
follows: (i) Class II shareholders who chose to reinvest their distributions
in Class I shares of the fund or another Franklin Templeton Fund before
November 17, 1997, may continue to do so; and (ii) Class II shareholders may
reinvest their distributions in shares of any Franklin Templeton money fund.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE
WILL AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE
SAME CLASS OF THE FUND. You may change your distribution option at any time
by notifying us by mail or phone. Please allow at least seven days before the
record date for us to process the new option. For Trust Company retirement
plans, special forms are required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value
per share of the class you wish to purchase, plus any applicable sales
charges. When you sell shares, you receive the Net Asset Value per share
minus any applicable Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you
buy or sell shares through your Securities Dealer, however, we will use the
Net Asset Value next calculated after your Securities Dealer receives your
request, which is promptly transmitted to the fund. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents.
HOW AND WHEN SHARES ARE PRICED
The fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the close of the NYSE, normally
1:00 p.m. Pacific time. You can find the prior day's closing Net Asset Value
and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on
a pro rata basis. It is based on each class' proportionate participation in
the fund, determined by the value of the shares of each class. Each class,
however, bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To
calculate Net Asset Value per share of each class, the assets of each class
are valued and totaled, liabilities are subtracted, and the balance, called
net assets, is divided by the number of shares of the class outstanding. The
fund's assets are valued as described under "How Are Fund Shares Valued?" in
the SAI.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any
delay in processing your transaction, they should include:
o Your name,
o The fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the
evening if preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of
transactions or account changes. These include transactions or account
changes that you could also make by phone, such as certain redemptions of
$50,000 or less, exchanges between identically registered accounts, and
changes to the address of record. For most other types of transactions or
changes, written instructions must be signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed
by all registered owners on the account.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential
claims based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should
be able to obtain a signature guarantee from a bank, broker, credit union,
savings association, clearing agency, or securities exchange or association.
A NOTARIZED SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate
is lost, stolen or destroyed, you may have to pay an insurance premium of up
to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone.
Please refer to the sections of this prospectus that discuss the transaction
you would like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to
ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we
are not reasonably satisfied that the instructions are genuine. If this
occurs, we will not be liable for any loss. We also will not be liable for
any loss if we follow instructions by phone that we reasonably believe are
genuine or if you are unable to execute a transaction by phone.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b)
retirement accounts by phone, certain restrictions may be imposed on other
retirement plans.
To obtain any required forms or more information about distribution or
transfer procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register
the account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of
survivorship" is shown as "Jt Ten" on your account statement. For any account
with two or more owners, we cannot accept instructions to change owners on
the account unless ALL owners agree in writing, even if the law in your state
says otherwise. If you would like another person or owner to sign for you,
please send us a current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this
form of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please
send us the following documents when you open your account. This will help
avoid delays in processing your transactions while we verify who may sign on
the account.
- --------------------------------------------------------------------------------
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------------------------------------------------------------
CORPORATION Corporate Resolution
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with Distributors or we cannot process
the transfer. Contact your Securities Dealer to initiate the transfer. We
will process the transfer after we receive authorization in proper form from
your delivering Securities Dealer. Accounts may be transferred electronically
through the NSCC. For accounts registered in street or nominee name, we may
take instructions directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements
and other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions
directly from your dealer or representative, including instructions to
exchange or redeem your shares. Electronic instructions may be processed
through established electronic trading systems and programs used by the fund.
Telephone instructions directly from your representative will be accepted
unless you have told us that you do not want telephone privileges to apply to
your account.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do
this if the value of your account fell below this amount because you
voluntarily sold your shares and your account has been inactive (except for
the reinvestment of distributions) for at least six months. Before we close
your account, we will notify you and give you 30 days to increase the value
of your account to $100. These minimums do not apply to IRAs and other
retirement plan accounts or to accounts managed by the Franklin Templeton
Group.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the fund.
Under the plan, you can have money transferred automatically from your
checking or savings account to the fund each month to buy additional shares.
If you are interested in this program, please refer to the automatic
investment plan application included with this prospectus or contact your
investment representative. The market value of the fund's shares may
fluctuate and a systematic investment plan such as this will not assure a
profit or protect against a loss. You may discontinue the program at any time
by calling Shareholder Services.
AUTOMATIC PAYROLL DEDUCTION - CLASS I ONLY
You may have money transferred from your paycheck to the fund to buy
additional Class I shares. Your investments will continue automatically until
you instruct the fund and your employer to discontinue the plan. To process
your investment, we must receive both the check and payroll deduction
information in required form. Due to different procedures used by employers
to handle payroll deductions, there may be a delay between the time of the
payroll deduction and the time we receive the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or
annual basis. The value of your account must be at least $5,000 and the
minimum payment amount for each withdrawal must be at least $50. For
retirement plans subject to mandatory distribution requirements, the $50
minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete
the systematic withdrawal plan section of the shareholder application
included with this prospectus and indicate how you would like to receive your
payments. You may choose to direct your payments to buy the same class of
shares of another Franklin Templeton Fund or have the money sent directly to
you, to another person, or to a checking or savings account. If you choose to
have the money sent to a checking or savings account, please see "Electronic
Fund Transfers" below. Once your plan is established, any distributions paid
by the fund will be automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan may
also be subject to a Contingent Deferred Sales Charge. Please see "Contingent
Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. Please see "How Do I Buy, Sell and Exchange
Shares? - Systematic Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions or payments
under a systematic withdrawal plan sent directly to a checking or savings
account. If the account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton
Fund;
o exchange shares (within the same class) between identically registered
Franklin Templeton Class I and Class II accounts; and
o request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the code number for each class to use TeleFACTS(R). The code
number is 134 for Class I and 234 for Class II.
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the fund will be sent every six months. To reduce
fund expenses, we attempt to identify related shareholders within a
household and send only one copy of a report. Call Fund Information if you
would like an additional free copy of the fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more
information, call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your
shares are held by a financial institution, in a street name account, or
networked through the NSCC, the fund may not be able to offer these services
directly to you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor
Services at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California
94403-7777. The fund, Distributors and the manager are also located at this
address. You may also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION
(PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- ------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with
high quality service. You will hear a regular beeping tone if your call is
being recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
BOARD - The Board of Directors of the fund
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The fund offers three classes of
shares, designated "Class I," "Class II," and "Advisor Class." The three
classes have proportionate interests in the fund's portfolio. They differ,
however, primarily in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the
contingency period is 18 months. The holding period begins on the day you buy
your shares. For example, if you buy shares on the 18th of the month, they
will age one month on the 18th day of the next month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply
if you sell your shares within the Contingency Period.
DEPOSITARY RECEIPTS - U.S. Certificates that give their holders the right to
receive securities (a) of a foreign issuer deposited in a U.S. bank or trust
company (American Depositary Receipts, "ADRs"); or (b) of a foreign or U.S.
issuer deposited in a foreign bank or trust company (Global Depositary
Receipts, "GDRs" or European Depositary Receipts, "EDRs").
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Directors."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined
the fund is a legally permissible investment and that can only buy shares of
the fund without paying sales charges.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable
Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the fund's
shareholder servicing and transfer agent
IRA - Individual retirement account or annuity qualified under section 408 of
the Code
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange
shares based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
Offering Price - The public offering price is based on the Net Asset Value
per share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 5.75% for Class I and 1% for Class II. We calculate
the offering price to two decimal places using standard rounding criteria.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established
under section 408(k) of the Code
SIMPLE (SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES) - An employer sponsored
salary deferral plan established under section 408(p) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an
affiliate of Distributors and both are wholly owned subsidiaries of Resources.
WE/OUR/US - Unless the context indicates a different meaning, these terms
refer to the fund and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.
ANNUAL REPORT
FRANKLIN EQUITY FUND
June 30, 1998
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective and remember that all securities markets move
both up and down, as do mutual fund share prices. We appreciate your past
support and look forward to serving your investment needs in the years ahead.
Conrad B. Herrmann
Portfolio Manager
Franklin Equity Fund
Contents
Shareholder Letter................................................ 1
Performance Summaries
Class I.......................................................... 5
Class II......................................................... 8
Advisor Class.................................................... 11
Financial Highlights &
Statement of Investments ........................................ 14
Financial Statements ............................................ 21
Notes to
Financial Statements.............................................. 24
Independent
Auditor's Report.................................................. 27
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 17 of
this report
SHAREHOLDER LETTER
Your Fund's Objective: Franklin Equity Fund seeks capital appreciation and
secondarily, current income, by investing primarily in common stocks or
securities convertible into common stocks.
Dear Shareholder:
We are pleased to bring you this report for Franklin Equity Fund covering the
fiscal year ended June 30, 1998. During this period, the ongoing currency crisis
in Asia caused periodic turbulence in global equity markets. However, as of June
30, this crisis had not significantly affected the U.S. or European economies.
U.S. gross domestic product grew at an estimated 3.5% rate, while the consumer
price index increased only +1.7%. With European conditions also bright, stock
prices in many developed markets ended the year at, or near, record high levels.
Within this environment, Franklin Equity Fund - Class I shares provided a
+22.43% one-year total return, as shown in the Performance Summary on page 5,
outperforming the Dow Jones(R) Industrial Average, which posted a return of
+18.73%. The Standard & Poor's(R) 500 (S&P 500(R)) stock index delivered a
return of +30.16% for the same period.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Holdings from several diverse industries contributed to the fund's positive
performance. The price of our stock in Cisco Systems, Inc., which supplies most
of the devices that regulate the flow of data over the Internet, increased 105%
during the fund's fiscal year and shares of Owens-Illinois, Inc., a leading
global producer of glass and plastic containers, rose 44%. Stock prices of the
advertising agency Omnicom Inc., Providian Financial Corp., and the computer
game software developer Electronic Arts, Inc., increased 61%, 144%, and 60%,
respectively.
Due to anticipated cost savings and more complete product lines, several
corporate mergers and acquisitions involving companies in our portfolio also
contributed to the fund's performance. The price of our stock in U.S.A. Waste
Services, Inc. increased when it merged with Waste Management Corp. to create
the largest waste disposal company in the country; our holdings in Citicorp and
Travelers Group, Inc. benefited from their proposal to combine into a financial
services powerhouse; and our shares in Tellabs, Inc. and CIENA Corp. increased
in price after the announcement that they will combine to produce high-speed
fiber optic telecommunications transmission equipment.
Of course, not every holding performed well. During the reporting period, prices
for several of the fund's technology-related stocks performed below
expectations. Examples include Xilinx, Inc., a leading provider of
custom-programmed semiconductors, and Motorola, Inc., a world leader in wireless
communications systems. Although weak demand from Asian countries affected these
companies, we believe they still have solid long-term growth prospects. In fact,
we remained overweighted in the technology sector because of its potential for
tremendous growth through ongoing changes in computing and communications.
During the period under review, prices declined dramatically for many natural
resource commodities such as crude oil, exerting downward pressure on a number
of stocks in the oilfield services sector and oil exploration and production
industry. This enabled the fund to initiate additional positions in EVI
Weatherford, Inc. and Varco International, Inc., two manufacturers of oilfield
equipment. The former is a leading supplier of oilfield tools and equipment, and
the latter is a leading supplier of oil drilling rigs for offshore deepwater
locations. Oil producers have become more interested in exploring these areas as
a result of operating economics and improved surveying technology.
Looking forward, we are bullish about the domestic market's prospects. An aging
"baby-boom" generation has fostered increased awareness about investing for
retirement, which should provide positive money flows into the capital markets.
And a growing global economy could continue to provide worldwide growth and
productivity opportunities for many domestic firms. Of course, the U.S. equity
market does face at least two potential pitfalls. First, the Asian crisis could
begin to affect U.S. and European economic growth, causing a slowdown in
corporate profits to spread from technology companies to the rest of the
economy. Second, the current, low U.S. unemployment rate could lead to wage
inflation, which might pressure the Federal Reserve to tighten monetary policy.
We believe that Franklin Equity Fund, while not immune to slowing growth and
turmoil in Asia, is positioned so that it may weather any volatility better than
the overall market. The fund has a lower weighted average price/earnings ratio
than that of the S&P 500 (based on an average of analysts' estimates of next
year's earnings), but the weighted average estimated earnings growth rate of our
portfolio is higher than the estimate of earnings growth for the S&P 500 as
estimated by the same analysts. In our opinion, the fund's lower valuation
ratios should provide reduced downside risk, while the higher earnings growth
may provide relatively high returns over the long run.
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Please remember, this discussion reflects our views and opinions as of June 30,
1998, the end of the reporting period.
Of course, market and economic conditions are changing constantly, which may
affect our strategies and portfolio holdings. Although historic performance is
no guarantee of future results, these insights may help you understand our
investment and management philosophy.
As always, we thank you for your participation in Franklin Equity Fund and look
forward to serving your investment needs in the years to come. We welcome any
comments or suggestions you may have.
Sincerely,
Conrad B. Herrmann
Portfolio Manager
Franklin Equity Fund
PERFORMANCE SUMMARY
Class I
Franklin Equity Fund - Class I reported a +22.43% cumulative total return for
the one-year period ended June 30, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of all distributions,
and does not include the sales charge. The fund's share price, as measured by
net asset value, increased 83 cents, from $10.16 on June 30, 1997, to $10.99 on
June 30, 1998. During the reporting period, shareholders received per-share
distributions of 5.5 cents ($0.055) in income dividends, 14.95 cents ($0.1495)
in short-term capital gains, and $1.0965 in long-term capital gains.
Distributions will vary depending on income earned by the fund and any profits
realized from the sale of securities in the portfolio, as well as the level of
the fund's operating expenses.
The graph on page 6 compares the performance of Franklin Equity Fund - Class I
to that of the Standard and Poor's 500 Stock Index (S&P 500) over the past ten
years. The S&P 500 is a domestic, broad market index consisting of various-sized
companies. Of course, such unmanaged market indices have inherent performance
differentials over any fund. They do not pay management fees to cover salaries
of securities analysts or portfolio managers, or pay commissions or market
spreads to buy and sell securities. Unlike an index, mutual funds are never 100%
invested because they need cash on hand to redeem shares. In addition, the
performance shown for the fund includes the maximum initial sales charge, all
fund expenses and account fees. If operating expenses such as the fund's had
been applied to the index, its performance would have been lower. Please
remember that an index is simply a measure of performance, and one cannot invest
in it directly.
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Class I
Periods ended 6/30/98
1-Year 5-Year 10-Year
Cumulative Total Return1 22.43% 134.77% 234.31%
Average Annual Total Return2 16.90% 18.61% 12.83%
Value of $10,000 Investment3 $11,690 $23,477 $33,431
6/30/94 6/30/95 6/30/96 6/30/97 6/30/98
One-Year Total Return4 2.32% 23.78% 22.16% 29.75% 22.43%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, maximum 4.5%
initial sales charge. Prior to July 1, 1994, Class I shares were offered at a
lower initial sales charge, with dividends reinvested at the offering price;
thus actual total returns would differ.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the sales charge. Prior to July 1,
1994, Class I shares were offered at a lower initial sales charge, with
dividends reinvested at the offering price; thus actual total returns would
differ.
4. One-year total return represents the change in value of an investment over
the periods ended on the dates indicated and does not include the sales charge.
Effective May 1, 1994, the fund eliminated the sales charge on reinvested
dividends and implemented a Rule 12b-1 plan, which affects subsequent
performance.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, and you may have a gain or loss
when you sell your shares.
Franklin Equity Fund - Class I paid distributions derived from long-term capital
gains of $1.0965 per share in December 1997. The fund hereby designates such
distributions as capital gain dividends per Section 852 (b)(3) of the Internal
Revenue Code.
Class II
Franklin Equity Fund - Class II reported a +21.47% cumulative total return for
the one-year period ended June 30, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of all distributions,
and does not include sales charges. The fund's share price, as measured by net
asset value, increased 79 cents, from $10.12 on June 30, 1997, to $10.91 on June
30, 1998. During the reporting period, shareholders received per-share
distributions of 14.95 cents ($0.1495) in short-term capital gains and $1.0965
in long-term capital gains. Distributions will vary depending on income earned
by the fund and any profits realized from the sale of securities in the
portfolio, as well as the level of the fund's operating expenses.
The graph on page 10 compares the performance of Franklin Equity Fund - Class II
to that of the Standard and Poor's 500 Stock Index (S&P 500) over the past three
years. The S&P 500 is a domestic, broad market index consisting of various-sized
companies. Of course, such unmanaged market indices have inherent performance
differentials over any fund. They do not pay management fees to cover salaries
of securities analysts or portfolio managers, or pay commissions or market
spreads to buy and sell securities. Unlike an index, mutual funds are never 100%
invested because they need cash on hand to redeem shares. In addition, the
performance shown for the fund includes the maximum initial sales charge, all
fund expenses and account fees. If operating expenses such as the fund's had
been applied to the index, its performance would have been lower. Please
remember that an index is simply a measure of performance, and one cannot invest
in it directly.
GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Class II
Periods ended 6/30/98
Since
Inception
1-Year 3-Year (5/1/95)
Cumulative Total Return1 21.47% 89.39% 107.53%
Average Annual Total Return2 19.29% 23.33% 25.53%
Value of $10,000 Investment3 $11,929 $18,758 $20,537
6/30/96 6/30/97 6/30/98
One-Year Total Return4 20.94% 28.93% 21.47%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge applicable to shares
redeemed within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include all sales charges.
4. One-year total return represents the change in value of an investment over
the periods ended on the dates indicated and does not include the sales charges.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares.
Franklin Equity Fund - Class II paid distributions derived from long-term
capital gains of $1.0965 per share in December 1997. The fund hereby designates
such distributions as capital gain dividends per Section 852 (b)(3) of the
Internal Revenue Code.
Advisor Class
Franklin Equity Fund - Advisor Class reported a +22.61% cumulative total return
for the one-year period ended June 30, 1998. Cumulative total return measures
the change in value of an investment, assuming reinvestment of all
distributions. The fund's share price, as measured by net asset value, increased
83 cents, from $10.17 on June 30, 1997, to $11.00 on June 30, 1998. During the
reporting period, shareholders received per-share distributions of 7.22 cents
($0.0722) in income dividends, 14.95 cents ($0.1495) in short-term capital
gains, and $1.0965 in long-term capital gains. Distributions will vary depending
on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses.
The graph on page 12 compares the performance of Franklin Equity Fund - Advisor
Class to that of the Standard and Poor's 500 (S&P 500) Stock Index over the past
ten years. The S&P 500 is a domestic, broad market index consisting of
various-sized companies. Of course, such unmanaged market indices have inherent
performance differentials over any fund. They do not pay management fees to
cover salaries of securities analysts or portfolio managers, or pay commissions
or market spreads to buy and sell securities. Unlike an index, mutual funds are
never 100% invested because they need cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as the
fund's had been applied to the index, its performance would have been lower.
Please remember that an index is simply a measure of performance, and one cannot
invest in it directly.
GRAPHIC MATERIAL 5 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Advisor Class
Periods ended 6/30/98
1-Year* 5-Year* 10-Year*
Cumulative Total Return1 22.61% 146.61% 251.03%
Average Annual Total Return1 22.61% 19.79% 13.38%
Value of $10,000 Investment*,2 $12,261 $24,661 $35,103
6/30/94 6/30/95 6/30/96 6/30/97 6/30/98
One-Year Total Return*, 32.32% 23.78% 22.16% 29.99% 22.61%
*On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I sales
charge, but including the effect of Class I expenses, such as 12b-1 fees; and
(b) for periods after January 1, 1997, figures reflect actual Advisor Class
performance including the deduction of all fees and expenses applicable only to
that class. Since January 2, 1997, (commencement of sales), the cumulative total
return of Advisor Class shares was 45.25%. This was a period of generally rising
securities prices.
1. Cumulative total return represents the change in value of an investment over
the periods indicated. Average annual total return represents the average annual
change in value of an investment over the periods indicated.
2. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated.
3. One-year total return represents the change in value of an investment over
the periods ended on the indicated dates. All calculations assume reinvestment
of dividends and capital gains at net asset value. Since markets can go down as
well as up, investment return and principal value will fluctuate with market
conditions. You may have a gain or loss when you sell your shares.
Franklin Equity Fund - Advisor Class paid distributions derived from long-term
capital gains of $1.0965 per share in December 1997. The fund hereby designates
such distributions as capital gain dividends per Section 852 (b)(3) of the
Internal Revenue Code.
Past performance is not predictive of future results.
FRANKLIN EQUITY FUND
Financial Highlights
<TABLE>
<CAPTION>
Class I
---------------------------------------------------------
Year Ended June 30,
---------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $10.16 $ 8.26 $7.24 $6.53 $7.25
---------------------------------------------------------
Income from investment operations:
Net investment income ............................ .05 .05 .06 .08 .10
Net realized and unrealized gains ................ 2.08 2.34 1.48 1.33 .11
---------------------------------------------------------
Total from investment operations .................. 2.13 2.39 1.54 1.41 .21
---------------------------------------------------------
Less distributions from:
Net investment income ............................ (.05) (.06) (.06) (.08) (.10)
Net realized gains ............................... (1.25) (.43) (.46) (.62) (.83)
----------------------------------------------------------
Total distributions ............................... (1.30) (.49) (.52) (.70) (.93)
----------------------------------------------------------
Net asset value, end of year ...................... $10.99 $10.16 $8.26 $7.24 $6.53
=========================================================
Total return* ..................................... 22.43% 29.75% 22.16% 23.78% 2.32%
Ratios/supplemental data
Net assets, end of year (000's) ................... $613,835 $462,972 $366,602 $317,463 $279,880
Ratios to average net assets:
Expenses ......................................... .90% .91% .95% .95% .79%
Net investment income ............................ .48% .61% .72% 1.21% 1.27%
Portfolio turnover rate ........................... 38.00% 53.67% 59.86% 86.20% 95.18%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
Class II
---------------------------------------------
Year Ended June 30,
---------------------------------------------
1998 1997 1996 1995+
---------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................... $10.12 $ 8.23 $7.24 $6.65
---------------------------------------------
Income from investment operations:
Net investment income (loss) ................................ (.01) (.02) .02 .01
Net realized and unrealized gains ........................... 2.05 2.34 1.45 .62
---------------------------------------------
Total from investment operations ............................. 2.04 2.32 1.47 .63
---------------------------------------------
Less distributions from:
Net investment income ....................................... -- -- (.02) (.04)
Net realized gains .......................................... (1.25) (.43) (.46) --
---------------------------------------------
Total distributions .......................................... (1.25) (.43) (.48) (.04)
---------------------------------------------
Net asset value, end of year ................................. $10.91 $10.12 $8.23 $7.24
=============================================
Total return* ................................................ 21.47% 28.93% 20.94% 9.42%
Ratios/supplemental data
Net assets, end of year (000's) .............................. $35,717 $9,554 $4,208 $342
Ratios to average net assets:
Expenses .................................................... 1.69% 1.72% 1.77% 1.77%**
Net investment income (loss) ................................ (.28%) (.22%) (.10%) .74%**
Portfolio turnover rate ...................................... 38.00% 53.67% 59.86% 86.20%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
+For the period May 1, 1995 (effective date) to June 30, 1995.
Advisor Class
--------------------------
Year Ended June 30,
--------------------------
1998 1997++
--------------------------
<S> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................................. $10.17 $ 8.62
--------------------------
Income from investment operations:
Net investment income ......................................................... .07 .03
Net realized and unrealized gains ............................................. 2.08 1.56
--------------------------
Total from investment operations ............................................... 2.15 1.59
--------------------------
Less distributions from:
Net investment income ......................................................... (.07) (.04)
Net realized gains ............................................................ (1.25) --
--------------------------
Total distributions ............................................................ (1.32) (.04)
--------------------------
Net asset value, end of year ................................................... $11.00 $10.17
==========================
Total return* .................................................................. 22.61% 18.47%
Ratios/supplemental data
Net assets, end of year (000's) ................................................ $16,911 $6,890
Ratios to average net assets:
Expenses ...................................................................... .69% .72%**
Net investment income ......................................................... .71% .79%**
Portfolio turnover rate ........................................................ 38.00% 53.67%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
++For the period January 2, 1997 (effective date) to June 30, 1997.
See notes to financial statements.
FRANKLIN EQUITY FUND
Statement of Investments, June 30, 1998
SHARES VALUE
<S> <C> <C>
Common Stocks 93.4%
Consumer Durables 1.5%
Mattel, Inc............................................................ 225,000 $ 9,520,313
-------------
Consumer Non-Durables 7.0%
ConAgra, Inc........................................................... 200,000 6,337,500
Gillette Co. .......................................................... 130,000 7,369,375
Nike, Inc., Class B.................................................... 115,000 5,599,063
PepsiCo, Inc........................................................... 150,000 6,178,125
Philip Morris Cos., Inc................................................ 170,000 6,693,750
Procter & Gamble Co. .................................................. 80,000 7,285,000
Sara Lee Corp. ........................................................ 125,000 6,992,188
-------------
46,455,001
-------------
Consumer Services .9%
a CapStar Hotel Co. ..................................................... 225,000 6,300,000
-------------
Electronic Technology 18.6%
a 3Com Corp. ............................................................ 200,000 6,137,500
a Adaptec, Inc........................................................... 150,000 2,146,875
a Altera Corp. .......................................................... 110,582 3,269,080
a Amkor Technology, Inc.................................................. 150,000 1,401,570
a Applied Materials, Inc................................................. 125,000 3,687,500
a CIENA Corp. ........................................................... 150,000 10,443,750
a Cisco Systems, Inc..................................................... 200,000 18,412,500
Intel Corp. ........................................................... 140,000 10,377,500
a Komag, Inc............................................................. 450,000 2,404,710
a L-3 Communications Holdings, Inc....................................... 50,000 1,634,375
Linear Technology Corp. ............................................... 75,000 4,523,438
Lockheed Martin Corp. ................................................. 47,305 5,008,417
a Loral Space & Communications, Ltd...................................... 300,000 8,475,000
Lucent Technologies, Inc............................................... 100,000 8,318,750
Motorola, Inc.......................................................... 85,000 4,467,813
Nokia Corp., ADR (Finland)............................................. 120,000 8,707,500
a RELTEC Corp. .......................................................... 51,200 2,304,000
a Tekelec ............................................................... 100,000 4,475,000
a Tellabs, Inc........................................................... 100,000 7,162,500
a Uniphase Corp. ........................................................ 90,000 5,650,317
a Xilinx, Inc............................................................ 150,000 5,100,000
-------------
124,108,095
-------------
Energy Minerals 6.0%
a Barrett Resources Corp. ............................................... 225,000 8,423,438
Mobil Corp. ........................................................... 100,000 7,662,500
Texaco, Inc............................................................ 125,000 7,460,938
Ultramar Diamond Shamrock Corp. ....................................... 250,000 7,890,625
YPF, SA, ADR (Argentina)............................................... 275,000 8,267,188
-------------
39,704,689
-------------
Finance 16.6%
Ace, Ltd............................................................... 125,000 $ 4,875,000
American International Group, Inc...................................... 75,000 10,950,000
ARM Financial Group, Inc., Class A..................................... 100,000 2,212,500
Associates First Capital Corp. ........................................ 125,000 9,609,375
BankBoston Corp. ...................................................... 150,000 8,343,750
Citicorp .............................................................. 30,000 4,477,500
Espirito Santo Financial Group, ADR (Luxembourg)....................... 400,000 9,750,000
a Federated Investors, Inc., Class B..................................... 350,000 6,475,000
FelCor Suite Hotels, Inc............................................... 150,000 4,706,250
a Heller Financial, Inc.................................................. 37,500 1,125,000
Household International, Inc........................................... 75,000 3,731,250
Life Re Corp. ......................................................... 47,000 3,854,000
Providian Financial Corp. ............................................. 125,000 9,820,313
a Security Capital Group, Inc., Class B.................................. 150,000 3,993,750
Starwood Hotels & Resorts ............................................. 150,000 7,246,875
Travelers Group, Inc................................................... 115,000 6,971,875
U.S. Bancorp .......................................................... 195,000 8,385,000
Washington Mutual, Inc................................................. 93,750 4,072,266
-------------
110,599,704
-------------
Health Services 1.3%
HBO & Co. ............................................................. 250,000 8,812,500
-------------
Health Technology 7.9%
Baxter International, Inc.............................................. 125,000 6,726,563
Bristol-Myers Squibb Co. .............................................. 70,000 8,045,625
a ESC Medical Systems, Ltd............................................... 250,000 8,437,500
Mentor Corp. .......................................................... 187,900 4,556,575
Novartis, AG (Switzerland) ............................................ 5,000 8,320,148
Roche Holdings, AG (Switzerland) ...................................... 700 6,874,011
a Serologicals Corp. .................................................... 200,000 6,450,000
a Shire Pharmaceuticals Group, Plc., ADR (United Kingdom)................ 152,700 3,263,963
-------------
52,674,385
-------------
Industrial Services 4.7%
a AES Corp. ............................................................. 250,000 13,140,625
a American Disposal Services ............................................ 140,000 6,562,500
a U.S.A. Waste Services, Inc............................................. 100,000 4,937,500
a Varco International, Inc............................................... 275,000 5,448,438
Waste Management, Inc.................................................. 35,000 1,225,000
-------------
31,314,063
-------------
Non-Energy Minerals 2.5%
Carpenter Technology Corp. ............................................ 150,000 7,537,500
De Beers Cons Mines, ADR (South Africa)................................ 300,000 5,250,000
a Ispat International, NV (Netherlands).................................. 200,000 3,750,000
-------------
16,537,500
-------------
Process Industries 2.9%
Crown Cork & Seal Co., Inc............................................. 75,000 $ 3,562,500
a Owens-Illinois, Inc.................................................... 200,000 8,950,000
Praxair, Inc........................................................... 150,000 7,021,875
-------------
19,534,375
-------------
Producer Manufacturing 2.7%
a Atchison Casting Corp. ................................................ 75,000 1,340,625
a EVI Weatherford, Inc................................................... 175,000 6,496,875
Mark IV Industries, Inc................................................ 262,500 5,676,563
Roper Industries, Inc.................................................. 150,000 3,918,750
a U.S. Filter Corp. ..................................................... 29,300 822,231
-------------
18,255,044
-------------
Retail Trade .4%
a Consolidated Stores Corp. ............................................. 75,000 2,718,750
-------------
Technology Services 8.4%
Adobe Systems, Inc..................................................... 100,000 4,243,750
a Electronic Arts, Inc................................................... 175,000 9,450,000
a i2 Technologies, Inc................................................... 200,000 7,025,000
a Oracle Corp. .......................................................... 150,000 3,684,375
a Parametric Technology Corp. ........................................... 225,000 6,103,125
SAP, AG (Germany)...................................................... 25,000 15,166,205
a Synopsys, Inc.......................................................... 215,000 9,836,250
a Unigraphics Solutions, Inc............................................. 20,700 289,800
-------------
55,798,505
-------------
Transportation 4.1%
Air Express International Corp. ....................................... 300,000 8,025,000
C.H. Robinson Worldwide, Inc........................................... 274,500 6,828,188
Expeditors International of Washington, Inc............................ 150,000 6,600,000
Southwest Airlines Co. ................................................ 202,500 5,999,063
-------------
27,452,251
-------------
Utilities & Telecommunications 7.9%
a AirTouch Communications, Inc........................................... 200,000 11,687,500
Enron Corp. ........................................................... 225,000 12,164,063
GTE Corp. ............................................................. 75,000 4,171,875
a Paging Network, Inc.................................................... 500,000 7,000,000
PG & E Corp. .......................................................... 125,000 3,945,313
Portugal Telecommunications, SA (Portugal)............................. 175,000 9,274,840
a STET Hellas Telecommunications, SA, ADR (Greece)....................... 41,000 1,701,500
TECO Energy, Inc....................................................... 100,000 2,681,250
-------------
....................................................................... 52,626,341
-------------
Total Common Stocks (Cost $424,415,660) 622,411,516
-------------
Convertible Bonds 1.8%
Omnicom Group, Inc. sub. notes, 4.25%, 1/03/07 ........................ $ 2,000,000 $ 3,337,500
Omnicom Group, Inc. sub. notes, 144A 4.25%, 1/03/07 ................... 2,000,000 3,322,500
U.S. Filter Corp., sub. notes, 4.50%, 12/15/01 ........................ 5,200,000 5,310,500
-------------
Total Convertible Bonds (Cost $9,995,140).............................. 11,970,500
-------------
b Repurchase Agreement 5.6%
Joint Repurchase Agreement, 5.614%, 7/01/98,
(Maturity Value $37,556,177) (Cost $37,550,321)........................... 37,550,321 37,550,321
BancAmerica Robertson Stephens
Barclays Capital Group, Inc.
Bear, Stearns Securities Corp.
BT Alex Brown, Inc.
Chase Securities, Inc.
CIBC Wood Gundy Securities Corp.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner, Kleinwort Benson, North America, L.L.C.
Greenwich Capital Markets, Inc.
Paribas Corp.
SBC Warburg Dillon Read, Inc.
Collateralized by U.S. Treasury Bills & Notes
Total Investments (Cost $471,961,121) 100.8%........................... 671,932,337
Other Assets, less Liabilities (.8%)................................... (5,469,311)
-------------
Total Net Assets: 100.0%............................................... $666,463,026
=============
aNon-income producing.
bInvestment is through participation in a joint account with other funds managed
by the investment advisor. At June 30, 1998, all repurchase agreements had been
entered into on that date.
See notes to financial statements.
FRANKLIN EQUITY FUND
Financial Statements
Statement of Assets and Liabilities
June 30, 1998
<S> <C>
Assets:
Investments in securities, at value (cost $471,961,121) ................................... $671,932,337
Cash ...................................................................................... 828,973
Receivables:
Investment securities sold ............................................................... 2,061,161
Capital shares sold ...................................................................... 582,251
Dividends and interest ................................................................... 477,251
-------------
Total assets ......................................................................... 675,881,973
-------------
Liabilities:
Payables:
Investment securities purchased .......................................................... 893,831
Capital shares redeemed .................................................................. 94,799
Affiliates ............................................................................... 605,167
Shareholders ............................................................................. 773,150
Payable upon return of securities loaned (Note 6) ......................................... 7,000,000
Other liabilities ......................................................................... 52,000
-------------
Total liabilities .................................................................... 9,418,947
-------------
Net assets, at value ................................................................ $666,463,026
=============
Net assets consist of:
Undistributed net investment income ....................................................... $--
Net unrealized appreciation ............................................................... 199,971,216
Accumulated net realized gain ............................................................. 36,407,655
Capital shares ............................................................................ 430,084,155
-------------
Net assets, at value ................................................................. $666,463,026
=============
Class I:
Net asset value per share ($613,835,217 / 55,832,059 shares outstanding)* ................. $10.99
=============
Maximum offering price per share ($10.99 / 95.5%) ......................................... $11.51
=============
Class II:
Net asset value per share ($35,716,958 / 3,273,565 shares outstanding)* ................... $10.91
=============
Maximum offering price per share ($10.91 / 99.0%) ......................................... $11.02
=============
Advisor Class:
Net asset value and maximum offering price per share
($16,910,851 / 1,537,562 shares outstanding) ............................................... $11.00
=============
*Redemption price is equal to net asset value less any applicable contingent deferred sales charge.
Statement of Operations
for the year ended June 30, 1998
<S> <C> <C>
Investment income:
(Net of foreign taxes of $141,967)
Dividends .................................................................... $ 5,327,245
Interest ..................................................................... 2,682,061
------------
Total investment income ................................................. $ 8,009,306
Expenses:
Management fees (Note 3) ..................................................... 2,894,330
Distribution fees (Note 3)
Class I ..................................................................... 1,143,410
Class II .................................................................... 193,215
Transfer agent fees (Note 3) ................................................. 741,808
Custodian fees ............................................................... 31,095
Reports to shareholders ...................................................... 182,801
Registration and filing fees ................................................. 75,141
Professional fees ............................................................ 43,829
Directors' fees and expenses ................................................. 23,057
Other ........................................................................ 14,683
------------
Total expenses .......................................................... 5,343,369
--------------
Net investment income .................................................. 2,665,937
--------------
Realized and unrealized gains:
Net realized gain from:
Investments ................................................................. 45,937,802
Foreign currency transactions ............................................... 18,318
------------
Net realized gain ....................................................... 45,956,120
Net unrealized appreciation on investments ................................... 64,966,613
--------------
Net realized and unrealized gain .............................................. 110,922,733
--------------
Net increase in net assets resulting from operations .......................... $113,588,670
==============
Statements of Changes in Net Assets
for the years ended June 30, 1998 and 1997
1998 1997
---------------------------
<S> <C> <C>
Increase in net assets:
Operations:
Net investment income ..................................................... $ 2,665,937 $ 2,459,947
Net realized gain from investments and foreign currency transactions ...... 45,956,120 53,832,495
Net unrealized appreciation on investments ................................ 64,966,613 52,251,082
---------------------------
Net increase in net assets resulting from operations .................. 113,588,670 108,543,524
Distributions to shareholders from:
Net investment income:
Class I ................................................................... (2,815,157) (2,742,841)
Class II .................................................................. -- (499)
Advisor Class ............................................................. (101,907) (13,857)
Net realized gains:
Class I ................................................................... (59,592,831) (19,328,932)
Class II .................................................................. (1,764,595) (302,817)
Advisor Class ............................................................. (1,486,880) --
---------------------------
Total distributions to shareholders ........................................ (65,761,370) (22,388,946)
Capital share transactions: (Note 2)
Class I ................................................................... 105,330,108 12,024,439
Class II .................................................................. 24,428,866 3,888,815
Advisor Class ............................................................. 9,460,338 6,538,415
---------------------------
Total capital share transactions ........................................... 139,219,312 22,451,669
Net increase in net assets ............................................ 187,046,612 108,606,247
Net assets:
Beginning of year .......................................................... 479,416,414 370,810,167
---------------------------
End of year ................................................................ $666,463,026 $479,416,414
===========================
</TABLE>
See notes to financial statements.
FRANKLIN EQUITY FUND
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Equity Fund (the Fund) is registered under the Investment Company Act
of 1940 as a diversified, open-end investment company. The Fund seeks to provide
capital growth. The following summarizes the Fund's significant accounting
policies.
a. Security Valuation:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Directors.
b. Foreign Currency Translation:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. Income Taxes:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
d. Security Transactions, Investment Income, Expenses and Distributions:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
e. Accounting Estimates:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. CAPITAL STOCK
The Fund offers three classes of shares: Class I, Class II and Advisor Class.
The shares have the same rights except for their initial sales load,
distribution fees, voting rights on matters affecting a single class and the
exchange privilege of each class.
At June 30, 1998, there were 5 billion shares authorized (no par value), of
which 2 billion shares each were designated as Class I and Class II, and 1
billion shares were designated as Advisor Class. Transactions in the Fund's
shares were as follows:
<TABLE>
<CAPTION>
Year Ended June 30
-------------------------------------------------------
1998 1997
-------------------------------------------------------
Shares Amount Shares Amount
-------------------------------------------------------
<S> <C> <C> <C> <C>
Class I Shares
Shares sold ..................................... 22,473,770 $238,141,732 12,390,036 $ 110,637,538
Shares issued on reinvestment of distributions .. 5,802,636 57,378,546 2,264,152 20,354,201
Shares redeemed ................................. (17,998,114) (190,190,170) (13,503,886) (118,967,300)
-------------------------------------------------------
Net increase .................................... 10,278,292 $ 105,330,108 1,150,302 $ 12,024,439
=======================================================
Class II Shares
Shares sold ..................................... 3,076,695 $ 32,410,808 709,987 $ 6,305,367
Shares issued on reinvestment of distributions .. 162,921 1,603,453 30,191 268,397
Shares redeemed ................................. (910,495) (9,585,395) (307,006) (2,684,949)
-------------------------------------------------------
Net increase .................................... 2,329,121 $ 24,428,866 433,172 $ 3,888,815
=======================================================
Advisor Class Shares*
Shares sold ..................................... 1,602,804 $ 17,239,578 732,158 $ 7,035,865
Shares issued on reinvestment of distributions .. 160,504 1,588,337 1,393 13,857
Shares redeemed ................................. (903,282) (9,367,577) (56,015) (511,307)
-------------------------------------------------------
Net increase .................................... 860,026 $ 9,460,338 677,536 $ 6,538,415
=======================================================
</TABLE>
*Effective date of Advisor Class shares was January 2, 1997.
3. TRANSACTIONS WITH AFFILIATES
Certain officers and directors of the Fund are also officers and/or directors of
Franklin Advisers, Inc. (Advisers), Franklin Templeton Services, Inc. (FT
Services), Franklin/Templeton Distributors, Inc. (Distributors), and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Fund's
investment manager, administrative manager, principal underwriter and transfer
agent, respectively.
The Fund pays an investment management fee to Advisers based on the average net
assets of the Fund as follows:
Annualized
Fee Rate Month-End Net Assets
-------------------------------------------------------------
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% In excess of $250 million
Under an agreement with Advisers, FT Services provides administrative services
to the Fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Fund.
3. TRANSACTIONS WITH AFFILIATES (cont.)
The Fund reimburses Distributors up to .25% and 1.00% per year of its average
daily net assets of Class I and Class II, respectively, for costs incurred in
marketing the Fund's shares.
Distributors paid net commissions on sales of Fund shares, and received
contingent deferred sales charges for the year of $138,630 and $9,399,
respectively.
4. INCOME TAXES
At June 30, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes of $472,238,229 was as follows:
Unrealized appreciation ........ $215,722,502
Unrealized depreciation ........ (16,028,394)
Net unrealized appreciation .... $199,694,108
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions. Net realized
capital gains differ for financial statement and tax purposes primarily due to
differing treatment of foreign currency transactions and wash sales.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended June 30, 1998 aggregated $296,899,712 and $206,459,590, respectively.
6. LENDING OF PORTFOLIO SECURITIES
The Fund loans securities to certain brokers for which it receives cash
collateral against the loaned securities in an amount equal to at least 102% of
the market value of the loaned securities. Net interest income from the
investment of the cash collateral received was $327,714 for the year ended June
30,1998. The value of the loaned securities was $6,496,875 at June 30, 1998.
FRANKLIN EQUITY FUND
Independent Auditor's Report
To the Shareholders and Board of Directors
of Franklin Equity Fund:
We have audited the accompanying statement of assets and liabilities of the
Franklin Equity Fund (the Fund), including the Fund's statement of investments,
as of June 30, 1998, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1998, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Franklin Equity Fund as of June 30, 1998, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and its financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles.
PricewaterhouseCoopers LLP
San Francisco, California
August 5, 1998
FRANKLIN EQUITY FUND
Tax Information
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Fund hereby
designates $30,426,840 as a 20% capital gain dividend for the fiscal year ended
June 30, 1998.
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
36.20% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended June 30, 1998.
GRAPHIC MATERIAL (1)
This chart shows, in pie format, the sector distribution of total net assets
for the Franklin Equity Fund, as of June 30, 1998.
Electronic Technology 18.6%
Finance 16.6%
Technology Services 8.4%
Health Technology 7.9%
Utilities 7.9%
Consumer Non-Durables 7.0%
Other Sectors 28.8%
Short-Term Investments & Other Net Assets 4.8%
100.0%
GRAPHIC MATERIAL (2)
This chart shows the top ten holdings of the Franklin Equity Fund, including
company name and industry, as of June 30, 1998, based on total net assets.
% OF TOTAL
COMPANY, INDUSTRY NET ASSETS
Cisco Systems, Inc. 2.8%
ELECTRONIC TECHNOLOGY
SAP AG (Germany) 2.3%
TECHNOLOGY SERVICES
AES Corp. 2.0%
INDUSTRIAL SERVICES
Enron Corp. 1.8%
UTILITIES
AirTouch Communications, Inc. 1.8%
UTILITIES & TELECOMMUNICATIONS
American International Group, Inc. 1.6%
FINANCE
CIENA Corp. 1.6%
ELECTRONIC TECHNOLOGY
Intel Corp. 1.6%
ELECTRONIC TECHNOLOGY
Synopsys, Inc. 1.5%
TECHNOLOGY SERVICES
Providian Financial Corp. 1.5%
FINANCE
GRAPHIC MATERIAL (3)
The following line graph hypothetically compares the performance of the
Franklin Equity Fund - Class I to that of the S&P 500 Stock Index, based on a
$10,000 investment from July 1, 1988 to June 30, 1998.
DATE FRANKLIN S&P 500 500
EQUITY FUND Composite $T
- CLASS I
6/30/88 $9,556 $10,000
7/31/88 $9,384 $9,962 -0.38%
8/31/88 $8,934 $9,623 -3.40%
9/30/88 $9,339 $10,033 4.26%
10/31/88 $9,556 $10,312 2.78%
11/30/88 $9,281 $10,165 -1.43%
12/31/88 $9,541 $10,343 1.75%
1/31/89 $10,177 $11,100 7.32%
2/28/89 $9,985 $10,823 -2.49%
3/31/89 $10,118 $11,075 2.33%
4/30/89 $10,547 $11,650 5.19%
5/31/89 $11,006 $12,122 4.05%
6/30/89 $10,665 $12,053 -0.57%
7/31/89 $11,376 $13,141 9.03%
8/31/89 $11,910 $13,399 1.96%
9/30/89 $11,605 $13,344 -0.41%
10/31/89 $10,857 $13,034 -2.32%
11/30/89 $10,963 $13,300 2.04%
12/31/89 $11,174 $13,620 2.40%
1/31/90 $10,433 $12,706 -6.71%
2/28/90 $10,638 $12,870 1.29%
3/31/90 $11,142 $13,211 2.65%
4/30/90 $10,701 $12,882 -2.49%
5/31/90 $11,631 $14,138 9.75%
6/30/90 $11,430 $14,043 -0.67%
7/31/90 $11,350 $13,998 -0.32%
8/31/90 $9,932 $12,733 -9.04%
9/30/90 $9,278 $12,113 -4.87%
10/31/90 $8,832 $12,060 -0.43%
11/30/90 $9,645 $12,840 6.46%
12/31/90 $10,172 $13,198 2.79%
1/31/91 $11,223 $13,773 4.36%
2/28/91 $11,951 $14,758 7.15%
3/31/91 $12,096 $15,115 2.42%
4/30/91 $12,032 $15,151 0.24%
5/31/91 $12,662 $15,804 4.31%
6/30/91 $11,997 $15,081 -4.58%
7/31/91 $12,339 $15,783 4.66%
8/31/91 $12,584 $16,157 2.37%
9/30/91 $12,372 $15,888 -1.67%
10/31/91 $12,225 $16,100 1.34%
11/30/91 $11,655 $15,452 -4.03%
12/31/91 $12,890 $17,219 11.44%
1/31/92 $12,960 $16,899 -1.86%
2/29/92 $13,201 $17,117 1.29%
3/31/92 $12,787 $16,783 -1.95%
4/30/92 $12,718 $17,277 2.94%
5/31/92 $12,683 $17,361 0.49%
6/30/92 $12,410 $17,103 -1.49%
7/31/92 $12,741 $17,802 4.09%
8/31/92 $12,532 $17,437 -2.05%
9/30/92 $12,689 $17,641 1.17%
10/31/92 $12,672 $17,701 0.34%
11/30/92 $13,212 $18,303 3.40%
12/31/92 $13,353 $18,528 1.23%
1/31/93 $13,447 $18,684 0.84%
2/28/93 $13,223 $18,938 1.36%
3/31/93 $13,633 $19,337 2.11%
4/30/93 $13,242 $18,869 -2.42%
5/31/93 $13,633 $19,373 2.67%
6/30/93 $13,602 $19,429 0.29%
7/31/93 $13,414 $19,352 -0.40%
8/31/93 $14,033 $20,085 3.79%
9/30/93 $13,827 $19,931 -0.77%
10/31/93 $14,277 $20,343 2.07%
11/30/93 $14,540 $20,150 -0.95%
12/31/93 $14,492 $20,394 1.21%
1/31/94 $14,916 $21,087 3.40%
2/28/94 $14,959 $20,516 -2.71%
3/31/94 $14,131 $19,621 -4.36%
4/30/94 $14,280 $19,872 1.28%
5/31/94 $14,195 $20,198 1.64%
6/30/94 $13,918 $19,703 -2.45%
7/31/94 $14,109 $20,350 3.28%
8/31/94 $14,685 $21,184 4.10%
9/30/94 $14,386 $20,667 -2.44%
10/31/94 $14,621 $21,132 2.25%
11/30/94 $14,280 $20,363 -3.64%
12/31/94 $14,292 $20,664 1.48%
1/31/95 $14,292 $21,199 2.59%
2/28/95 $14,812 $22,026 3.90%
3/31/95 $15,380 $22,676 2.95%
4/30/95 $15,735 $23,343 2.94%
5/31/95 $16,374 $24,276 4.00%
6/30/95 $17,228 $24,840 2.32%
7/31/95 $17,942 $25,664 3.32%
8/31/95 $18,061 $25,728 0.25%
9/30/95 $18,703 $26,814 4.22%
10/31/95 $18,275 $26,718 -0.36%
11/30/95 $18,822 $27,890 4.39%
12/31/95 $18,999 $28,429 1.93%
1/31/96 $19,431 $29,395 3.40%
2/29/96 $19,761 $29,669 0.93%
3/31/96 $19,761 $29,954 0.96%
4/30/96 $20,777 $30,394 1.47%
5/31/96 $21,183 $31,178 2.58%
6/30/96 $21,046 $31,296 0.38%
7/31/96 $19,619 $29,913 -4.42%
8/31/96 $20,485 $30,544 2.11%
9/30/96 $21,861 $32,264 5.63%
10/31/96 $22,065 $33,154 2.76%
11/30/96 $23,849 $35,661 7.56%
12/31/96 $23,362 $34,955 -1.98%
1/31/97 $24,916 $37,140 6.25%
2/28/97 $24,112 $37,429 0.78%
3/31/97 $23,362 $35,891 -4.11%
4/30/97 $24,594 $38,034 5.97%
5/31/97 $26,657 $40,350 6.09%
6/30/97 $27,307 $42,157 4.48%
7/31/97 $29,538 $45,513 7.96%
8/31/97 $28,705 $42,964 -5.60%
9/30/97 $30,640 $45,319 5.48%
10/31/97 $29,189 $43,805 -3.34%
11/30/97 $29,457 $45,833 4.63%
12/31/97 $29,581 $46,622 1.72%
1/31/98 $29,581 $47,139 1.11%
2/28/98 $31,980 $50,538 7.21%
3/31/98 $33,043 $53,126 5.12%
4/30/98 $33,711 $53,662 1.01%
5/31/98 $32,253 $52,739 -1.72%
6/30/98 $33,431 $54,880 4.06%
GRAPHIC MATERIAL (4)
The following line graph hypothetically compares the performance of the
Franklin Equity Fund - Class II to that of the S&P 500 Stock Index, based on
a $10,000 investment from July 1, 1988 to June 30, 1998.
DATE FRANKLIN S&P 500 500
EQUITY FUND Composite $T
- CLASS II
5/1/95 $9,896 $10,000
5/31/95 $10,298 $10,400 4.00%
6/30/95 $10,843 $10,641 2.32%
7/31/95 $11,262 $10,995 3.32%
8/31/95 $11,322 $11,022 0.25%
9/30/95 $11,726 $11,487 4.22%
10/31/95 $11,457 $11,446 -0.36%
11/30/95 $11,786 $11,948 4.39%
12/31/95 $11,901 $12,179 1.93%
1/31/96 $12,156 $12,593 3.40%
2/29/96 $12,363 $12,710 0.93%
3/31/96 $12,347 $12,832 0.96%
4/30/96 $12,968 $13,021 1.47%
5/31/96 $13,223 $13,357 2.58%
6/30/96 $13,113 $13,407 0.38%
7/31/96 $12,221 $12,815 -4.42%
8/31/96 $12,747 $13,085 2.11%
9/30/96 $13,607 $13,822 5.63%
10/31/96 $13,719 $14,203 2.76%
11/30/96 $14,818 $15,277 7.56%
12/31/96 $14,501 $14,975 -1.98%
1/31/97 $15,453 $15,911 6.25%
2/28/97 $14,969 $16,035 0.78%
3/31/97 $14,484 $15,376 -4.11%
4/30/97 $15,236 $16,294 5.97%
5/31/97 $16,506 $17,286 6.09%
6/30/97 $16,907 $18,060 4.48%
7/31/97 $18,260 $19,498 7.96%
8/31/97 $17,742 $18,406 -5.60%
9/30/97 $18,928 $19,415 5.48%
10/31/97 $17,993 $18,766 -3.34%
11/30/97 $18,176 $19,635 4.63%
12/31/97 $18,240 $19,973 1.72%
1/31/98 $18,221 $20,195 1.11%
2/28/98 $19,690 $21,651 7.21%
3/31/98 $20,330 $22,759 5.12%
4/30/98 $20,725 $22,989 1.01%
5/31/98 $19,803 $22,594 -1.72%
6/30/98 $20,537 $23,511 4.06%
GRAPHIC MATERIAL (5)
The following line graph hypothetically compares the performance of the
Franklin Equity Fund - Advisor Class to that of the S&P 500 Stock Index,
based on a $10,000 investment from July 1, 1988 to June 30, 1998.
DATE FRANKLIN S&P 500 500
EQUITY FUND - Composite $T
ADV CLASS
7/1/88 $10,000 $10,000
7/31/88 $9,820 $9,962 -0.38%
8/31/88 $9,350 $9,623 -3.40%
9/30/88 $9,773 $10,033 4.26%
10/31/88 $10,000 $10,312 2.78%
11/30/88 $9,713 $10,165 -1.43%
12/31/88 $9,985 $10,343 1.75%
1/31/89 $10,650 $11,100 7.32%
2/28/89 $10,449 $10,823 -2.49%
3/31/89 $10,588 $11,075 2.33%
4/30/89 $11,037 $11,650 5.19%
5/31/89 $11,517 $12,122 4.05%
6/30/89 $11,161 $12,053 -0.57%
7/31/89 $11,904 $13,141 9.03%
8/31/89 $12,464 $13,399 1.96%
9/30/89 $12,144 $13,344 -0.41%
10/31/89 $11,361 $13,034 -2.32%
11/30/89 $11,473 $13,300 2.04%
12/31/89 $11,693 $13,620 2.40%
1/31/90 $10,918 $12,706 -6.71%
2/28/90 $11,132 $12,870 1.29%
3/31/90 $11,660 $13,211 2.65%
4/30/90 $11,198 $12,882 -2.49%
5/31/90 $12,171 $14,138 9.75%
6/30/90 $11,961 $14,043 -0.67%
7/31/90 $11,878 $13,998 -0.32%
8/31/90 $10,393 $12,733 -9.04%
9/30/90 $9,709 $12,113 -4.87%
10/31/90 $9,242 $12,060 -0.43%
11/30/90 $10,093 $12,840 6.46%
12/31/90 $10,645 $13,198 2.79%
1/31/91 $11,745 $13,773 4.36%
2/28/91 $12,506 $14,758 7.15%
3/31/91 $12,658 $15,115 2.42%
4/30/91 $12,591 $15,151 0.24%
5/31/91 $13,251 $15,804 4.31%
6/30/91 $12,555 $15,081 -4.58%
7/31/91 $12,913 $15,783 4.66%
8/31/91 $13,169 $16,157 2.37%
9/30/91 $12,947 $15,888 -1.67%
10/31/91 $12,794 $16,100 1.34%
11/30/91 $12,196 $15,452 -4.03%
12/31/91 $13,490 $17,219 11.44%
1/31/92 $13,562 $16,899 -1.86%
2/29/92 $13,815 $17,117 1.29%
3/31/92 $13,381 $16,783 -1.95%
4/30/92 $13,309 $17,277 2.94%
5/31/92 $13,273 $17,361 0.49%
6/30/92 $12,987 $17,103 -1.49%
7/31/92 $13,334 $17,802 4.09%
8/31/92 $13,115 $17,437 -2.05%
9/30/92 $13,279 $17,641 1.17%
10/31/92 $13,261 $17,701 0.34%
11/30/92 $13,826 $18,303 3.40%
12/31/92 $13,974 $18,528 1.23%
1/31/93 $14,072 $18,684 0.84%
2/28/93 $13,837 $18,938 1.36%
3/31/93 $14,267 $19,337 2.11%
4/30/93 $13,857 $18,869 -2.42%
5/31/93 $14,267 $19,373 2.67%
6/30/93 $14,234 $19,429 0.29%
7/31/93 $14,038 $19,352 -0.40%
8/31/93 $14,686 $20,085 3.79%
9/30/93 $14,470 $19,931 -0.77%
10/31/93 $14,941 $20,343 2.07%
11/30/93 $15,216 $20,150 -0.95%
12/31/93 $15,166 $20,394 1.21%
1/31/94 $15,610 $21,087 3.40%
2/28/94 $15,654 $20,516 -2.71%
3/31/94 $14,788 $19,621 -4.36%
4/30/94 $14,943 $19,872 1.28%
5/31/94 $14,855 $20,198 1.64%
6/30/94 $14,564 $19,703 -2.45%
7/31/94 $14,765 $20,350 3.28%
8/31/94 $15,367 $21,184 4.10%
9/30/94 $15,055 $20,667 -2.44%
10/31/94 $15,300 $21,132 2.25%
11/30/94 $14,944 $20,363 -3.64%
12/31/94 $14,956 $20,664 1.48%
1/31/95 $14,956 $21,199 2.59%
2/28/95 $15,501 $22,026 3.90%
3/31/95 $16,095 $22,676 2.95%
4/30/95 $16,466 $23,343 2.94%
5/31/95 $17,135 $24,276 4.00%
6/30/95 $18,028 $24,840 2.32%
7/31/95 $18,775 $25,664 3.32%
8/31/95 $18,900 $25,728 0.25%
9/30/95 $19,572 $26,814 4.22%
10/31/95 $19,124 $26,718 -0.36%
11/30/95 $19,697 $27,890 4.39%
12/31/95 $19,882 $28,429 1.93%
1/31/96 $20,334 $29,395 3.40%
2/29/96 $20,679 $29,669 0.93%
3/31/96 $20,679 $29,954 0.96%
4/30/96 $21,743 $30,394 1.47%
5/31/96 $22,168 $31,178 2.58%
6/30/96 $22,024 $31,296 0.38%
7/31/96 $20,531 $29,913 -4.42%
8/31/96 $21,438 $30,544 2.11%
9/30/96 $22,877 $32,264 5.63%
10/31/96 $23,091 $33,154 2.76%
11/30/96 $24,957 $35,661 7.56%
12/31/96 $24,448 $34,955 -1.98%
1/31/97 $26,074 $37,140 6.25%
2/28/97 $25,261 $37,429 0.78%
3/31/97 $24,476 $35,891 -4.11%
4/30/97 $25,765 $38,034 5.97%
5/31/97 $27,924 $40,350 6.09%
6/30/97 $28,630 $42,157 4.48%
7/31/97 $30,938 $45,513 7.96%
8/31/97 $30,094 $42,964 -5.60%
9/30/97 $32,121 $45,319 5.48%
10/31/97 $30,601 $43,805 -3.34%
11/30/97 $30,910 $45,833 4.63%
12/31/97 $31,011 $46,622 1.72%
1/31/98 $31,043 $47,139 1.11%
2/28/98 $33,527 $50,538 7.21%
3/31/98 $34,673 $53,126 5.12%
4/30/98 $35,373 $53,662 1.01%
5/31/98 $33,813 $52,739 -1.72%
6/30/98 $35,103 $54,880 4.06%
EVERY SHAREHOLDER'S VOTE IS IMPORTANT!
PLEASE SIGN, DATE AND RETURN YOUR
PROXY TODAY!
Please detach at perforation before mailing.
PROXY PROXY
SPECIAL SHAREHOLDERS MEETING OF TEMPLETON AMERICAN TRUST, INC.
March 19, 1999
The undersigned hereby revokes all previous proxies for his shares and appoints
Barbara J. Green, James R. Baio and Bruce S. Rosenberg, and each of them,
proxies of the undersigned with full power of substitution to vote all shares of
Templeton American Trust, Inc. ("American Trust") that the undersigned is
entitled to vote at American Trust's Special Shareholders Meeting (the
"Meeting") to be held at 500 East Broward Boulevard, Fort Lauderdale, FL
33394-3091 at 10:00 a.m., EST on the 19th day of March 1999, including any
adjournment thereof, upon such business as may properly be brought before the
Meeting.
YOU ARE URGED TO DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY. THIS WILL HELP
SAVE THE EXPENSE OF FOLLOW-UP LETTERS TO SHAREHOLDERS WHO HAVE NOT RESPONDED.
NOTE: Please sign exactly as your name appears on the proxy.
If signing for estates, trusts or corporations, title or
capacity should be stated. If shares are held jointly, each
holder must sign.
------------------------------------------------------------
Signature
------------------------------------------------------------
Signature
------------------------------------------------------------
Signature
(Continued on the other side)
EVERY SHAREHOLDER'S VOTE IS IMPORTANT!
PLEASE SIGN, DATE AND RETURN YOUR
PROXY TODAY!
Please detach at perforation before mailing.
This proxy is solicited on behalf of the Board of Directors of American Trust.
It will be voted as specified. If no specification is made, this proxy shall be
voted in favor of Proposal 1, regarding the Reorganization of American Trust
pursuant to the Agreement and Plan of Reorganization with Franklin Equity Fund.
If any other matters properly come before the Meeting about which the
proxyholders were not aware prior to the time of the solicitation, authorization
is given to the proxyholders to vote in accordance with the views of management
on such matters. Management is not aware of any such matters.
<TABLE>
<CAPTION>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1 AND 2.
<S> <C> <C> <C>
FOR AGAINST ABSTAIN
1. To approve an Agreement and Plan of Reorganization
between American Trust and Franklin Equity Fund,
which provides for the acquisition of substantially [ ] [ ] [ ]
all of the assets of American Trust in exchange for
Class A and Class C Shares of Franklin Equity Fund, the
distribution of such shares to the shareholders of
American Trust, and the dissolution of American
Trust (the "Reorganization").
FOR AGAINST ABSTAIN
2. To grant the proxyholders the authority to vote in
their discretion and vote upon any other business [ ] [ ] [ ]
that may legally come before the Meeting or any
adjournment thereof.
IMPORTANT: PLEASE SEND IN YOUR PROXY...TODAY! ow
PLEASE SIGN AND PROMPTLY RETURN IN THE ACCOMPANYING ENVELOPE. NO POSTAGE REQUIRED IF MAILED IN THE U.S. ow
</TABLE>
STATEMENT OF ADDITIONAL INFORMATION
FOR
FRANKLIN EQUITY FUND
Acquisition of the Assets of the
TEMPLETON AMERICAN TRUST, INC.
By and in exchange Class A and Class C Shares of the
FRANKLIN EQUITY FUND
This Statement of Additional Information (SAI) relates specifically to
the proposed delivery of substantially all of the assets of the Templeton
American Trust, Inc. (the "American Trust") for Class A and Class C Shares of
Franklin Equity Fund.
This SAI consists of this Cover Page and the following documents. Each
of these documents is attached and is legally considered to be a part of this
SAI:
1. Statement of Additional Information of Franklin Equity Fund
dated November 1, 1998.
2. Annual Report of American Trust for the fiscal year ended
December 31, 1997 and Semi-Annual Report of American Trust
for the period ended June 30, 1998.
This SAI is not a Prospectus; you should read this SAI in conjunction
with the Prospectus/Proxy Statement dated January 15, 1999, relating to the
above-referenced transaction. You can request a copy of the Prospectus/Proxy
Statement by calling 1-800/DIAL BEN or by writing to Templeton American
Trust, Inc., 500 East Broward Boulevard, Fort Lauderdale, FL 33394-3091, or
to Franklin Equity Fund, 777 Mariners Island Boulevard, P.O. Box 7777, San
Mateo, CA 94403-7777. The date of this SAI is January 15, 1999.
134 *SA
SHARE CLASS REDESIGNATION
Effective January 1, 1999
Class A - Formerly Class I
Class B - New Share Class
Class C - Formerly Class II
SUPPLEMENT DATED JANUARY 1, 1999
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN EQUITY FUND
DATED NOVEMBER 1, 1998
The Statement of Additional Information is amended as follows:
I. As of January 1, 1999, the fund offers four classes of shares: Class A,
Class B, Class C and Advisor Class. Before January 1, 1999, Class A shares
were designated Class I and Class C shares were designated Class II. All
references in the Statement of Additional Information to Class I shares are
replaced with Class A, and all references to Class II shares are replaced
with Class C.
II. The first sentence of the second paragraph on the cover is revised to read:
This SAI describes the fund's Class A, B and C shares.
III. The following is added to the "Officers and Directors" section:
As of December 7, 1998, the officers and Board members, as a group, owned
of record and beneficially the following shares of the fund: approximately
8,540 Class A shares and 89,295 Advisor Class shares, or less than 1% and
4.22%, respectively, of the total outstanding Class A and Advisor Class
shares of the fund.
IV. The first sentence in the section "Additional Information on Exchanging
Shares," found under "How Do I Buy, Sell and Exchange Shares?", is replaced
with the following:
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.
V. In the section "The Rule 12b-1 Plans," found under "The Fund's
Underwriter,"
(a) the first sentence is replaced with the following:
Each class has a separate distribution or "Rule 12b-1" plan that was
adopted pursuant to Rule 12b-1 of the 1940 Act.
(b) the following paragraphs are added after the section "The Class I
Plan":
THE CLASS B PLAN. Under the Class B plan, the fund pays Distributors up to
0.75% per year of the class' average daily net assets, payable quarterly,
to pay Distributors or others for providing distribution and related
services and bearing certain expenses. All distribution expenses over this
amount will be borne by those who have incurred them. The fund may also pay
a servicing fee of up to 0.25% per year of the class' average daily net
assets, payable quarterly. This fee may be used to pay Securities Dealers
or others for, among other things, helping to establish and maintain
customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend
payments from the fund on behalf of customers, and similar servicing and
account maintenance activities.
The expenses relating to the Class B plan are also used to pay Distributors
for advancing the commission costs to Securities Dealers with respect to
the initial sale of Class B 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.
(c) and the section "The Class I and Class II Plans" is renamed "The Class
A, B and C Plans."
VI. Under "Miscellaneous Information,"
(a) the fourth paragraph is replaced with the following:
The fund offers four classes of shares: Franklin Equity Fund, Franklin
Equity Fund Series, Franklin Equity Fund - Class A; Franklin Equity Fund,
Franklin Equity Fund Series, Franklin Equity Fund - Class B; Franklin
Equity Fund, Franklin Equity Fund Series, Franklin Equity Fund - Class C;
and Franklin Equity Fund, Franklin Equity Fund Series, Franklin Equity Fund
- Advisor Class.
(b) and the following is added:
The Information Services & Technology division of Resources established a
Year 2000 Project Team in 1996. This team has already begun making
necessary software changes to help the computer systems that service the
fund and its shareholders to be Year 2000 compliant. After completing these
modifications, comprehensive tests are conducted in one of Resources' U.S.
test labs to verify their effectiveness. Resources continues to seek
reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis.
Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical
to develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use
of normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
As of December 7, 1998, the principal shareholders of the fund, beneficial
or of record, were as follows:
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- ------------------------------------------------------------------------
ADVISOR CLASS
FTTC Trust Services FBO 135,063.222 6.39%
Martin Wiskemann IRA
P.O. Box 5086
San Mateo, CA 94402-0086
FTTC TTEE for ValuSelect 262,647.473 12.42%
Franklin Resources PSP
Attn: Trading
P.O. Box 2438
Rancho Cordova, CA 95741-2438
FT Fund Allocator 467,093.686 22.09%
Moderate Target Fund
C/O Fund Accounting Department
Attn: Kimberley Monasterio
1810 Gateway 3rd Floor
San Mateo, CA 94404-2470
FT Fund Allocator 936,917.652 44.32%
Growth Target Fund
C/O Fund Accounting Department
Attn: Kimberley Monasterio
1810 Gateway 3rd Floor
San Mateo, CA 94404-2470
VII. In the "Useful Terms and Definitions" section, the definitions of "Class I,
Class II and Advisor Class" and "Offering Price" are replaced with the
following:
CLASS A, CLASS B, CLASS C AND ADVISOR CLASS - The fund offers four classes
of shares, designated "Class A," "Class B," "Class C" and "Advisor Class."
The four classes have proportionate interests in the fund's portfolio. They
differ, however, primarily in their sales charge and expense structures.
OFFERING PRICE - The public offering price is based on the Net Asset Value
per share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 5.75% for Class A and 1% for Class C. There is no
front-end sales charge for Class B. We calculate the offering price to two
decimal places using standard rounding criteria.
Please keep this supplement for future reference.
FRANKLIN
EQUITY FUND
STATEMENT OF
ADDITIONAL INFORMATION
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)
NOVEMBER 1, 1998
TABLE OF CONTENTS
How Does the Fund Invest Its Assets? ............................. 2
What Are the Risks
of Investing in the Fund? ....................................... 8
Investment Restrictions .......................................... 11
Officers and Directors ........................................... 12
Investment Management
and Other Services .............................................. 16
How Does the Fund Buy
Securities for Its Portfolio? ................................... 17
How Do I Buy, Sell and Exchange Shares? .......................... 18
How Are Fund Shares Valued? ...................................... 21
Additional Information on
Distributions and Taxes ......................................... 22
The Fund's Underwriter ........................................... 28
How Does the Fund Measure Performance? ........................... 29
Miscellaneous Information ........................................ 32
Financial Statements ............................................. 33
Useful Terms and Definitions ..................................... 33
Appendix
Description of Ratings .......................................... 34
- ------------------------------------------------------------------------------
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and
Definitions."
- ------------------------------------------------------------------------------
The fund is a diversified, open-end management investment company. The
Prospectus, dated November 1, 1998, which we may amend from time to time,
contains the basic information you should know before investing in the fund.
For a free copy, call 1-800/DIAL BEN.
This SAI describes the fund's Class I and Class II shares. The fund currently
offers another share class with a different sales charge and expense
structure, which affects performance. To receive more information about the
fund's other share class, contact your investment representative or call
1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN
MORE DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE
YOU WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF
THE FUND, AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
- ------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
- ------------------------------------------------------------------------------
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- ------------------------------------------------------------------------------
HOW DOES THE FUND INVEST ITS ASSETS?
WHAT ARE THE FUND'S GOALS?
The principal investment goal of the fund is capital appreciation. The fund's
secondary goal is to provide current income return through the receipt of
dividends or interest from its investments. These goals are fundamental,
which means that they may not be changed without shareholder approval.
The following gives more detailed information about the fund's investment
policies and the types of securities that it may buy. Please read this
information together with the section "How Does the Fund Invest Its Assets?"
in the Prospectus.
MORE INFORMATION ABOUT
THE KINDS OF SECURITIES THE FUND BUYS
EQUITY SECURITIES. The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner
of an equity security may participate in a company's success through the
receipt of dividends which are distributions of earnings by the company to
its owners. Equity security owners may also participate in a company's
success or lack of success through increases or decreases in the value of the
company's shares as traded in the public trading market for such shares.
Equity securities generally take the form of common stock or preferred stock.
Preferred stockholders typically receive greater dividends but may receive
less appreciation than common stockholders and may have greater voting rights
as well. Equity securities may also include convertible securities.
DEBT SECURITIES. A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain period of time. A company typically meets its payment
obligations associated with its outstanding debt securities before it
declares and pays any dividends to holders of its equity securities. Bonds,
notes, debentures and commercial paper differ in the length of the issuer's
payment schedule, with bonds carrying the longest repayment schedule and
commercial paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
these securities generally declines. These changes in market value will be
reflected in the fund's Net Asset Value.
REPURCHASE AGREEMENTS. Repurchase agreements are contracts under which the
buyer of a security simultaneously commits to resell the security to the
seller at an agreed upon price and date. Under a repurchase agreement, the
seller is required to maintain the value of the securities subject to the
repurchase agreement at no less than the repurchase price. 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 seller, including possible delays
or restrictions upon a fund's ability to dispose of the underlying
securities. The funds will enter into repurchase agreements only with parties
who meet creditworthiness standards approved by the fund's board, i.e., banks
or broker-dealers that have been determined by the manager to present no
serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
LOANS OF PORTFOLIO SECURITIES. The fund may lend to banks and broker-dealers
portfolio securities with an aggregate market value of up to 10% 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. The fund retains all or a
portion of the interest received on investment of the cash collateral or
receives a fee from the borrower. The fund may terminate the loans at any
time and obtain the return of the securities loaned within five business
days. The 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 in recovery or even loss of rights in collateral should the borrower
fail.
FOREIGN SECURITIES. The fund may buy securities of foreign issuers directly
in foreign markets so long as, in the manager's judgment, an established
public trading market exists (that is, there are a sufficient number of
shares traded regularly relative to the number of shares to be purchased by
the fund). Securities acquired by the fund outside the U.S. that are publicly
traded in the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered by the fund to be illiquid assets so
long as the fund buys and holds the securities with the intention of
reselling the securities in the foreign trading market, the fund reasonably
believes it can readily dispose of the securities for cash in the U.S. or
foreign market, and current market quotations are readily available. The fund
will not buy securities of foreign issuers outside of the U.S. under
circumstances where, at the time of acquisition, the fund has reason to
believe that it could not resell the securities in a public trading market.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.
The fund does not presently intend to buy securities of issuers in developing
nations.
DEPOSITARY RECEIPTS. Many securities of foreign issuers are represented by
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
and Global Depositary Receipts ("GDRs") (collectively "Depositary Receipts").
ADRs evidence ownership of, and represent the right to receive, securities of
foreign issuers deposited in a domestic bank or trust company or a foreign
correspondent bank. EDRs and GDRs are typically issued by foreign banks or
trust companies, although they also may be issued by U.S. banks or trust
companies, and evidence ownership of underlying securities issued by either a
foreign or a U.S. corporation. Generally, Depositary Receipts in registered
form are designed for use in the U.S. securities market and Depositary
Receipts in bearer form are designed for use in securities markets outside
the U.S.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. While ADRs do not eliminate all the risk
associated with foreign investments, by investing in ADRs rather than
directly in the stock of foreign issuers, the fund will avoid currency risks
during the settlement period for either purchases or sales. In general, there
is a large, liquid market in the U.S. for ADRs quoted on a national
securities exchange or on NASDAQ. The information available for ADRs is
subject to the accounting, auditing and financial reporting standards of the
U.S. market or exchange on which they are traded, which standards are more
uniform and more exacting than those to which many foreign issuers may be
subject. EDRs and GDRs may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted.
Depositary Receipts may be issued under sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of Depositary Receipts. In unsponsored programs, the
issuer may not be directly involved in the creation of the program. Although
regulatory requirements with respect to sponsored and unsponsored programs
are generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a
sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs and there may
not be a correlation between this information and the market value of the
Depositary Receipts.
CONVERTIBLE SECURITIES. A convertible security is generally a debt obligation
or preferred stock that may be converted within a specified period of time
into a certain amount of common stock of the same or a different issuer. A
convertible security provides a fixed-income stream and the opportunity,
through its conversion feature, to participate in the capital appreciation
resulting from a market price advance in its underlying common stock. As with
a straight fixed-income security, a convertible security tends to increase in
market value when interest rates decline and decrease in value when interest
rates rise. Like a common stock, the value of a convertible security also
tends to increase as the market value of the underlying stock rises, and it
tends to decrease as the market value of the underlying stock declines.
Because its value can be influenced by both interest rate and market
movements, a convertible security is not as sensitive to interest rates as a
similar fixed-income security, nor is it as sensitive to changes in share
price as its underlying stock.
A convertible security is usually issued either by an operating company or by
an investment bank. When issued by an operating company, a convertible
security tends to be senior to common stock, but subordinate to other types
of fixed-income securities issued by that company. When a convertible
security issued by an operating company is "converted," the operating company
often issues new stock to the holder of the convertible security but, if the
parity price of the convertible security is less than the call price, the
operating company may pay out cash instead of common stock. If the
convertible security is issued by an investment bank, the security is an
obligation of and is convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer. In addition, a convertible security
may be subject to redemption by the issuer, but only after a specified date
and under circumstances established at the time the security is issued.
While the fund uses the same criteria to rate a convertible debt security
that it uses to rate a more conventional debt security, a convertible
preferred stock is treated like a preferred stock for the fund's financial
reporting, credit rating, and investment limitation purposes. A preferred
stock is subordinated to all debt obligations in the event of insolvency, and
an issuer's failure to make a dividend payment is generally not an event of
default entitling the preferred shareholder to take action. A preferred stock
generally has no maturity date, so that its market value is dependent on the
issuer's business prospects for an indefinite period of time. In addition,
distributions from preferred stock are dividends, rather than interest
payments, and are usually treated as such for corporate tax purposes.
ENHANCED CONVERTIBLE SECURITIES. The fund may invest in convertible preferred
stocks that offer enhanced yield features, such as Preferred Equity
Redemption Cumulative Stocks ("PERCS"), which provide an investor, such as
the fund, with the opportunity to earn higher dividend income than is
available on a company's common stock. PERCS are preferred stocks that
generally feature a mandatory conversion date, as well as a capital
appreciation limit which is usually expressed in terms of a stated price.
Most PERCS expire three years from the date of issue, at which time they are
convertible into common stock of the issuer. PERCS are generally not
convertible into cash at maturity. Under a typical arrangement, after three
years PERCS convert into one share of the issuer's common stock if the
issuer's common stock is trading at a price below that set by the capital
appreciation limit, and into less than one full share if the issuer's common
stock is trading at a price above that set by the capital appreciation limit.
The amount of that fractional share of common stock is determined by dividing
the price set by the capital appreciation limit by the market price of the
issuer's common stock. PERCS can be called at any time prior to maturity, and
hence do not provide call protection. If called early, however, the issuer
must pay a call premium over the market price to the investor. This call
premium declines at a preset rate daily, up to the maturity date.
The fund may also invest in other enhanced convertible securities. These
include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities), and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all have the
following features: they are issued by the company, the common stock of which
will be received in the event the convertible preferred stock is converted;
unlike PERCS they do not have a capital appreciation limit; they seek to
provide the investor with high current income with some prospect of future
capital appreciation; they are typically issued with three or four-year
maturities; they typically have some built-in call protection for the first
two to three years; investors have the right to convert them into shares of
common stock at a preset conversion ratio or hold them until maturity, and
upon maturity, they will automatically convert to either cash or a specified
number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked
as senior or subordinated debt in the issuer's corporate structure according
to the terms of the debt indenture. There may be additional types of
convertible securities not specifically referred to herein which may be
similar to those described above in which the fund may invest, consistent
with its goals and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the fund. The fund may have difficulty disposing
of such securities because there may be a thin trading market for a
particular security at any given time. Reduced liquidity may have an adverse
impact on market price and the fund's ability to dispose of particular
securities, when necessary, to meet the fund's liquidity needs or in response
to a specific economic event, such as the deterioration in the
creditworthiness of an issuer. Reduced liquidity in the secondary market for
certain securities may also make it more difficult for the fund to obtain
market quotations based on actual trades for purposes of valuing the fund's
portfolio. The fund, however, intends to buy liquid securities, though there
can be no assurances that this will be achieved.
OPTIONS, FUTURES, AND OPTIONS
ON FINANCIAL FUTURES
CALL AND PUT OPTIONS. The fund may write (sell) covered put and call options
and buy put and call options on securities listed on a national securities
exchange and in the over-the-counter ("OTC") market. Additionally, the fund
may "close out" options it has entered into.
A call option gives the option holder the right to buy the underlying
security from the option writer at the option exercise price at any time
prior to the expiration of the option. A put option gives the option holder
the right to sell the underlying security to the option writer at the option
exercise price at any time prior to the expiration of the option.
A call option written by the fund is "covered" if the fund owns the
underlying security that is subject to the call or has an absolute and
immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated
account by its custodian bank) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the fund
holds a call on the same security and in the same principal amount as the
call written where the exercise price of the call held (a) is equal to or
less than the exercise price of the call written or (b) is greater than the
exercise price of the call written if the difference in exercise prices is
maintained by the fund in cash and high grade debt securities in a segregated
account with its custodian bank. The premium paid by the purchaser of an
option will reflect, among other things, the relationship of the exercise
price to the market price and volatility of the underlying security, the
remaining term of the option, supply and demand and interest rates.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the
case of a put option, since the writer may be assigned an exercise notice at
any time prior to the termination of the obligation. Whether or not an option
expires unexercised, the writer retains the amount of the premium. This
amount may, in the case of a covered call option, be offset by a decline in
the market value of the underlying security during the option period. If a
call option is exercised, the writer experiences a profit or loss from the
sale of the underlying security. If a put option is exercised, the writer
must fulfill the obligation to buy the underlying security at the exercise
price, which will usually exceed the market value of the underlying security
at that time.
If the writer of an option wants to terminate its obligation, the writer may
effect a "closing purchase transaction" by buying an option of the same
series as the option previously written. The effect of the purchase is that
the clearing corporation will cancel the writer's position. However, a writer
may not effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, the holder of an option may liquidate its
position by effecting a "closing sale transaction" by selling an option of
the same series as the option previously purchased. There is no guarantee
that either a closing purchase or a closing sale transaction may be made at
the time desired by the fund.
Effecting a closing transaction in the case of a written call option allows a
fund to write another call option on the underlying security with a different
exercise price, expiration date or both. In the case of a written put option,
a closing transaction allows a fund to write another covered put option.
Effecting a closing transaction also allows the cash or proceeds from the
sale of any securities subject to the option to be used for other fund
investments. If the fund wants to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or at the same time as the sale of the security.
The fund will realize a profit from a closing transaction if the cost of the
transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option. The fund will realize a
loss from a closing transaction if the cost of the transaction is more than
the premium received from writing the option or is less than the premium paid
to buy the option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying
security, any loss resulting from the closing transaction of a written call
option is likely to be offset in whole or in part by appreciation of the
underlying security owned by the fund.
The fund may buy call options on securities that it intends to buy in order
to limit the risk of a substantial increase in the market price of the
security before the purchase is effected. The fund may also buy call options
on securities held in its portfolio and on which it has written call options.
A call option gives the holder the right to buy the underlying securities
from the option writer at a stated exercise price. Prior to its expiration, a
call option may be sold in a closing sale transaction. Profit or loss from
such a sale will depend on whether the amount received is more or less than
the premium paid for the call option (including transaction costs).
A put option gives the purchaser of the option the right to sell, and the
writer the obligation to buy, the underlying security at the exercise price
during the option period. The option may be exercised at any time before its
expiration date. The operation of put options in other respects, including
their related risks and rewards, is substantially identical to that of call
options.
The fund may write (sell) put options only on a covered basis, which means
that the fund maintains in a segregated account cash, U.S. government
securities or other liquid, high-grade debt securities in an amount not less
than the exercise price at all times while the put option is outstanding.
(The rules of the clearing corporation currently require that such assets be
deposited in escrow to secure payment of the exercise price.) The fund may
generally write covered put options in circumstances where the manager wants
to buy the underlying security for the fund's portfolio at a price lower than
the current market price of the security. In such event, the fund may write a
put option at an exercise price that, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the fund may
also receive interest on debt securities or currencies maintained to cover
the exercise price of the option, this technique could be used to enhance
current return during periods of market uncertainty. The risk in this
transaction is that the market price of the underlying security would decline
below the exercise price less the premiums received.
The fund may buy put options. As the holder of a put option, the fund has the
right to sell the underlying security at the exercise price at any time
during the option period. The fund may enter into closing sale transactions
with respect to such options, exercise them or permit them to expire.
The fund may buy a put option on an underlying security ("a protective put")
owned by the fund as a hedging technique in order to protect against an
anticipated decline in the value of the security. Such hedge protection is
provided only during the life of the put option when the fund, as the holder
of the put option, is able to sell the underlying security at the put
exercise price, regardless of any decline in the underlying security's market
price or currency's exchange value. For example, a put option may be
purchased in order to protect unrealized appreciation of a security when the
manager finds it desirable to continue to hold the security because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any short-term capital gain that may be available for
distribution when the security is eventually sold.
The fund may also buy put options at a time when the fund does not own the
underlying security. If the fund buys a security it does not own, the fund
seeks to benefit from a decline in the market price of the underlying
security. If the put option is not sold when it has remaining value, and if
the market price of the underlying security remains equal to or greater than
the exercise price during the life of the put option, the fund will lose its
entire investment in the put option. In order for the purchase of a put
option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale
transaction.
OVER-THE-COUNTER ("OTC") OPTIONS. The fund may write covered put and call
options and buy put and call options that trade in the OTC market to the same
extent that it may engage in exchange traded options. OTC options differ from
exchange traded options in certain material respects.
OTC options are arranged directly with dealers and not with a clearing
corporation. Thus, there is a risk of non-performance by the dealer. Because
there is no exchange, pricing is typically done based on information from
market makers. OTC options are available for a greater variety of securities
and in a wider range of expiration dates and exercise prices, however, than
exchange traded options and the writer of an OTC option is paid the premium
in advance by the dealer.
There can be no assurance that a continuous liquid secondary market will
exist for any particular OTC option at any specific time. The fund may be
able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer
that issued it. The fund may suffer a loss if it is not able to exercise or
sell its position on a timely basis. When the fund writes an OTC option, it
generally can close out that option prior to its expiration only by entering
into a closing purchase transaction with the dealer with which the fund
originally wrote the option.
The fund understands the current position of the staff of the SEC to be that
purchased OTC options are illiquid securities and that the assets used to
cover the sale of an OTC option are considered illiquid. The fund and the
manager disagree with this position. Nevertheless, pending a change in the
staff's position, the fund will treat OTC options and "cover" assets as
subject to the fund's limitation on illiquid securities.
OPTIONS ON STOCK INDICES. The fund may also buy call and put options on stock
indices in order to hedge against the risk of market or industry-wide stock
price fluctuations. Call and put options on stock indices are similar to
options on securities except that, rather than the right to buy or sell stock
at a specified price, options on a stock index give the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level
of the underlying stock index is greater (or less, in the case of puts) than
the exercise price of the option. This amount of cash is equal to the
difference between the closing price of the index and the exercise price of
the option expressed in dollars multiplied by a specified number. Thus,
unlike stock options, all settlements are in cash, and gain or loss depends
on the price movements of the underlying index rather than the price
movements of an individual stock.
When the fund writes an option on a stock index, the fund will establish a
segregated account containing cash or high quality fixed-income securities
with its custodian bank in an amount at least equal to the market value of
the underlying stock index. The fund will maintain the account while the
option is open or it will otherwise cover the transaction.
FUTURES CONTRACTS. The fund may enter into contracts to buy or sell futures
contracts based upon financial indices ("financial futures"). Financial
futures contracts are commodity contracts that obligate the long or short
holder to take or make delivery of a specified quantity of a financial
instrument, such as a security, or the cash value of a securities index
during a specified future period at a specified price. A "sale" of a futures
contract means the acquisition of a contractual obligation to deliver the
securities called for by the contract at a specified price on a specified
date. A "purchase" of a futures contract means the acquisition of a
contractual obligation to acquire the securities called for by the contract
at a specified price on a specified date. Futures contracts have been
designed by exchanges that have been designated "contracts markets" by the
Commodity Futures Trading Commission and must be executed through a futures
commission merchant, or brokerage firm, that is a member of the relevant
contract market.
At the same time a futures contract is purchased or sold, the fund must
allocate cash or securities as a deposit payment ("initial deposit"). Daily
thereafter, the futures contract is valued and the payment of "variation
margin" may be required since each day the fund would provide or receive cash
that reflects any decline or increase in the contract's value.
Although financial futures contracts by their terms call for the actual
delivery or acquisition of securities, or the cash value of the index, in
most cases the contractual obligation is fulfilled before the date of the
contract without having to make or take delivery of the securities or cash.
The offsetting of a contractual obligation is accomplished by buying (or
selling, as the case may be) on a commodities exchange an identical financial
futures contract calling for delivery in the same month. This transaction,
which is effected through a member of an exchange, cancels the obligation to
make or take delivery of the securities or cash. Since all transactions in
the futures market are made, offset or fulfilled through a clearinghouse
associated with the exchange on which the contracts are traded, the fund will
incur brokerage fees when it buys or sells financial futures.
The fund will not engage in transactions in futures contracts or related
options for speculation but only as a hedge against changes resulting from
market conditions in the values of its securities or securities that it
intends to buy. The fund will not enter into any stock index or financial
futures contract or related option if, immediately thereafter, more than
one-third of the fund's total assets would be represented by futures
contracts or related options. In addition, the fund may not buy or sell
futures contracts or buy or sell related options, if immediately thereafter,
the sum of the amount of initial deposits on its existing financial futures
and premiums paid on options on financial futures contracts would exceed 5%
of the market value of the fund's total assets. When the fund buys futures
contracts or related call options, money market instruments equal to the
market value of the futures contract or related option will be deposited in a
segregated account with the custodian bank to collateralize such long
positions.
The purpose of the acquisition or sale of a futures contract is to attempt to
protect the fund from fluctuations in price of portfolio securities without
actually buying or selling the underlying security.
To the extent the fund enters into a futures contract, it will maintain with
its custodian bank, to the extent required by the rules of the SEC, assets in
a segregated account to cover its obligations with respect to such contract.
The segregated account will consist of cash, cash equivalents or high quality
debt securities from its portfolio in an amount equal to the difference
between the fluctuating market value of such futures contract and the
aggregate value of the initial and variation margin payments made by the fund
with respect to such futures contracts.
STOCK AND BOND INDEX FUTURES AND
OPTIONS ON THESE FUTURES
The fund may buy and sell stock index futures contracts and options on stock
index futures contracts.
STOCK INDEX FUTURES. A stock index futures contract obligates the seller to
deliver (and the buyer to take) an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at
the close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index
is made.
The fund may sell stock index futures contracts in anticipation of or during
a market decline to attempt to offset the decrease in market value of its
equity securities that might otherwise result. When the fund is not fully
invested in stocks and anticipates a significant market advance, it may buy
stock index futures in order to gain rapid market exposure that may in part
or entirely offset increases in the cost of common stocks that it intends to
buy.
OPTIONS ON STOCK INDEX FUTURES. The fund may buy and sell call and put
options on stock index futures to hedge against risks of marketside price
movements. The need to hedge against these risks will depend on the extent of
diversification of the fund's common stock portfolio and the sensitivity of
such investments to factors influencing the stock market as a whole.
Call and put options on stock index futures are similar to options on
securities except that, rather than the right to buy or sell stock at a
specified price, options on stock index futures give the holder the right to
receive cash. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised on the last trading day before the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the
closing price of the futures contract on the expiration date.
BOND INDEX FUTURES AND RELATED OPTIONS. The fund may buy and sell futures
contracts based on an index of debt securities and options on such futures
contracts to the extent they currently exist and, in the future, may be
developed. The fund reserves the right to conduct futures and options
transactions based on an index that may be developed in the future to
correlate with price movements in certain categories of debt securities. The
fund's investment strategy in employing futures contracts based on an index
of debt securities will be similar to that used by it in other financial
futures transactions.
The fund may also buy and write put and call options on bond index futures
and enter into closing transactions with respect to such options.
FUTURE DEVELOPMENTS. The fund may take advantage of opportunities in the area
of options and futures contracts and any other derivative investments that
are not presently contemplated for use by the fund or that are not currently
available but may be developed, to the extent such opportunities are both
consistent with the fund's investment goals and legally permissible for the
fund.
Options, futures, and options on futures are generally considered derivative
securities. The fund's investments in these derivative securities will be for
portfolio hedging purposes in an effort to stabilize principal fluctuations.
The fund is not obligated to hedge its investment positions, but may do so
when deemed prudent and consistent with the fund's goals and policies.
WHAT ARE THE RISKS
OF INVESTING IN THE FUND?
DERIVATIVE SECURITIES. The fund's ability to hedge effectively all or a
portion of its securities through transactions in options on stock indexes,
stock index futures and related options depends on the degree to which price
movements in the underlying index or underlying securities correlate with
price movements in the relevant portion of the fund's portfolio. Inasmuch as
these securities will not duplicate the components of any index or underlying
securities, the correlation will not be perfect. Consequently, the fund bears
the risk that the prices of the securities being hedged will not move in the
same amount as the hedging instrument. It is also possible that there may be
a negative correlation between the index or other securities underlying the
hedging instrument and the hedged securities that would result in a loss on
both the securities and the hedging instrument. Accordingly, successful use
by the fund of options on stock indexes, stock index futures, financial
futures, and related options will be subject to the manager's ability to
predict correctly movements in the direction of the securities markets
generally or of a particular segment. This requires different skills and
techniques than predicting changes in the price of individual stocks.
Positions in stock index options, stock index futures and related options may
be closed out only on an exchange that provides a secondary market. There can
be no assurance that a liquid secondary market will exist for any particular
stock index option or futures contract or related option at any specific
time. Thus, it may not be possible to close an option or futures position.
The inability to close options or futures positions could have an adverse
impact on the fund's ability to effectively hedge its securities. The fund
will enter into an option or futures position only if there appears to be a
liquid secondary market for such options or futures.
There can be no assurance that a continuous liquid secondary market will
exist for any particular OTC option at any specific time. Consequently, the
fund may be able to realize the value of an OTC option it has purchased only
by exercising it or entering into a closing sale transaction with the dealer
that issued it. Similarly, when the fund writes an OTC option, it generally
can close out that option prior to its expiration only by entering into a
closing purchase transaction with the dealer to whom the fund originally
wrote it. If a covered call option writer cannot effect a closing
transaction, it cannot sell the underlying security until the option expires
or the option is exercised. Therefore, a covered call option writer of an OTC
option may not be able to sell an underlying security even though it might
otherwise be advantageous to do so. Likewise, a secured put writer of an OTC
option may be unable to sell the securities pledged to secure the put for
other investment purposes while it is obligated as a put writer. Similarly, a
buyer of such put or call option might also find it difficult to terminate
its position on a timely basis in the absence of a secondary market.
The CFTC and the various exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position
that any person may hold or control in a particular futures contract. Trading
limits are imposed on the maximum number of contracts that any person may
trade on a particular trading day. An exchange may order the liquidation of
positions found to be in violation of these limits and it may impose other
sanctions or restrictions. The fund does not believe that these trading and
positions limits will have an adverse impact on the fund's strategies for
hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts through offsetting
transactions that could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced, thus producing distortion.
Third, from the point of view of speculators, the margin deposit requirements
in the futures market are less onerous than margin requirements in the
securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility
of distortion, a correct forecast of general interest rate trends by the
manager may still not result in a successful transaction.
Although the fund believes that use of futures contracts will benefit the
fund, if the manager's judgment about the general direction of interest rates
is incorrect, the fund's overall performance would be poorer than if it had
not entered into any futures contract. For example, if the fund has hedged
against the possibility of an increase in interest rates that would adversely
affect the price of bonds held in its portfolio and interest rates decrease
instead, the fund will lose part or all of the benefit of the increased value
of its bonds that it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the fund has
insufficient cash, it may have to sell securities from its portfolio to meet
daily variation margin requirements. Such sales may be, but will not
necessarily be, at increased prices which reflect the rising market. The fund
may have to sell securities at a time when it may be disadvantageous to do so.
The fund's sale of futures contracts and buying put options on futures will
be solely to protect its investments against declines in value and, to the
extent consistent therewith, to accommodate cash flows. The fund expects that
in the normal course it will buy securities upon termination of long futures
contracts and long call options on future contracts, but under unusual market
conditions it may terminate any of such positions without correspondingly
buying securities.
To the extent that the fund does invest in options and futures, it may be
limited by the requirements of the Code for qualification as a regulated
investment company and such investments may reduce the portion of the fund's
dividends that are eligible for the corporate dividends-received deduction.
These transactions are also subject to certain distributions to shareholders.
FOREIGN SECURITIES. You should consider carefully the substantial risks
involved in securities of companies of foreign nations, which are in addition
to the usual risks inherent in domestic investments.
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. Foreign markets
have substantially less volume than the NYSE, 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. In many foreign countries there is less government supervision and
regulation of stock exchanges, brokers, and listed companies than in the U.S.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political, and economic stability; (ii) 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; (iii) certain national policies which may restrict
the fund's investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interests; (iv) foreign
taxation; (v) the absence of developed legal structures governing private or
foreign investment or allowing for judicial redress for injury to private
property; (vi) the absence, until recently in certain Eastern European
countries, of a capital market structure or market-oriented economy; and
(vii) the possibility that recent favorable economic developments in Eastern
Europe may be slowed or reversed by unanticipated political or social events
in such countries.
In addition, many countries in which the fund 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.
Emerging markets involve additional significant risks, including political
and social uncertainty (for example, regional conflicts and risk of war),
currency exchange rate volatility, pervasiveness of corruption and crime,
delays in settling portfolio transactions, and risk of loss arising out of
the system of share registration and custody.
The fund's management endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when the 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. Also, some countries may adopt policies that would prevent the
fund from transferring cash out of the country or withhold portions of
interest and dividends at the source. There is the possibility of cessation
of trading on national exchanges, expropriation, nationalization, or
confiscatory 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), default in foreign
government securities, political or social instability, or diplomatic
developments that could affect investments in securities of issuers in
foreign nations.
The fund may be affected either favorably or unfavorably 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 fund may invest may also have fixed
or managed currencies that are not free-floating against the U.S. dollar.
Further, certain currencies may not be internationally traded.
Certain of these currencies have experienced a steady devaluation relative to
the U.S. dollar. Any devaluations in the currencies in which the fund's
portfolio securities are denominated may have a detrimental impact on the
fund. Through the fund's 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 fund's 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 Board considers at least annually the likelihood of the imposition by any
foreign government of exchange control restrictions which would affect the
liquidity of the fund's 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 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
manager, any losses resulting from the holding of the fund's 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's
appraisal of the risks will always be correct or that such exchange control
restrictions or political acts of foreign governments might not occur.
LOWER-RATED SECURITIES. Although they may offer higher yields than do higher
rated securities, low rated and unrated debt securities generally involve
greater volatility of price and risk to principal and income, including the
possibility of default by, or bankruptcy of, 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 a 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 a 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 a 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, a fund
may incur additional expenses to seek recovery.
INVESTMENT RESTRICTIONS
The fund has adopted the following restrictions as fundamental policies.
These restrictions may not be changed without the approval of a majority of
the outstanding voting securities of the fund. Under the 1940 Act, this means
the approval of (i) more than 50% of the outstanding shares of the fund or
(ii) 67% or more of the shares of the fund present at a shareholder meeting
if more than 50% of the outstanding shares of the fund are represented at the
meeting in person or by proxy, whichever is less. The fund MAY NOT:
1. Purchase the securities of any one issuer (other than obligations of the
U.S.) if immediately thereafter and as a result of the purchase, the fund
would (a) have invested more than 5% of the value of the total assets in the
securities of the issuer, or (b) hold more than 10% of any or all classes of
the securities of any one issuer;
2. Make loans to other persons, except by the purchase of bonds, debentures
or similar obligations which are publicly distributed or of a character
usually acquired by institutional investors or through loans of the fund's
portfolio securities, or to the extent the entry into a repurchase agreement
may be deemed a loan;
3. Borrow money, except for temporary or emergency (but not investment)
purposes, and then only from banks and only in an amount up to 5% of the
value of the assets;
4. Invest more than 25% of the fund's assets (at the time of the most recent
investment) in any single industry;
5. Underwrite securities of other issuers, or acquire securities which, at
the time of the acquisition, could be disposed of publicly by the fund only
after registration under the Securities Act of 1933;
6. Invest in securities for the purpose of exercising management or control
of the issuer;
7. Maintain a margin account with a securities dealer or invest in
commodities or commodity contracts;
8. Effect short sales, unless at the time the fund owns securities
equivalent in kind and amount to those sold. The fund has not in the past,
nor does it currently intend to employ this investment technique;
9. Invest more than 5% of the fund's total assets in companies which have a
record of less than three years continuous operation, including the
operations of any predecessor companies;
10. Invest directly in real estate (although the fund may invest in real
estate investment trusts) or in the securities of other open-end investment
companies, except: (a) where there is no commission other than the customary
brokerage commission; except (b) that securities of another open-end
investment company may be acquired pursuant to a plan of reorganization,
merger, consolidation or acquisition; and (c) except to the extent the fund
invests its uninvested daily cash balances in shares of Franklin Money Fund
and other money market funds in the Franklin Group of Funds(R) provided i) its
purchases and redemptions of such money market fund shares may not be subject
to any purchase or redemption fees, ii) its investments may not be subject to
duplication of management fees, nor to any charge related to the expense of
distributing the fund's shares (as determined under Rule 12b-1, as amended
under the federal securities laws) and iii) aggregate investments by the fund
in any such money market fund do not exceed (A) the greater of (1) 5% of the
fund's total net assets or (2) $2.5 million, or (B) more than 3% of the
outstanding shares of any such money market fund; or
11. Purchase or retain in the fund's portfolio any security if any officer,
director or security holder of the issuer is at the same time an officer,
director or employee of the fund or of the manager and such person owns
beneficially more than 1/2 of 1% of the securities, and if all such persons
owning more than 1/2 of 1% own more than 5% of the outstanding securities of
the issuer.
In addition to these fundamental policies, it is the present policy of the
fund (which may be changed without shareholder approval) not to pledge,
mortgage or hypothecate the fund's assets as security for loans, nor to
engage in joint or joint and several trading accounts in securities (except
with respect to short-term investments of cash pending investment into
portfolio securities of the type discussed in the Prospectus), except that an
order to purchase or sell may be combined with orders from other persons to
obtain lower brokerage commissions.
Finally, the fund does not currently expect to invest in Franklin money
market funds, although the fund is legally authorized to do so subject to the
limitations set forth above.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the fund, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. In this case, the
fund intends to dispose of the investment 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.
OFFICERS AND DIRECTORS
The Board has the responsibility for the overall management of the fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the fund who are responsible for
administering the fund's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the fund under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND OFFICES PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS WITH THE FUND DURING THE PAST FIVE YEARS
- ------------------------------------------------------------------------------
Frank H. Abbott, III (77) Director
1045 Sansome Street
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold
Mines Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (66) Director
191 Clapboard Ridge Road
Greenwich, CT 06830
Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods (a meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
S. Joseph Fortunato (66) Director
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee,
as the case may be, of 51 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, General Host Corporation
(nursery and craft centers).
* Charles B. Johnson (65) Chairman of
777 Mariners Island Blvd. the Board
San Mateo, CA 94404 and Director
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor
Services, Inc. and Franklin Templeton Services, Inc.; officer and/or director
or trustee, as the case may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 50 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, General Host Corporation
(nursery and craft centers).
* Charles E. Johnson (42) President
500 East Broward Blvd. and Director
Fort Lauderdale, FL
33394-3091
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment
Counsel, Inc.; Vice President, Franklin Advisers, 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 34 of the
investment companies in the Franklin Templeton Group of Funds.
* Rupert H. Johnson, Jr. (58) Vice President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404
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.
Frank W.T. LaHaye (69) Director
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); Chairman of the Board and Director,
Quarterdeck Corporation (software firm); Director, Digital Transmission
Systems, Inc. (wireless communications); director or trustee, as the case may
be, of 27 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Director, Fischer Imaging Corporation (medical imaging
systems) and General Partner, Peregrine Associates, which was the General
Partner of Peregrine Ventures (venture capital firm).
Gordon S. Macklin (70) Director
8212 Burning Tree Road
Bethesda, MD 20817
Director, Fund American Enterprises Holdings, Inc., MCI Communications
Corporation, MedImmune, Inc. (biotechnology), Spacehab, Inc. (aerospace
services) and Real 3D (software); director or trustee, as the case may be, of
49 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chairman, White River Corporation (financial services) and
Hambrecht and Quist Group (investment banking), and President, National
Association of Securities Dealers, Inc.
* R. Martin Wiskemann (71) Vice President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404
Senior Vice President, Portfolio Manager and Director, Franklin Advisers,
Inc.; Senior Vice President, Franklin Management, Inc.; Vice President and
Director, ILA Financial Services, Inc.; and officer and/or director or
trustee, as the case may be, of 15 of the investment companies in the
Franklin Templeton Group of Funds.
Harmon E. Burns (53) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
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) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 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 (49) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
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.
Diomedes Loo-Tam (59) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 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) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
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.
The table above shows the officers and Board members who are affiliated with
Distributors and the manager. As of June 1, 1998, nonaffiliated members of
the Board are paid $325 per month plus $300 per meeting attended. As shown
above, the nonaffiliated Board members also serve as directors or trustees of
other investment companies in the Franklin Templeton Group of Funds. They may
receive fees from these funds for their services. The fees payable to
nonaffiliated Board members by the fund are subject to reductions resulting
from fee caps limiting the amount of fees payable to Board members who serve
on other boards within the Franklin Templeton Group of Funds. The following
table provides the total fees paid to nonaffiliated Board members by the fund
and by other funds in the Franklin Templeton Group of Funds.
NUMBER OF BOARDS
TOTAL FEES IN THE FRANKLIN
TOTAL FEES RECEIVED FROM THE TEMPLETON GROUP
RECEIVED FROM FRANKLIN TEMPLETON OF FUNDS ON WHICH
NAME THE FUND*** GROUP OF FUNDS**** EACH SERVES*****
- ----------------------------------------------------------------------------
Frank H. Abbott, III .... $4,880 $165,937 27
Harris J. Ashton ........ 4,699 344,642 49
S. Joseph Fortunato ..... 4,667 361,562 51
David W. Garbellano* .... 800 91,317 N/A
Frank W.T. LaHaye ....... 4,880 141,433 27
Gordon S. Macklin** ..... 2,899 337,292 49
*Deceased, September 27, 1997.
**Appointed, November 18, 1997.
***For the fiscal year ended June 30, 1998. During the period from July 1,
1997 through May 31, 1998, fees at the rate of $200 per month plus $200 per
meeting attended were in effect.
****For the calendar year ended December 31, 1997.
*****We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the Board members are responsible. The Franklin Templeton Group of
Funds currently includes 54 registered investment companies, with
approximately 168 U.S. based funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or Board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in
the fees paid to its subsidiaries.
As of August 4, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the fund: approximately 2,873
Class I shares and 402,130 Advisor Class shares, or less than 1% and 19%,
respectively, of the total outstanding Class I and Advisor Class shares of
the fund. Many of the Board members also own shares in other funds in the
Franklin Templeton Group of Funds. Charles B. Johnson and Rupert H. Johnson,
Jr. are brothers and the father and uncle, respectively, of Charles E.
Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The fund's investment manager is
Franklin Advisers, Inc. The manager provides investment research and
portfolio management services, including the selection of securities for the
fund to buy, hold or sell and the selection of brokers through whom the
fund's portfolio transactions are executed. The manager's activities are
subject to the review and supervision of the Board to whom the manager
renders periodic reports of the fund's investment activities. The manager and
its officers, directors and employees are covered by fidelity insurance for
the protection of the fund.
The manager and its affiliates act as investment manager to numerous other
investment companies and accounts. The manager may give advice and take
action with respect to any of the other funds it manages, or for its own
account, that may differ from action taken by the manager on behalf of the
fund. Similarly, with respect to the fund, the manager is not obligated to
recommend, buy or sell, or to refrain from recommending, buying or selling
any security that the manager and access persons, as defined by the 1940 Act,
may buy or sell for its or their own account or for the accounts of any other
fund. The manager is not obligated to refrain from investing in securities
held by the fund or other funds that it manages. Of course, any transactions
for the accounts of the manager and other access persons will be made in
compliance with the fund's Code of Ethics. Please see "Miscellaneous
Information - Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, the fund pays the manager a
management fee equal to a monthly rate of 5/96 of 1% of the value of net
assets up to and including $100 million; and 1/24 of 1% of the value of net
assets over $100 million and not over $250 million; and 9/240 of 1% of the
value of net assets in excess of $250 million. The fee is computed at the
close of business on the last business day of each month. Each class pays its
proportionate share of the management fee.
For the fiscal years ended June 30, 1998, 1997 and 1996, management fees
totaling $2,894,330, $2,108,910, and $1,832,299 respectively, were paid to
the manager.
MANAGEMENT AGREEMENT. The management agreement is in effect until April 30,
1999. It may continue in effect for successive annual periods if its
continuance is specifically approved at least annually by a vote of the Board
or by a vote of the holders of a majority of the fund's outstanding voting
securities, and in either event by a majority vote of the Board members who
are not parties to the management agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting
called for that purpose. The management agreement may be terminated without
penalty at any time by the Board or by a vote of the holders of a majority of
the fund's outstanding voting securities on 30 days' written notice to the
manager, or by the manager on 30 days' written notice to the fund, and will
automatically terminate in the event of its assignment, as defined in the
1940 Act.
ADMINISTRATIVE SERVICES. Under an agreement with the manager, FT Services
provides certain administrative services and facilities for the fund. These
include preparing and maintaining books, records, and tax and financial
reports, and monitoring compliance with regulatory requirements. FT Services
is a wholly owned subsidiary of Resources.
Under its administration agreement, the manager pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the fund's average
daily net assets up to $200 million, 0.135% of average daily net assets over
$200 million up to $700 million, 0.10% of average daily net assets over $700
million up to $1.2 billion, and 0.075% of average daily net assets over $1.2
billion. During the fiscal years ended June 30, 1998 and 1997, administration
fees totaling $814,177 and $456,465, respectively, were paid to FT Services.
The fee is paid by the manager. It is not a separate expense of the fund.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the fund's shareholder servicing agent and acts as the fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. The fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the fund. The amount of reimbursements for these
services per benefit plan participant fund account per year may not exceed
the per account fee payable by the fund to Investor Services in connection
with maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
the fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITOR. PricewaterhouseCoopers LLP, 333 Market Street, San Francisco,
California 94105, is the fund's independent auditor. During the fiscal year
ended June 30, 1998, the auditor's services consisted of rendering an opinion
on the financial statements of the fund included in the fund's Annual Report
to Shareholders for the fiscal year ended June 30, 1998.
HOW DOES THE FUND
BUY SECURITIES FOR ITS PORTFOLIO?
The manager selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management
agreement and any directions that the Board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid by the
fund is negotiated between the manager and the broker executing the
transaction. The determination and evaluation of the reasonableness of the
brokerage commissions paid are based to a large degree on the professional
opinions of the persons responsible for placement and review of the
transactions. These opinions are based on the experience of these individuals
in the securities industry and information available to them about the level
of commissions being paid by other institutional investors of comparable
size. The manager will ordinarily place orders to buy and sell
over-the-counter securities on a principal rather than agency basis with a
principal market maker unless, in the opinion of the manager, a better price
and execution can otherwise be obtained. Purchases of portfolio securities
from underwriters will include a commission or concession paid by the issuer
to the underwriter, and purchases from dealers will include a spread between
the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager include, among others, supplying
information about particular companies, markets, countries, or local,
regional, national or transnational economies, statistical data, quotations
and other securities pricing information, and other information that provides
lawful and appropriate assistance to the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the fund. They must, however, be of value to the manager in carrying
out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on
the research services the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services permits the manager to supplement its
own research and analysis activities and to receive the views and information
of individuals and research staffs of other securities firms. As long as it
is lawful and appropriate to do so, the manager and its affiliates may use
this research and data in their investment advisory capacities with other
clients. If the fund's officers are satisfied that the best execution is
obtained, the sale of fund shares, as well as shares of other funds in the
Franklin Templeton Group of Funds, may also be considered a factor in the
selection of broker-dealers to execute the fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. As a means of recapturing brokerage for the
benefit of the fund, any portfolio securities tendered by the fund will be
tendered through Distributors if it is legally permissible to do so. In turn,
the next management fee payable to the manager will be reduced by the amount
of any fees received by Distributors in cash, less any costs and expenses
incurred in connection with the tender.
If purchases or sales of securities of the fund and one or more other
investment companies or clients supervised by the manager are considered at
or about the same time, transactions in these securities will be allocated
among the several investment companies and clients in a manner deemed
equitable to all by the manager, taking into account the respective sizes of
the funds and the amount of securities to be purchased or sold. In some cases
this procedure could have a detrimental effect on the price or volume of the
security so far as the fund is concerned. In other cases it is possible that
the ability to participate in volume transactions may improve execution and
reduce transaction costs to the fund.
During the fiscal years ended June 30, 1998, 1997 and 1996, the fund paid
brokerage commissions totaling $386,000, $468,666 and $455,544, respectively.
As of June 30, 1998, the fund owned securities issued by Travelers Group Inc.
valued in the aggregate at $7 million. Salomon-Smith Barney Inc., a
subsidiary of Travelers Group Inc., is a regular broker-dealer of the fund.
Except as noted, the fund did not own any securities issued by its regular
broker-dealers as of the end of the fiscal year.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The fund continuously offers its shares through Securities Dealers who have
an agreement with Distributors. Securities Dealers may at times receive the
entire sales charge. A Securities Dealer who receives 90% or more of the
sales charge may be deemed an underwriter under the Securities Act of 1933,
as amended.
Banks and financial institutions that sell shares of the fund may be required
by state law to register as Securities Dealers. Financial institutions or
their affiliated brokers may receive an agency transaction fee in the
percentages indicated in the table under "How Do I Buy Shares? - Purchase
Price of Fund Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the fund we may impose a $10 charge against your account for each returned
item.
Under agreements with certain banks in Taiwan, Republic of China, the fund's
shares are available to these banks' trust accounts without a sales charge.
The banks may charge service fees to their customers who participate in the
trusts. A portion of these service fees may be paid to Distributors or one of
its affiliates to help defray expenses of maintaining a service office in
Taiwan, including expenses related to local literature fulfillment and
communication facilities.
Class I shares of the fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
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%
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 1% on
sales of $1 million to $2 million, plus 0.80% on sales over $2 million to $3
million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on
sales over $50 million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts,
out of its own resources, to Securities Dealers who initiate and are
responsible for purchases of Class I shares by certain retirement plans
without a front-end sales charge, as discussed in the Prospectus: 1% on sales
of $500,000 to $2 million, plus 0.80% on sales over $2 million to $3 million,
plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales over
$50 million to $100 million, plus 0.15% on sales over $100 million.
Distributors may make these payments in the form of contingent advance
payments, which may be recovered from the Securities Dealer or set off
against other payments due to the dealer if shares are sold within 12 months
of the calendar month of purchase. Other conditions may apply. All terms and
conditions may be imposed by an agreement between Distributors, or one of its
affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing
efforts in the Franklin Templeton Group of Funds; a Securities Dealer's
support of, and participation in, Distributors' marketing programs; a
Securities Dealer's compensation programs for its registered representatives;
and the extent of a Securities Dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to Securities Dealers
may be made by payments from Distributors' resources, from Distributors'
retention of underwriting concessions and, in the case of funds that have
Rule 12b-1 plans, from payments to Distributors under such plans. In
addition, certain Securities Dealers may receive brokerage commissions
generated by fund portfolio transactions in accordance with the NASD's rules.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. 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.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy
Class I shares, as described in the Prospectus. At any time within 90 days
after the first investment that you want to qualify for a reduced sales
charge, you may file with the fund a signed shareholder application with the
Letter of Intent section completed. After the Letter is filed, each
additional investment will be entitled to the sales charge applicable to the
level of investment indicated on the Letter. Sales charge reductions based on
purchases in more than one Franklin Templeton Fund will be effective only
after notification to Distributors that the investment qualifies for a
discount. Your holdings in the Franklin Templeton Funds acquired more than 90
days before the Letter is filed will be counted towards completion of the
Letter, but they will not be entitled to a retroactive downward adjustment in
the sales charge. Any redemptions you make during the 13 month period, except
in the case of certain retirement plans, will be subtracted from the amount
of the purchases for purposes of determining whether the terms of the Letter
have been completed. If the Letter is not completed within the 13 month
period, there will be an upward adjustment of the sales charge, depending on
the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute
a Letter before a change in the sales charge structure of the fund, you may
complete the Letter at the lower of the new sales charge structure or the
sales charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the fund registered
in your name until you fulfill the Letter. This policy of reserving shares
does not apply to certain retirement plans. If the amount of your total
purchases, less redemptions, equals the amount specified under the Letter,
the reserved shares will be deposited to an account in your name or delivered
to you or as you direct. If the amount of your total purchases, less
redemptions, exceeds the amount specified under the Letter and is an amount
that would qualify for a further quantity discount, a retroactive price
adjustment will be made by Distributors and the Securities Dealer through
whom purchases were made pursuant to the Letter (to reflect such further
quantity discount) on purchases made within 90 days before and on those made
after filing the Letter. The resulting difference in Offering Price will be
applied to the purchase of additional shares at the Offering Price applicable
to a single purchase or the dollar amount of the total purchases. If the
amount of your total purchases, less redemptions, is less than the amount
specified under the Letter, you will remit to Distributors an amount equal to
the difference in the dollar amount of sales charge actually paid and the
amount of sales charge that would have applied to the aggregate purchases if
the total of the purchases had been made at a single time. Upon remittance,
the reserved shares held for your account will be deposited to an account in
your name or delivered to you or as you direct. If within 20 days after
written request the difference in sales charge is not paid, the redemption of
an appropriate number of reserved shares to realize the difference will be
made. In the event of a total redemption of the account before fulfillment of
the Letter, the additional sales charge due will be deducted from the
proceeds of the redemption, and the balance will be forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and
any reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve
5% of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will
be purchased at the Net Asset Value determined on the business day following
the dividend record date (sometimes known as the "ex-dividend date"). The
processing date for the reinvestment of dividends may vary and does not
affect the amount or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the fund under the exchange privilege, the fund might have to
sell portfolio securities it might otherwise hold and incur the additional
costs related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is the fund's general policy to initially invest this money in
short-term, interest-bearing money market instruments, unless it is believed
that attractive investment opportunities consistent with the fund's
investment goals exist immediately. This money will then be withdrawn from
the short-term, money market instruments and invested in portfolio securities
in as orderly a manner as is possible when attractive investment
opportunities arise.
The proceeds from the sale of shares of an investment company are generally
not available until the 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. Please see "May I Exchange
Shares for Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
Systematic Withdrawal Plan. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be
made from the redemption of an equivalent amount of shares in your account,
generally on the 25th day of the month in which a payment is scheduled. If
the 25th falls on a weekend or holiday, we will process the redemption on the
next business day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
The fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if
all shares in your account are withdrawn or if the fund receives notification
of the shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the fund
in a timely fashion. Any loss to you resulting from your dealer's failure to
do so must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the SEC. In the case
of redemption requests in excess of these amounts, the Board reserves the
right to make payments in whole or in part in securities or other assets of
the fund, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the fund. In these
circumstances, the securities distributed would be valued at the price used
to compute the fund's net assets and you may incur brokerage fees in
converting the securities to cash. The fund does not intend to redeem
illiquid securities in kind. If this happens, however, you may not be able to
recover your investment in a timely manner.
GENERAL INFORMATION
If dividend checks are returned to the fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your
dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at Net Asset Value until we receive new
instructions.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the fund nor
its affiliates will be liable for any loss caused by your failure to cash
such checks. The fund is not responsible for tracking down uncashed checks,
unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions
that maintain omnibus accounts with the fund on behalf of numerous beneficial
owners for recordkeeping operations performed with respect to such owners.
For each beneficial owner in the omnibus account, the fund may reimburse
Investor Services an amount not to exceed the per account fee that the fund
normally pays Investor Services. These financial institutions may also charge
a fee for their services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the close of the NYSE,
normally 1:00 p.m. Pacific time, each day that the NYSE is open for trading.
As of the date of this SAI, the fund is informed that the NYSE observes the
following holidays: New Year's Day, Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
For the purpose of determining the aggregate net assets of the fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System for which market quotations are readily available are valued at the
last quoted sale price of the day or, if there is no such reported sale,
within the range of the most recent quoted bid and ask prices.
Over-the-counter portfolio securities are valued within the range of the most
recent quoted bid and ask prices. Portfolio securities that are traded both
in the over-the-counter market and on a stock exchange are valued according
to the broadest and most representative market as determined by the manager.
Portfolio securities underlying actively traded call options are valued at
their market price as determined above. The current market value of any
option held by the fund is its last sale price on the relevant exchange
before the time when assets are valued. Lacking any sales that day or if the
last sale price is outside the bid and ask prices, options are valued within
the range of the current closing bid and ask prices if the valuation is
believed to fairly reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on
the foreign exchange on which it is traded or as of the close of trading on
the NYSE, if that is earlier. The value is then converted into its U.S.
dollar equivalent at the foreign exchange rate in effect at noon, New York
time, on the day the value of the foreign security is determined. If no sale
is reported at that time, the foreign security is valued within the range of
the most recent quoted bid and ask prices. Occasionally events that affect
the values of foreign securities and foreign exchange rates may occur between
the times at which they are determined and the close of the exchange and
will, therefore, not be reflected in the computation of the Net Asset Value
of each class. If events materially affecting the values of these foreign
securities occur during this period, the securities will be valued in
accordance with procedures established by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the Net Asset Value of each class 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 Net Asset Value. If events
materially affecting the values of these securities occur during this period,
the securities will be valued at their fair value as determined in good faith
by the Board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the Board. With the approval of
the Board, the fund may use a pricing service, bank or Securities Dealer to
perform any of the above described functions.
ADDITIONAL INFORMATION
ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. The fund receives income generally in
the form of dividends, interest, original issue, market and acquisition
discount, and other income derived from its investments. This income, less
expenses incurred in the operation of the fund, constitute its net investment
income from which dividends may be paid to you. Any distributions by the fund
from such income will be taxable to you as ordinary income, whether you take
them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS. The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income.
Distributions paid from long-term capital gains realized by the fund will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net short-term or long-term capital gains
realized by the fund (net of any capital loss carryovers) generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate federal excise or income taxes on
the fund.
Gains from securities sold by the fund that are held for more than one year
will be taxable at a maximum rate of 20% for individual investors in the 28%
or higher federal income tax brackets; at a maximum rate of 10% for
individual investors in the 15% federal income tax bracket. Gains from
securities sold by the fund prior to January 1, 1998, are taxable at
different rates depending on the length of time the fund held such assets.
For "qualified 5-year gains," the maximum capital gains tax rate is 18% for
individuals in the 28% or higher federal income tax brackets; 8% for
individuals in the 15% federal income tax bracket. For individuals in the 15%
bracket, qualified 5-year gains are net gains on securities held for more
than 5 years which are sold after December 31, 2000. For individuals who are
subject to tax at higher rates, qualified 5-year gains are net gains on
securities which are purchased after December 31, 2000 and are held for more
than 5 years. Taxpayers subject to tax at the higher rates may also make an
election for shares held on January 1, 2001 to recognize gain on their shares
in order to qualify such shares as qualified 5-year property.
Additional information on reporting capital gains distributions on your
personal income tax returns is available in Franklin Templeton's Tax
Information Handbook. Please call Fund Information to request a copy.
Questions concerning each investor's personal tax reporting should be
addressed to the investor's personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November or December and paid to you in January of the following
year, will be treated for tax purposes as if they had been received by you on
December 31 of the year in which they were declared. The fund will report
this income to you on your Form 1099-DIV for the year in which these
distributions were declared.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS. Most foreign exchange gains
realized on the sale of debt instruments are treated as ordinary income by
the fund. Similarly, foreign exchange losses realized by the fund on the sale
of debt instruments are generally treated as ordinary losses by the fund.
These gains when distributed will be taxable to you as ordinary dividends,
and any losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the fund's
ordinary income distributions to you, and may cause some or all of the fund's
previously distributed income to be classified as a return of capital.
The fund may be subject to foreign withholding taxes on income from certain
of its foreign securities. If more than 50% of the total assets of the fund
at the end of the fiscal year are invested in securities of foreign
corporations, the fund may elect to pass-through to you your pro rata share
of foreign taxes paid by the fund subject to certain holding period
requirements. If this election is made, you will be (i) required to include
in your gross income your pro rata share of foreign source income (including
any foreign taxes paid by the fund), and, (ii) entitled to either deduct your
share of such foreign taxes in computing your taxable income or to claim a
credit for such taxes against your U.S. income tax, subject to certain
limitations under the Code. You will be informed by the fund at the end of
each calendar year regarding the availability of any such foreign tax credits
and the amount of foreign source income (including any foreign taxes paid by
the fund). If the fund elects to pass-through to you the foreign income taxes
that it has paid, you will be informed at the end of the calendar year of the
amount of foreign taxes paid and foreign source income that must be included
on your federal income tax return. If the fund invests 50% or less of its
total assets in securities of foreign corporations, it will not be entitled
to pass-through to you your pro rata share of the foreign taxes paid by the
fund. In this case, these taxes will be taken as a deduction by the fund, and
the income reported to you will be the net amount after these deductions.
The procedures by which investors in funds that invest in foreign securities
can claim tax credits on their individual income tax returns for the foreign
taxes paid by the fund have been simplified for tax years beginning in 1998.
These provisions will allow investors who claim a credit for foreign taxes
paid of $300 or less on a single return or $600 or less on a joint return
during any year (all of which must be reported on IRS Form 1099-DIV from the
fund to the investor) to bypass the burdensome and detailed reporting
requirements on the supporting foreign tax credit schedule (Form 1116) and
report foreign taxes paid directly on page 2 of Form 1040.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The fund will inform you
of the amount and character of your distributions at the time they are paid,
and will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held fund shares for a full year, you may have designated and distributed to
you as ordinary income or capital gain a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. The fund has elected
to be treated as a regulated investment company under Subchapter M of the
Code, has qualified as such for its most recent fiscal year, and intends to
so qualify during the current fiscal year. The Board reserves the right not
to maintain the qualification of the fund as a regulated investment company
if it determines such course of action to be beneficial to you. In such case,
the fund will be subject to federal, and possibly state, corporate taxes on
its taxable income and gains, and distributions to you will be taxed as
ordinary dividend income to the extent of the fund's available earnings and
profits.
In order to qualify as a regulated investment company for tax purposes, the
fund must meet certain specific requirements, including:
o The fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the fund's total assets,
and, with respect to 50% of the fund's total assets, no investment (other
than cash and cash items, U.S. government securities and securities of
other regulated investment companies) can exceed 5% of the fund's total
assets or 10% of the outstanding voting securities of the issuer;
o The fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies; and
o The fund must distribute to its shareholders at least 90% of its
investment company taxable income (i.e., net investment income plus net
short-term capital gains) and net tax-exempt income for each of its fiscal
years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires the fund to
distribute at least 98% of its taxable ordinary income earned during the
calendar year and 98% of its capital gain net income earned during the twelve
month period ending October 31 (in addition to undistributed amounts from the
prior year) to you by December 31 of each year in order to avoid federal
excise taxes. The fund intends to declare and pay sufficient dividends in
December (or in January that are treated by you as received in December) but
does not guarantee and can give no assurances that its distributions will be
sufficient to eliminate all such taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. The tax law
requires that you recognize a gain or loss in an amount equal to the
difference between your tax basis and the amount you received in exchange for
your shares, subject to the rules described below. If you hold your shares as
a capital asset, the gain or loss that you realize will be capital gain or
loss, and will be long-term for federal income tax purposes if you have held
your shares for more than one year at the time of redemption or exchange. Any
loss incurred on the redemption or exchange of shares held for six months or
less will be treated as a long-term capital loss to the extent of any
long-term capital gains distributed to you by the fund on those shares.
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you purchase other shares
in the fund (through reinvestment of dividends or otherwise) within 30 days
before or after your share redemption. Any loss disallowed under these rules
will be added to your tax basis in the new shares you purchase.
DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for
your shares in the fund will be excluded from your tax basis in any of the
shares sold within 90 days of their purchase (for the purpose of determining
gain or loss upon the sale of such shares) if you reinvest the sales proceeds
in the fund or in another of the Franklin Templeton Funds, and the sales
charge that would otherwise apply to your reinvestment is reduced or
eliminated. The portion of the sales charge excluded from your tax basis in
the shares sold will equal the amount that the sales charge is reduced on
your reinvestment. Any portion of the sales charge excluded from your tax
basis in the shares sold will be added to the tax basis of the shares you
acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that
must be met by the fund. Investments in GNMA/FNMA securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
At the end of each calendar year, the fund will provide you with the
percentage of any dividends paid that may qualify for tax-free treatment on
your personal income tax return. You should consult with your own tax advisor
to determine the application of your state and local laws to these
distributions. Because the rules on exclusion of this income are different
for corporations, corporate shareholders should consult with their corporate
tax advisors about whether any of their distributions may be exempt from
corporate income or franchise taxes.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. As a corporate shareholder,
you should note that 36.20% of the dividends paid by the fund for the most
recent fiscal year qualified for the dividends-received deduction. You will
be permitted in some circumstances to deduct these qualified dividends,
thereby reducing the tax that you would otherwise be required to pay on these
dividends. The dividends-received deduction will be available only with
respect to dividends designated by the fund as eligible for such treatment.
Dividends so designated by the fund must be attributable to dividends earned
by the fund from U.S. corporations that were not debt-financed.
The amount that the fund may designate as eligible for the dividends-received
deduction will be reduced or eliminated if the shares on which the dividends
were earned by the fund were debt-financed or held by the fund for less than
a 46 day period during a 90 day period beginning 45 days before the
ex-dividend date of the corporate stock. Similarly, if your fund shares are
debt-financed or held by you for less than this same 46 day period, then the
dividends-received deduction may also be reduced or eliminated. Even if
designated as dividends eligible for the dividends-received deduction, all
dividends (including the deducted portion) must be included in your
alternative minimum taxable income calculation.
INVESTMENT IN COMPLEX SECURITIES. The fund's investment in options, futures
contracts and forward contracts, including transactions involving actual or
deemed short sales or foreign exchange gains or losses are subject to many
complex and special tax rules. Over-the-counter options on debt securities
and equity options, including options on stock and on narrow-based stock
indexes, will be subject to tax under section 1234 of the Code, generally
producing a long-term or short-term capital gain or loss upon exercise,
lapse, or closing out of the option or sale of the underlying stock or
security. Certain other options, futures and forward contracts entered into
by the fund are generally governed by section 1256 of the Code. These
"section 1256" positions generally include listed options on debt securities,
options on broad-based stock indexes, options on securities indexes, options
on futures contracts, regulated futures contracts and certain foreign
currency contracts and options thereon.
Absent a tax election to the contrary, each such section 1256 position held
by the fund will be marked-to-market (i.e., treated as if it were sold for
fair market value) on the last business day of the fund's fiscal year (and on
other dates as prescribed by the Code), and all gain or loss associated with
fiscal year transactions and mark-to-market positions at fiscal year end
(except certain currency gain or loss covered by section 988 of the Code)
will generally be treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss. Even though marked-to-market, gains and
losses realized on foreign currency and foreign security investments will
generally be treated as ordinary income. The effect of section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or
short-term capital losses into long-term capital losses within the fund. The
acceleration of income on section 1256 positions may require the fund to
accrue taxable income without the corresponding receipt of cash. In order to
generate cash to satisfy the distribution requirements of the Code, the fund
may be required to dispose of portfolio securities that it otherwise would
have continued to hold or to use cash flows from other sources such as the
sale of fund shares. In these ways, any or all of these rules may affect the
amount, character and timing of income distributed to you by the fund.
When the fund holds an option or contract which substantially diminishes the
fund's risk of loss with respect to another position of the fund (as might
occur in some hedging transactions), this combination of positions could be
treated as a "straddle" for tax purposes, possibly resulting in deferral of
losses, adjustments in the holding periods and conversion of short-term
capital losses into long-term capital losses. The fund may make certain tax
elections for mixed straddles (i.e., straddles comprised of at least one
section 1256 position and at least one non-section 1256 position) which may
reduce or eliminate the operation of these straddle rules.
When the fund enters into "constructive sale transactions," the fund must
recognize gain (but not loss) on any constructive sale of an appreciated
financial position in stock, a partnership interest or certain debt
instruments. The fund will generally be treated as making a constructive sale
when it: 1) enters into a short sale on the same property, 2) enters into an
offsetting notional principal contract, or 3) enters into a futures or
forward contract to deliver the same or substantially similar property. Other
transactions (including certain financial instruments called collars) will be
treated as constructive sales as provided in Treasury regulations to be
published. There are also certain exceptions that apply for transactions that
are closed before the end of the 30th day after the close of the taxable year.
Distributions paid to you by the fund of ordinary income and short-term
capital gains arising from the fund's investments, including investments in
options, forwards, and futures contracts, will be taxable to you as ordinary
income. The fund will monitor its transactions in such options and contracts
and may make certain other tax elections in order to mitigate the effect of
the above rules.
INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES. The fund is
authorized to invest in foreign currency denominated securities. Such
investments, if made, will have the following additional tax consequences:
Under the Code, gains or losses attributable to fluctuations in foreign
currency exchange rates which occur between the time the fund accrues income
(including dividends), or accrues expenses which are denominated in a foreign
currency, and the time the fund actually collects such income or pays such
expenses generally are treated as ordinary income or loss. Similarly, on the
disposition of debt securities denominated in a foreign currency and on the
disposition of certain options, futures, forward contracts, gain or loss
attributable to fluctuations in the value of foreign currency between the
date of acquisition of the security or contract and the date of its
disposition are also treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "section 988" gains or losses, may increase or
decrease the amount of the fund's net investment company taxable income,
which, in turn, will affect the amount of income to be distributed to you by
the fund.
If the fund's section 988 losses exceed the fund's other net investment
company taxable income during a taxable year, the fund generally will not be
able to make ordinary dividend distributions to you for that year, or
distributions made before the losses were realized will be recharacterized as
return of capital distributions for federal income tax purposes, rather than
as an ordinary dividend or capital gain distribution. If a distribution is
treated as a return of capital, your tax basis in your fund shares will be
reduced by a like amount (to the extent of such basis), and any excess of the
distribution over your tax basis in your fund shares will be treated as
capital gain to you.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES. The fund may
invest in shares of foreign corporation which may be classified under the
Code as passive foreign investment companies ("PFICs"). In general, a foreign
corporation is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income.
If the fund receives an "excess distribution" with respect to PFIC stock, the
fund itself may be subject to U.S. federal income tax on a portion of the
distribution, whether or not the corresponding income is distributed by the
fund to you. In general, under the PFIC rules, an excess distribution is
treated as having been realized ratably over the period during which the fund
held the PFIC shares. The fund itself will be subject to tax on the portion,
if any, of an excess distribution that is so allocated to prior fund taxable
years, and an interest factor will be added to the tax, as if the tax had
been payable in such prior taxable years. In this case, you would not be
permitted to claim a credit on your own tax return for the tax paid by the
fund. Certain distributions from a PFIC as well as gain from the sale of PFIC
shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital
gain. This may have the effect of increasing fund distributions to you that
are treated as ordinary dividends rather than long-term capital gain
dividends.
The fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, the fund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC during such period. If this
election were made, the special rules, discussed above, relating to the
taxation of excess distributions, would not apply. In addition, under another
election that involves marking-to-market the fund's PFIC shares at the end of
each taxable year (and on certain other dates as prescribed in the Code),
unrealized gains would be treated as though they were realized. The fund
would also be allowed an ordinary deduction for the excess, if any, of the
adjusted basis of its investment in the PFIC stock over its fair market value
at the end of the taxable year. This deduction would be limited to the amount
of any net mark-to-market gains previously included with respect to that
particular PFIC security. If the fund were to make this second PFIC election,
tax at the fund level under the PFIC rules would generally be eliminated.
The application of the PFIC rules may affect, among other things, the amount
of tax payable by the fund (if any), the amounts distributable to you by the
fund, the time at which these distributions must be made, and whether these
distributions will be classified as ordinary income or capital gain
distributions to you.
You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is
a PFIC, and that there is always a possibility that a foreign corporation
will become a PFIC after the fund acquires shares in that corporation. While
the fund will generally seek to avoid investing in PFIC shares to avoid the
tax consequences detailed above, there are no guarantees that it will do so
and it reserves the right to make such investments as a matter of its
fundamental investment policy.
CONVERSION TRANSACTIONS. Gains realized by a fund from transactions that are
deemed to be "conversion transactions" under the Code, and that would
otherwise produce capital gain may be recharacterized as ordinary income to
the extent that such gain does not exceed an amount defined as the
"applicable imputed income amount". A conversion transaction is any
transaction in which substantially all of the fund's expected return is
attributable to the time value of the fund's net investment in such
transaction, and any one of the following criteria are met:
1) there is an acquisition of property with a substantially contemporaneous
agreement to sell the same or substantially identical property in the
future;
2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the fund on the basis that it
would have the economic characteristics of a loan but would be taxed as
capital gain; or
4) the transaction is specified in Treasury regulations to be promulgated
in the future.
The applicable imputed income amount, which represents the deemed return on
the conversion transaction based upon the time value of money, is computed
using a yield equal to 120 percent of the applicable federal rate, reduced by
any prior recharacterizations under this provision or the provisions of
section 263(g) of the Code dealing with capitalized carrying costs.
STRIPPED PREFERRED STOCK. Occasionally, the fund may purchase "stripped
preferred stock" that is subject to special tax treatment. Stripped preferred
stock is defined as certain preferred stock issues where ownership of the
stock has been separated from the right to receive dividends that have not
yet become payable. The stock must have a fixed redemption price, must not
participate substantially in the growth of the issuer, and must be limited
and preferred as to dividends. The difference between the redemption price
and purchase price is taken into fund income over the term of the instrument
as if it were original issue discount. The amount that must be included in
each period generally depends on the original yield to maturity, adjusted for
any prepayments of principal.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT BONDS. The
fund's investments in zero coupon bonds, bonds issued or acquired at a
discount, delayed interest bonds, or bonds that provide for payment of
interest-in-kind (PIK) may cause the fund to recognize income and make
distributions to you prior to its receipt of cash payments. Zero coupon and
delayed interest bonds are normally issued at a discount and are therefore
generally subject to tax reporting as OID obligations. The fund is required
to accrue as income a portion of the discount at which these securities were
issued, and to distribute such income each year (as ordinary dividends) in
order to maintain its qualification as a regulated investment company and to
avoid income reporting and excise taxes at the fund level. PIK bonds are
subject to similar tax rules concerning the amount, character and timing of
income required to be accrued by the fund. Bonds acquired in the secondary
market for a price less than their stated redemption price, or revised issue
price in the case of a bond having OID, are said to have been acquired with
market discount. For these bonds, the fund may elect to accrue market
discount on a current basis, in which case the fund will be required to
distribute any such accrued discount. If the fund does not elect to accrue
market discount into income currently, gain recognized on sale will be
recharacterized as ordinary income instead of capital gain to the extent of
any accumulated market discount on the obligation.
DEFAULTED OBLIGATIONS. The fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not
currently receiving interest or principal payments on such obligations. In
order to generate cash to satisfy these distribution requirements, the fund
may be required to dispose of portfolio securities that it otherwise would
have continued to hold or to use cash flows from other sources such as the
sale of fund shares.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the fund's shares. The
underwriting agreement will continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of
the Board or by a vote of the holders of a majority of the fund's outstanding
voting securities, and in either event by a majority vote of the Board
members who are not parties to the underwriting agreement or interested
persons of any such party (other than as members of the Board), cast in
person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated
by either party on 90 days' written notice.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
In connection with the offering of the fund's shares, aggregate underwriting
commissions for the fiscal years ended June 30, 1998, 1997 and 1996, were
$1,563,121, $706,061 and $623,114, respectively. After allowances to dealers,
Distributors retained $155,711, $74,074 and $66,540 in net underwriting
discounts and commissions and received $9,399, $3,842 and $883 in connection
with redemptions or repurchases of shares for the respective years.
Distributors may be entitled to reimbursement under the Rule 12b-1 plan for
each class, as discussed below. Except as noted, Distributors received no
other compensation from the fund for acting as underwriter.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 plans"
that were adopted pursuant to Rule 12b-1 of the 1940 Act.
THE CLASS I PLAN. Under the Class I plan, the fund may pay up to a maximum of
0.25% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares.
In implementing the Class I plan, the Board has determined that the annual
fees payable under the plan will be equal to the sum of: (i) the amount
obtained by multiplying 0.25% by the average daily net assets represented by
Class I shares of the fund that were acquired by investors on or after May 1,
1994, the effective date of the plan ("New Assets"), and (ii) the amount
obtained by multiplying 0.15% by the average daily net assets represented by
Class I shares of the fund that were acquired before May 1, 1994 ("Old
Assets"). These fees will be paid to the current Securities Dealer of record
on the account. In addition, until such time as the maximum payment of 0.25%
is reached on a yearly basis, up to an additional 0.05% will be paid to
Distributors under the plan. The payments made to Distributors will be used
by Distributors to defray other marketing expenses that have been incurred in
accordance with the plan, such as advertising.
The fee is a Class I expense. This means that all Class I shareholders,
regardless of when they purchased their shares, will bear Rule 12b-1 expenses
at the same rate. The initial rate will be at least 0.20% (0.15% plus 0.05%)
of the average daily net assets of Class I and, as Class I shares are sold on
or after May 1, 1994, will increase over time. Thus, as the proportion of
Class I shares purchased on or after May 1, 1994, increases in relation to
outstanding Class I shares, the expenses attributable to payments under the
plan will also increase (but will not exceed 0.25% of average daily net
assets). While this is the currently anticipated calculation for fees payable
under the Class I plan, the plan permits the Board to allow the fund to pay a
full 0.25% on all assets at any time. The approval of the Board would be
required to change the calculation of the payments to be made under the Class
I plan.
The Class I plan does not permit unreimbursed expenses incurred in a
particular year to be carried over to or reimbursed in later years.
THE CLASS II PLAN. Under the Class II plan, the fund pays Distributors up to
0.75% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the
fund.
Under the Class II plan, the fund also pays an additional 0.25% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
THE CLASS I AND CLASS II PLANS. In addition to the payments that Distributors
or others are entitled to under each plan, each plan also provides that to
the extent the fund, the manager or Distributors or other parties on behalf
of the fund, the manager or Distributors make payments that are deemed to be
for the financing of any activity primarily intended to result in the sale of
shares of each class within the context of Rule 12b-1 under the 1940 Act,
then such payments shall be deemed to have been made pursuant to the plan.
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 NASD.
To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks will not be entitled to participate in the plans as a result of
applicable federal law prohibiting certain banks from engaging in the
distribution of mutual fund shares. These banking institutions, however, are
permitted to receive fees under the plans for administrative servicing or for
agency transactions. If you are a customer of a bank that is prohibited from
providing these services, you would be permitted to remain a shareholder of
the fund, and alternate means for continuing the servicing would be sought.
In this event, changes in the services provided might occur and you might no
longer be able to avail yourself of any automatic investment or other
services then being provided by the bank. It is not expected that you would
suffer any adverse financial consequences as a result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1.
The plans are renewable annually by a vote of the Board, including a majority
vote of the Board members who are not interested persons of the fund and who
have no direct or indirect financial interest in the operation of the plans,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such Board members be done by the
non-interested members of the Board. The plans and any related agreement may
be terminated at any time, without penalty, by vote of a majority of the
non-interested Board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with the manager or by
vote of a majority of the outstanding shares of the class. Distributors or
any dealer or other firm may also terminate their respective distribution or
service agreement at any time upon written notice.
The 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 non-interested members of the Board, cast in person at a meeting
called for the purpose of voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly
on the amounts and purpose of any payment made under the 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 June 30, 1998, the total amount paid by the fund
pursuant to the Class I plan was $1,070,286, which was used for the following
purposes:
CLASS I
Advertising ............................. $ 30,363
Printing and mailing of
prospectuses other than
to current shareholders ................ $127,843
Payments to underwriters ................ $ 16,496
Payments to broker-dealers .............. $895,584
For the fiscal year ended June 30, 1998, Distributors had eligible
expenditures of $244,477 for advertising, printing, and payments to
underwriters and broker-dealers pursuant to the Class II plan, of which the
fund paid Distributors $155,323 under the Class II plan.
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return quotations used by the fund are based on the
standardized methods of computing performance mandated by the SEC. If a Rule
12b-1 plan is adopted, performance figures reflect fees from the date of the
plan's implementation. An explanation of these and other methods used by the
fund to compute or express performance follows. Regardless of the method
used, past performance does not guarantee future results, and is an
indication of the return to shareholders only for the limited historical
period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum front-end sales charge
is deducted from the initial $1,000 purchase, and income dividends and
capital gain distributions are reinvested at Net Asset Value. The quotation
assumes the account was completely redeemed at the end of each period and the
deduction of all applicable charges and fees. If a change is made to the
sales charge structure, historical performance information will be restated
to reflect the maximum front-end sales charge currently in effect.
The average annual total return for Class I for the one-, five- and ten-year
periods ended June 30, 1998, was 15.38%, 18.30% and 12.67%, respectively. The
average annual total return for Class II for the one-year period ended June
30, 1998, and for the period from inception (May 1, 1995) through June 30,
1998, was 19.29% and 25.53%, respectively.
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the
initial $1,000 purchase, and income dividends and capital gain distributions
are reinvested at Net Asset Value. Cumulative total return, however, is based
on the actual return for a specified period rather than on the average return
over the periods indicated above. The cumulative total return for Class I for
the one-, five- and ten-year periods ended June 30, 1998, was 15.38%, 131.72%
and 229.59%, respectively. The cumulative total return for Class II for the
one-year period ended June 30, 1998, and for the period from inception (May
1, 1995) through June 30, 1998, was 19.29% and 107.53%, respectively.
VOLATILITY
Occasionally statistics may be used to show the fund's volatility or risk.
Measures of volatility or risk are generally used to compare the fund's Net
Asset Value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities
in which the fund invests. A beta of more than 1.00 indicates volatility
greater than the market and a beta of less than 1.00 indicates volatility
less than the market. Another measure of volatility or risk is standard
deviation. Standard deviation is used to measure variability of Net Asset
Value or total return around an average over a specified period of time. The
idea is that greater volatility means greater risk undertaken in achieving
performance.
OTHER PERFORMANCE QUOTATIONS
The fund may also quote the performance of shares without a sales charge.
Sales literature and advertising may quote a current distribution rate,
yield, cumulative total return, average annual total return and other
measures of performance as described elsewhere in this SAI with the
substitution of Net Asset Value for the public Offering Price.
Sales literature referring to the use of the fund as a potential investment
for Individual Retirement Accounts (IRAs), Business Retirement Plans, and
other tax-advantaged retirement plans may quote a total return based upon
compounding of dividends on which it is presumed no federal income tax
applies.
The fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the fund may satisfy your
investment goal, advertisements and other materials about the fund may
discuss certain measures of fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) 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).
b) 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.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed
on the NYSE.
d) Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return for the mutual fund industry and
rank individual mutual fund performance over specified time periods, assuming
reinvestment of all distributions, exclusive of any applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
h) Financial publications: THE WALL STREET JOURNAL, and BUSINESS WEEK,
CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY MAGAZINES -
provide performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
l) Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
m) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its category.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or information may also compare the fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the fund's
fixed-income investments, if any, as well as the value of its shares that are
based upon the value of such portfolio investments, can be expected to
decrease. Conversely, when interest rates decrease, the value of the fund's
shares can be expected to increase. CDs are frequently insured by an agency
of the U.S. government. An investment in the fund is not insured by any
federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the fund to calculate its figures. In
addition, there can be no assurance that the fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to
have a projected amount available in the future to fund a child's college
education. (Projected college cost estimates are based upon current costs
published by the College Board.) The Franklin Retirement Planning Guide leads
you through the steps to start a retirement savings program. Of course, an
investment in the fund cannot guarantee that these goals will be met.
The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 50 years
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 $207 billion in
assets under management for more than 6 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers
117 U.S. based open-end investment companies to the public. The fund may
identify itself by its NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the
NYSE. While many of them have similar investment goals, no two are exactly
alike. As noted in the Prospectus, shares of the fund are generally sold
through Securities Dealers. Investment representatives of such Securities
Dealers are experienced professionals who can offer advice on the type of
investment suitable to your unique goals and needs, as well as the types of
risks associated with such investment.
The fund offers three classes of shares: Franklin Equity Fund, Franklin
Equity Fund Series, Franklin Equity Fund - Class I; Franklin Equity Fund,
Franklin Equity Fund Series, Franklin Equity Fund - Class II; and Franklin
Equity Fund, Franklin Equity Fund Series, Franklin Equity Fund - Advisor
Class.
As of August 4, 1998, the principal shareholders of the fund, beneficial or
of record, were as follows:
SHARE PER-
NAME AND ADDRESS AMOUNT CENTAGE
ADVISOR CLASS
FTTC Trust Services FBO
Martin Wiskemann IRA
P.O. Box 7519
San Mateo, CA
94403-7519 ............................. 360,869.641 17%
FTTC TTEE for ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA
95741-2438 ............................. 247,934.802 12%
FT Fund Allocator
Conservative Target Fund
c/o Fund Accounting
Department
1810 Gateway 3rd Floor
San Mateo, CA
94404-2470 ............................. 147,475.889 7%
FT Fund Allocator
Moderate Target Fund
c/o Fund Accounting
Department
1810 Gateway 3rd Floor
San Mateo, CA
94404-2470 ............................. 468,101.879 23%
FT Fund Allocator
Growth Target Fund
c/o Fund Accounting
Department
1810 Gateway 3rd Floor
San Mateo, CA
94404-2470 ............................. 625,195.816 30%
From time to time, the number of fund shares held in the "street name"
accounts of various Securities Dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal
securities transactions subject to the following general restrictions and
procedures: (i) the trade must receive advance clearance from a compliance
officer and must be completed by the close of the business day following the
day clearance is granted; (ii) copies of all brokerage confirmations 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.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to
Shareholders of the fund, for the fiscal year ended June 30, 1998, including
the auditor's report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
BOARD - The Board of Directors of the fund
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The fund offers three classes of
shares, designated "Class I," "Class II," and "Advisor Class." The three
classes have proportionate interests in the fund's portfolio. They differ,
however, primarily in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DEPOSITARY RECEIPTS - U.S. Certificates that give their holders the right to
receive securities (a) of a foreign issuer deposited in a U.S. bank or trust
company (American Depositary Receipts, "ADRs"); or (b) of a foreign or U.S.
issuer deposited in a foreign bank or trust company (Global Depositary
Receipts, "GDRs" or European Depositary Receipts, "EDRs").
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the fund's principal
underwriter
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable
Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value
per share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 5.75% for Class I and 1% for Class II. We calculate
the offering price to two decimal places using standard rounding criteria.
PROSPECTUS - The prospectus for the fund's Class I and Class II shares dated
November 1, 1998, which we may amend from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
WE/OUR/US - Unless a different meaning is indicated by the context, these
terms refer to the fund and/or Investor Services, Distributors, or other
wholly owned subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the long-term
risks appear somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium- grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. 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.
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.
<PAGE> 1
TEMPLETON AMERICAN
TRUST, INC.
Annual Report
DECEMBER 31, 1997
[LOGO] FRANKLIN TEMPLETON
<PAGE> 2
TECHNOLOGY UPDATE:
FRANKLIN TEMPLETON
COMBATS THE YEAR 2000 PROBLEM
By Charles B. Johnson,
President of Franklin Resources, Inc.
As we near the 21st century, Franklin Templeton is taking important steps to
tackle the computer glitch dubbed the Year 2000 Problem, Y2K, or the Millennium
Bug. The problem originated from the software designers' attempt to save memory
by recording years in a two-digit format -- "98" instead of "1998", for example
- -- but didn't take into account that the year 2000 or "00", could also be
interpreted as 1900. Uncorrected, this problem could prevent computers from
accurately processing date-sensitive data after 1999.
Franklin Templeton's Information Services & Technology division established a
Year 2000 Project Team that has already begun making the necessary software
changes to help ensure that our computer systems, which service the funds and
their shareholders, will be Year-2000 Compliant. As changes reach completion, we
will conduct comprehensive tests to verify their effectiveness. We will also
require all of our major software or data-services suppliers to be Year-2000
Compliant.
In addition, with an estimated 80% of businesses facing the Year 2000 Problem,
mutual fund portfolio managers must be aware of the impact it could have on
companies in their portfolios. That's why Franklin Templeton portfolio managers
consistently keep this issue in mind while selecting investments and managing
their portfolios.
[PHOTO]
PETER A. NORI
Portfolio Manager
Templeton American Trust, Inc.
<PAGE> 3
SHAREHOLDER LETTER
- -------------------------------------------------------------------------
Your Fund's Objective: The Templeton American Trust seeks long-term total
return through a flexible policy of investing primarily in stocks and debt
obligations of U.S. companies. The Fund may, however, invest up to 35% of its
assets in securities in any foreign country, developed or developing.
- -------------------------------------------------------------------------
Dear Shareholder:
We are pleased to bring you the annual report of Templeton American Trust for
the period ended December 31, 1997. Despite Alan Greenspan's December 1996
warning about "irrational exuberance," and the increase in the federal funds
rate from 5.25% to 5.50% in March 1997, low interest rates, strong corporate
profit growth, and benign inflation enabled the U.S. stock market to continue
setting records during the year. Although share prices of some companies doing
business in Asia declined substantially in 1997's fourth quarter, currency
crises there helped redirect portfolio flows to the U.S. market, which was
perceived by many investors to be safer. Within this environment, the Fund's
Class II shares provided a one-year total return of 21.83%, as discussed in the
Performance Summary on page 8. The Standard & Poor's 500 Stock Index (S&P
500(R)) posted a 31.63% return for the same period.(1)
1. Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
You may find a complete listing of the Fund's portfolio holdings, including the
number of shares and dollar value, beginning on page 13 of this report.
CONTENTS
Shareholder Letter ............ 1
Performance Summary
Class I ...................... 5
Class II ..................... 8
Financial Highlights &
Statement of Investments ......11
Financial Statements ..........16
Notes to Financial Statements .19
Independent Auditor's Report ..23
Tax Designation ...............24
[Pyramid Graph]
<PAGE> 4
The Fund's underperformance compared to the S&P 500 was due to its lack of
exposure to many of the large-cap growth companies with high price-to-earnings
ratios that dominate the index. The Fund also was hurt by price declines of
several foreign stocks, which generally underperformed the strong U.S. market.
However, many Fund holdings did perform well during the year. Prospects for
higher earnings benefited appliance maker Windmere-Durable Holdings Inc. and
telecommunication providers AT&T Corp. and US West Communications Group. And the
value of our holdings in APL Limited, Caliber Systems and Mapco Inc. increased
when they were the subject of takeover discussions. In addition, our shares in
American International Group Inc., Morgan Stanley Dean Witter Discover & Co.,
and the Federal National Mortgage Association (Fannie Mae) rose due to strong
capital markets and low interest rates.
We found excellent buying opportunities after the sharp market correction
between mid-March and mid-April, and added new positions to the portfolio from
several industries. These included technology companies such as Intuit Inc.,
3Com Corp., and Digital Equipment Corp., and transportation stocks Caliber
Systems and Landstar System Inc.
During the year, we also purchased shares of LTC Properties Inc., and National
Health Investors Inc., two Real Estate Investment Trusts (REITs). And because we
believed that some out-of-favor cyclical companies offered long-term value not
recognized by the marketplace, we initiated positions in Birmingham Steel Corp.,
Exide Corp., Occidental Petroleum Corp. and Sun Co. Inc.
2
GEOGRAPHIC DISTRIBUTION
Based on Total Net Assets
12/31/97
<TABLE>
<CAPTION>
<S> <C>
United States 72.5%
Europe 4.1%
Canada 1.6%
Latin America 1.5%
Australia &
New Zealand 1.4%
Asia 1.1%
Short-Term Obligations
& Other Net Assets 17.8%
</TABLE>
<PAGE> 5
On the sell side, we liquidated our holdings of several U.S. stocks which had
appreciated beyond our definition of fair value, including NationsBank Corp.,
Chase Manhattan Corp., Dayton-Hudson Corp. and Limited Inc. We also took profits
in three large foreign companies: the Australian bank ANZ Group, Swedish
pharmaceutical manufacturer Astra AB, and French telecommunications equipment
provider Alcatel Alsthom.
Although the Fund focuses on U.S. companies, we exercised our option to invest
in foreign securities. At the end of the reporting period, overseas investments
comprised 9.7% of total net assets. As you know, investing in foreign securities
involves special risks related to market and currency volatility and economic,
political, social and other factors in the countries where the Fund is invested.
Emerging markets involve similar but heightened risks, in addition to those
associated with their relatively small size and lesser liquidity. These special
risks and other considerations are discussed in the Fund's prospectus.
Looking forward, we remain positive about the U.S. market over the long-term,
although short-term valuations give us some concern. Because both the Dow
Jones(R) Industrial Average and the S&P 500 Index have been trading well-above
their 20-year average levels for price-to-dividends, price-to-sales, and
price-to-book value, we expect that our underweighting of these stocks will
continue. However, we are optimistic that our philosophy of buying temporarily
out-of-favor securities trading at depressed levels relative to long-term
expected earnings should produce attractive returns.
Please remember, this discussion reflects our views and opinions as of December
31, 1997, the end of the reporting period. However, market and economic
conditions are changing constantly, which may affect
TOP 10 HOLDINGS
12/31/97
COMPANY, % OF TOTAL
INDUSTRY NET ASSETS
--------------------------------------------
Intuit Inc.
Data Processing & Reproduction 3.2%
American International
Group Inc.
Insurance 2.8%
AT&T Corp.
Telecommunications 2.3%
Morgan Stanley
Dean Witter Discover & Co.
Financial Services 2.2%
Pinnacle West
Capital Corp.
Utilities Electrical & Gas 2.0%
Goodyear Tire &
Rubber Co.
Industrial Components 2.0%
Intel Corp.
Electronic Components &
Instruments 2.0%
Ford Motor Co.
Automobiles 2.0%
Landstar System Inc.
Transportation 2.0%
Exide Corp.
Industrial Components 1.9%
<PAGE> 6
our strategies and portfolio holdings. Although historic performance is no
guarantee of future results, these insights may help you understand our
investment and management philosophy.
As always, we thank you for your participation in the Templeton American Trust
and look forward to serving your investment needs in the years to come.
Sincerely,
/s/ Peter A. Nori
Peter A. Nori
Portfolio Manager
Templeton American Trust, Inc.
TOP 10 INDUSTRIES
12/31/97
% OF TOTAL
INDUSTRY NET ASSETS
--------------------------------------------
Data Processing &
Reproduction 10.2%
Insurance 7.9%
Industrial Components 5.9%
Energy Sources 5.7%
Merchandising 4.4%
Transportation 4.3%
Metals & Mining 4.1%
Telecommunications 3.9%
Health & Personal Care 3.9%
Electrical & Electronics 3.9%
<PAGE> 7
PERFORMANCE SUMMARY
CLASS I
Templeton American Trust - Class I produced a 22.66% cumulative total return for
the one-year period ended December 31, 1997. Cumulative total return measures
the change in value of an investment, assuming reinvestment of dividends and
capital gains, if any, and does not include the sales charge. We always maintain
a long-term perspective when managing the Fund, and we encourage shareholders to
view their investments in a similar manner. As you can see from the table on
page 7, the Fund's Class I shares delivered a cumulative total return of more
than 61% since inception on May 1, 1995.
The Fund's share price, as measured by net asset value, increased $1.15, from
$16.02 on December 31, 1996, to $17.17 on December 31, 1997. During the
reporting period, shareholders received per share distributions of 15 cents
($0.15) in income dividends, 14.5 cents ($0.145) in short-term capital gains,
and $2.105 in long-term capital gains. Distributions will vary depending on
income earned by the Fund and any profits realized from the sale of securities
in the portfolio, as well as the level of the Fund's operating expenses.
The graph on page 6 compares the performance of Templeton American Trust - Class
I since inception on May 1, 1995, with that of the unmanaged Standard and Poor's
500 (S&P 500) Stock Index.
The past performance is not predictive of future results.
5
<PAGE> 8
index is a domestic, broad market index consisting of 500 large-capitalization
U.S. stocks. The graph also shows the Fund's performance versus the Consumer
Price Index (CPI), a commonly used measure of inflation. Please remember that
the Fund's performance differs from that of an index because an index is not
managed according to any investment strategy, does not contain cash (the Fund
generally carries a certain percentage of cash at any given time), and includes
no sales charges or management expenses. Of course, one cannot invest directly
in an index, nor is an index representative of the Fund's portfolio.
CLASS 1
Total Return Index Comparison
$10,000 Investment (5/1/95 - 12/31/97)
<TABLE>
<CAPTION>
Templeton
American Trust(1)- Consumer S&P 500
Class I Price Index(3) Index(2)
-------------------------------------------------
<S> <C> <C> <C>
5/1/95 $9,423 $10,000 $10,000
5/95 $9,704 $10,020 $10,385
6/95 $9,887 $10,040 $10,627
7/95 $10,190 $10,040 $10,997
8/95 $10,134 $10,067 $11,019
9/95 $10,275 $10,086 $11,483
10/95 $9,972 $10,119 $11,448
11/95 $10,218 $10,112 $11,941
12/95 $10,351 $10,105 $12,171
1/96 $10,467 $10,164 $12,594
2/96 $10,548 $10,197 $12,703
3/96 $10,780 $10,250 $12,826
4/96 $11,071 $10,289 $13,020
5/96 $11,239 $10,309 $13,341
6/96 $11,253 $10,316 $13,393
7/96 $10,940 $10,335 $12,758
8/96 $11,246 $10,355 $13,079
9/96 $11,493 $10,388 $13,812
10/96 $11,755 $10,421 $14,204
11/96 $12,322 $10,441 $15,271
12/96 $12,411 $10,441 $14,969
1/97 $13,000 $10,473 $15,912
2/97 $12,864 $10,505 $16,029
3/97 $12,651 $10,531 $15,369
4/97 $12,880 $10,544 $16,289
5/97 $13,842 $10,537 $17,268
6/97 $14,158 $10,550 $18,043
7/97 $15,302 $10,563 $19,478
8/97 $15,136 $10,583 $18,383
9/97 $16,011 $10,609 $19,397
10/97 $15,065 $10,636 $18,761
11/97 $15,033 $10,629 $19,622
12/97 $15,223 $10,617 $19,960
</TABLE>
THE HISTORICAL PERFORMANCE DATA SHOWN PERTAIN ONLY TO THE FUND'S CLASS I SHARES.
THE FUND OFFERS ANOTHER SHARE CLASS SUBJECT TO DIFFERENT FEES AND EXPENSES,
WHICH AFFECT PERFORMANCE. PLEASE SEE THE PROSPECTUS FOR MORE DETAILS.
1. Includes the sales charge and represents the change in value of an investment
over the period shown. Total return assumes reinvestment of dividends and
capital gains.
2. Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
3. Source: U.S. Bureau of Labor Statistics.
Past performance is not predictive of future results.
6
<PAGE> 9
CLASS I
Periods ended 12/31/97
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (5/1/95)
----------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) 22.66% 61.58%
Average Annual Total Return(2) 15.61% 17.05%
Value of $10,000 Investment(3) $11,561 $15,229
</TABLE>
<TABLE>
<CAPTION>
12/31/96 12/31/97
----------------------------------------------------------------------
<S> <C> <C>
One-Year Total Return(4) 19.90% 22.66%
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the maximum 5.75% initial
sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and include the maximum 5.75% initial sales
charge.
4. One-year total return represents the change in value of an investment over
the indicated periods ended on the specified dates and does not include the
sales charge.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Investment return and principal value will fluctuate with market
conditions, currency volatility and the social, economic and political climates
of countries where investments are made. Emerging markets involve heightened
risks related to the same factors, in addition to those associated with their
relatively small size and lesser liquidity. You may have a gain or loss when you
sell your shares.
Past performance is not predictive of future results.
7
<PAGE> 10
CLASS II
Templeton American Trust - Class II produced a 21.83% cumulative total return
for the one-year period ended December 31, 1997. Cumulative total return
measures the change in value of an investment, assuming reinvestment of
dividends and capital gains, if any, and does not include sales charges. We
always maintain a long-term perspective when managing the Fund, and we encourage
shareholders to view their investments in a similar manner. As you can see from
the table on page 10, the Fund's Class II shares delivered a cumulative total
return of more than 145% since inception on February 27, 1991.
The Fund's share price, as measured by net asset value, increased $1.17, from
$16.04 on December 31, 1996, to $17.21 on December 31, 1997. During the
reporting period, shareholders received per share distributions of 0.32 cents
($0.0032) in dividend income, 14.5 cents ($0.145) in short-term capital gains,
and $2.105 in long-term capital gains. Distributions will vary depending on
income earned by the Fund and any profits realized from the sale of securities
in the portfolio, as well as the level of the Fund's operating expenses.
The graph on page 9 compares the performance of Templeton American Trust - Class
II since inception on February 27, 1991, with that of the unmanaged Standard and
Poor's 500 (S&P 500) Stock Index. The index is a domestic, broad market index
consisting of 500 large-capitalization U.S. stocks. The graph also shows the
Fund's
Past performance is not predictive of future results.
8
<PAGE> 11
performance versus the Consumer Price Index (CPI), a commonly used measure of
inflation. Please remember that the Fund's performance differs from that of an
index because an index is not managed according to any investment strategy, does
not contain cash (the Fund generally carries a certain percentage of cash at any
given time), and includes no sales charges or management expenses. Of course,
one cannot invest directly in an index, nor is an index representative of the
Fund's portfolio.
CLASS II
Total Return Index Comparison
$10,000 Investment (2/27/91 - 12/31/97)
<TABLE>
<CAPTION>
Templeton
American Trust(1)- Consumer S&P 500
Class II Price Index(3) Index(2)
-------------------------------------------------------------
<S> <C> <C> <C>
2/27/91 $9,901 $10,000 $10,000
2/91 $9,911 $9,999 $10,000
3/91 $10,119 $10,013 $10,246
4/91 $10,327 $10,028 $10,280
5/91 $10,673 $10,057 $10,708
6/91 $10,376 $10,088 $10,223
7/91 $10,515 $10,102 $10,712
8/91 $10,663 $10,132 $10,953
9/91 $10,584 $10,177 $10,770
10/91 $10,653 $10,191 $10,930
11/91 $10,208 $10,221 $10,476
12/91 $11,193 $10,229 $11,676
1/92 $11,543 $10,243 $11,470
2/92 $11,893 $10,281 $11,605
3/92 $11,513 $10,332 $11,381
4/92 $11,763 $10,347 $11,723
5/92 $11,783 $10,362 $11,760
6/92 $11,513 $10,399 $11,585
7/92 $11,873 $10,422 $12,083
8/92 $11,233 $10,451 $11,823
9/92 $11,443 $10,480 $11,961
10/92 $11,483 $10,517 $12,018
11/92 $11,923 $10,532 $12,411
12/92 $12,126 $10,525 $12,568
1/93 $12,486 $10,577 $12,679
2/93 $12,589 $10,614 $12,839
3/93 $12,898 $10,652 $13,111
4/93 $12,919 $10,681 $12,805
5/93 $13,125 $10,696 $13,124
6/93 $13,073 $10,711 $13,164
7/93 $13,218 $10,710 $13,134
8/93 $13,588 $10,740 $13,620
9/93 $13,527 $10,762 $13,516
10/93 $13,733 $10,807 $13,807
11/93 $13,630 $10,815 $13,660
12/93 $14,044 $10,814 $13,831
1/94 $14,778 $10,844 $14,308
2/94 $14,569 $10,882 $13,905
3/94 $14,021 $10,919 $13,301
4/94 $14,210 $10,934 $13,484
5/94 $14,358 $10,940 $13,683
6/94 $14,021 $10,978 $13,348
7/94 $14,621 $11,007 $13,809
8/94 $15,106 $11,052 $14,366
9/94 $14,716 $11,081 $14,013
10/94 $14,674 $11,089 $14,336
11/94 $14,252 $11,104 $13,804
12/94 $14,273 $11,104 $14,007
1/95 $14,227 $11,148 $14,381
2/95 $14,656 $11,192 $14,930
3/95 $14,942 $11,229 $15,376
4/95 $15,308 $11,266 $15,829
5/95 $15,789 $11,289 $16,437
6/95 $16,064 $11,311 $16,821
7/95 $16,556 $11,311 $17,406
8/95 $16,453 $11,341 $17,441
9/95 $16,682 $11,363 $18,176
10/95 $16,178 $11,400 $18,120
11/95 $16,568 $11,392 $18,901
12/95 $16,778 $11,384 $19,265
1/96 $16,955 $11,451 $19,934
2/96 $17,061 $11,488 $20,107
3/96 $17,414 $11,548 $20,302
4/96 $17,873 $11,592 $20,608
5/96 $18,144 $11,614 $21,118
6/96 $18,156 $11,622 $21,200
7/96 $17,637 $11,644 $20,194
8/96 $18,120 $11,666 $20,703
9/96 $18,509 $11,703 $21,863
10/96 $18,933 $11,740 $22,483
11/96 $19,839 $11,762 $24,173
12/96 $19,951 $11,762 $23,694
1/97 $20,896 $11,799 $25,186
2/97 $20,667 $11,835 $25,371
3/97 $20,312 $11,864 $24,326
4/97 $20,667 $11,878 $25,784
5/97 $22,200 $11,871 $27,333
6/97 $22,681 $11,886 $28,559
7/97 $24,506 $11,900 $30,832
8/97 $24,240 $11,922 $29,098
9/97 $25,634 $11,952 $30,702
10/97 $24,100 $11,982 $29,696
11/97 $24,037 $11,975 $31,060
12/97 $24,305 $11,961 $31,594
</TABLE>
THE HISTORICAL PERFORMANCE DATA SHOWN PERTAINS ONLY TO THE FUND'S CLASS II
SHARES. THE FUND OFFERS ANOTHER SHARE CLASS SUBJECT TO DIFFERENT FEES AND
EXPENSES, WHICH AFFECT PERFORMANCE. PLEASE SEE THE PROSPECTUS FOR MORE DETAILS.
1. Includes all sales charges and represents the change in value of an
investment over the period shown. Total return assumes reinvestment of dividends
and capital gains.
2. Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
3. Source: U.S. Bureau of Labor Statistics.
Past performance is not predictive of future results.
9
<PAGE> 12
CLASS II
Periods ended 12/31/97
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR (2/7/91)
------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 21.83% 100.45% 145.49%
Average Annual Total Return(2) 19.63% 14.69% 13.86%
Value of $10,000 Investment(3) $11,963 $19,843 $24,305
</TABLE>
<TABLE>
<CAPTION>
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) 15.82% 1.63% 17.55% 18.91% 21.83%
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the indicated periods and does not include sales charges. See Note below.
2. Average annual total return represents the average annual change in value of
an investment over the indicated periods and includes the current 1.0% initial
sales charge and the 1.0% contingent deferred sales charge applicable to shares
redeemed within 18 months of purchase. See Note below.
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the indicated periods and include sales charges.
4. One-year total return represents the change in value of an investment over
the indicated periods ended on the specified dates and does not include sales
charges.
Note: Prior to May 1, 1995, Class II shares were offered with no initial sales
charge and a higher but declining contingent deferred sales charge. Thus, actual
total returns for investors who paid this higher charge would differ. Past
expense waivers by the Fund's Manager increased the Fund's total returns.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Investment return and principal value will fluctuate with market
conditions, currency volatility and the social, economic and political climates
of countries where investments are made. Emerging markets involve heightened
risks related to the same factors, in addition to those associated with their
relatively small size and lesser liquidity. You may have a gain or loss when you
sell your shares.
Past performance is not predictive of future results.
10
<PAGE> 13
TEMPLETON AMERICAN TRUST, INC.
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995+
------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE - CLASS I
(For a share outstanding throughout the year)
Net asset value, beginning of year................................... $16.02 $14.23 $13.37
------------------------------------------
Income from investment operations:
Net investment income............................................... .13 .20 .11
Net realized and unrealized gain.................................... 3.42 2.60 1.21
------------------------------------------
Total from investment operations..................................... 3.55 2.80 1.32
------------------------------------------
Less distributions from:
Net investment income............................................... (.15) (.26) (.20)
Net realized gains.................................................. (2.25) (.75) (.26)
------------------------------------------
Total distributions.................................................. (2.40) (1.01) (.46)
------------------------------------------
Net asset value, end of year......................................... $17.17 $16.02 $14.23
==========================================
Total Return*........................................................ 22.66% 19.90% 9.94%
RATIOS /SUPPLEMENTAL DATA
Net assets, end of year (000's)...................................... $5,028 $2,053 $881
Ratios to average net assets:
Expenses............................................................ 1.41% 1.57% 1.81%**
Net investment income............................................... 0.58% 1.53% 1.31%**
Portfolio turnover rate.............................................. 41.06% 15.93% 4.44%
Average commission rate paid***...................................... $.0515 $.0410 --
</TABLE>
*Total return does not reflect sales commissions and is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities. Prior to fiscal year
1996 disclosure of average commission rate was not required.
+For the period May 1, 1995 (commencement of operations) to December 31, 1995.
11
<PAGE> 14
TEMPLETON AMERICAN TRUST, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE - CLASS II
(For a share outstanding throughout the year)
Net asset value, beginning of year.............................. $16.04 $14.25 $12.49 $13.39 $11.77
--------------------------------------------------
Income from investment operations:
Net investment income (loss)................................... (.03) .14 .14 .04 .04
Net realized and unrealized gain............................... 3.45 2.54 2.04 .17 1.82
--------------------------------------------------
Total from investment operations................................ 3.42 2.68 2.18 .21 1.86
--------------------------------------------------
Less distributions from:
Net investment income.......................................... -- (.14) (.14) (.05) (.03)
Net realized gains............................................. (2.25) (.75) (.28) (1.06) (.21)
--------------------------------------------------
Total distributions............................................. (2.25) (.89) (.42) (1.11) (.24)
--------------------------------------------------
Net asset value, end of year.................................... $17.21 $16.04 $14.25 $12.49 $13.39
==================================================
Total Return*................................................... 21.83% 18.91% 17.55% 1.63% 15.82%
RATIOS /SUPPLEMENTAL DATA
Net assets, end of year (000's)................................. $52,063 $44,648 $44,183 $37,959 $34,418
Ratios to average net assets:
Expenses....................................................... 2.17% 2.26% 2.40% 2.47% 2.53%
Net investment income (loss)................................... (0.16%) 0.85% 0.95% 0.34% 0.31%
Portfolio turnover rate......................................... 41.06% 15.93% 4.44% 31.92% 14.10%
Average commission rate paid**.................................. $.0515 $.0410 -- -- --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge.
**Relates to purchases and sales of equity securities. Prior to fiscal year 1996
disclosure of average commission rate was not required.
See Notes to Financial Statements.
12
<PAGE> 15
TEMPLETON AMERICAN TRUST, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 82.1%
AUTOMOBILES 2.0%
Ford Motor Co. ........................................................ United States 23,000 $ 1,119,812
-----------
BANKING 0.5%
Credicorp Ltd. ........................................................ Peru 14,400 259,200
-----------
BROADCASTING & PUBLISHING 0.4%
*Scholastic Corp. ..................................................... United States 5,600 210,000
-----------
BUILDING MATERIALS & COMPONENTS 0.8%
Pioneer International Ltd. ............................................ Australia 175,000 477,896
-----------
BUSINESS & PUBLIC SERVICES 2.6%
Columbia HCA Healthcare Corp. ......................................... United States 26,000 770,250
Wheelabrator Technologies Inc. ........................................ United States 44,000 706,750
-----------
1,477,000
-----------
CHEMICALS 0.9%
Great Lakes Chemical Corp. ............................................ United States 11,000 493,625
-----------
DATA PROCESSING & REPRODUCTION 10.2%
*3com Corp. ........................................................... United States 31,000 1,083,062
*Bay Networks Inc. .................................................... United States 35,000 894,687
*Digital Equipment Corp. .............................................. United States 24,200 895,400
*Intuit Inc. .......................................................... United States 44,200 1,823,250
*NCR Corp. ............................................................ United States 18,021 501,209
*Quantum Corp. ........................................................ United States 32,300 648,019
-----------
5,845,627
-----------
ELECTRICAL & ELECTRONICS 3.9%
Ametek Inc. ........................................................... United States 31,100 839,700
*DSC Communications Corp. ............................................. United States 36,100 866,400
Motorola Inc. ......................................................... United States 9,000 513,563
-----------
2,219,663
-----------
ELECTRONIC COMPONENTS & INSTRUMENTS 2.0%
Intel Corp. ........................................................... United States 16,000 1,124,000
-----------
ENERGY EQUIPMENT & SERVICES 1.7%
Sun Co. Inc. .......................................................... United States 23,300 980,056
-----------
ENERGY SOURCES 5.7%
Norsk Hydro AS, ADR.................................................... Norway 8,800 448,800
Occidental Petroleum Corp. ............................................ United States 32,150 942,397
Societe Elf Aquitane SA................................................ France 4,000 465,232
Total SA, B............................................................ France 7,000 761,818
YPF Sociedad Anonima, ADR.............................................. Argentina 18,000 615,375
-----------
3,233,622
-----------
FINANCIAL SERVICES 3.8%
Federal National Mortgage Association.................................. United States 16,000 913,000
Morgan Stanley, Dean Witter Discover & Co. ............................ United States 21,644 1,279,702
-----------
2,192,702
-----------
</TABLE>
13
<PAGE> 16
TEMPLETON AMERICAN TRUST, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FOOD & HOUSEHOLD PRODUCTS 1.1%
IBP Inc. .............................................................. United States 30,000 $ 628,125
-----------
FOREST PRODUCTS & PAPER 2.2%
Boise Cascade Corp. ................................................... United States 20,300 614,075
Fort James Corporation................................................. United States 17,100 654,075
-----------
1,268,150
-----------
HEALTH & PERSONAL CARE 3.9%
Aetna Inc. ............................................................ United States 8,500 599,781
Pharmacia & Upjohn..................................................... United States 20,000 732,500
Windmere-Durable Holdings Inc. ........................................ United States 40,000 902,500
-----------
2,234,781
-----------
INDUSTRIAL COMPONENTS 5.9%
Exide Corp. ........................................................... United States 43,000 1,112,625
Flowserve Corp. ....................................................... United States 20,904 584,005
Goodyear Tire & Rubber Co. ............................................ United States 18,000 1,145,250
Walbro Corp. .......................................................... United States 37,800 507,938
-----------
3,349,818
-----------
INSURANCE 7.9%
American General Corp. ................................................ United States 17,000 919,062
American International Group Inc. ..................................... United States 14,625 1,590,469
Presidential Life Corp. ............................................... United States 47,100 953,775
Travelers Inc. ........................................................ United States 19,298 1,039,653
-----------
4,502,959
-----------
MERCHANDISING 4.4%
American Stores Co. ................................................... United States 48,888 1,005,259
*Circuit City Stores Inc., Carmax Group................................ United States 43,200 388,800
*Gymboree Inc. ........................................................ United States 40,600 1,111,425
-----------
2,505,484
-----------
METALS & MINING 4.1%
Birmingham Steel Corp. ................................................ United States 56,800 894,600
Oregon Steel Mills Inc. ............................................... United States 36,600 780,038
Reynolds Metals Co. ................................................... United States 11,000 660,000
-----------
2,334,638
-----------
MISC MATERIALS & COMMODITIES 1.6%
Agrium Inc. ........................................................... Canada 75,000 914,062
-----------
MULTI-INDUSTRY 1.1%
Hutchison Whampoa Ltd. ................................................ Hong Kong 100,000 627,178
-----------
REAL ESTATE 1.6%
LTC Properties Inc. ................................................... United States 41,720 865,690
National Health Investors Inc. ........................................ United States 1,800 75,375
-----------
941,065
-----------
</TABLE>
14
<PAGE> 17
TEMPLETON AMERICAN TRUST, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
TELECOMMUNICATIONS 3.9%
AT&T Corp. ............................................................ United States 21,150 $ 1,295,437
U.S. West Communications Group......................................... United States 21,200 956,650
-----------
2,252,087
-----------
TEXTILES & APPAREL 1.9%
*Fruit of the Loom Inc., A............................................. United States 23,000 589,375
Shaw Industries Inc. .................................................. United States 45,000 523,125
-----------
1,112,500
-----------
TRANSPORTATION 4.3%
A.S.A. Holdings Inc. .................................................. United States 9,200 261,625
*Fritz Companies Inc. ................................................. United States 79,000 1,101,063
*Landstar System Inc. ................................................. United States 42,400 1,118,300
-----------
2,480,988
-----------
UTILITIES ELECTRICAL & GAS 3.2%
Iberdrola SA .......................................................... Spain 50,000 658,024
Pinnacle West Capital Corp. ........................................... United States 27,500 1,165,313
-----------
1,823,337
-----------
WHOLESALE & INTERNATIONAL TRADE 0.5%
Brierley Investments Ltd. ............................................. New Zealand 370,000 264,253
-----------
46,872,628
TOTAL COMMON STOCKS (COST $32,424,048)........................... -----------
PRINCIPAL
AMOUNT**
--------
BONDS (COST $21,406) 0.1%
Brierley Investments Ltd., 9.00%, conv., 6/30/98....................... New Zealand 46,250 NZD 30,072
-----------
SHORT TERM INVESTMENTS 3.7%
Federal Farm Credit Banks, 5.62%, 4/01/98.............................. United States 610,000 609,874
Federal National Mortgage Assn., 5.47%, 2/18/98........................ United States 900,000 893,479
United States Treasury Bill, 4.81%, 1/02/98............................ United States 610,000 610,000
-----------
2,113,353
TOTAL SHORT TERM INVESTMENTS (COST $2,113,136)................... -----------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST 49,016,053
$34,558,590)................................................... -----------
(a)REPURCHASE AGREEMENT 15.5%
Deutsche Bank AG, 6.80%, 1/02/98 (Maturity Value $8,855,344)
(Cost $8,852,000) Collateralized by U.S. Treasury Notes............... United States 8,852,000 8,852,000
-----------
57,868,053
TOTAL INVESTMENTS (COST $43,410,590) 101.4%..................... (777,019)
OTHER ASSETS, LESS LIABILITIES (1.4%)........................... -----------
$57,091,034
TOTAL NET ASSETS 100.0%......................................... ===========
</TABLE>
*Non-income producing.
**Securities traded in U.S. dollars unless otherwise indicated.
(a)See note 1e regarding repurchase agreement.
CURRENCY ABBREVIATION:
NZD -- New Zealand Dollar
See Notes to Financial Statements.
15
<PAGE> 18
TEMPLETON AMERICAN TRUST, INC.
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $43,410,590)............................... $57,868,053
Receivables:
Capital shares sold................................................................. 35,169
Dividends and interest.............................................................. 54,264
-----------
Total assets..................................................................... 57,957,486
-----------
Liabilities:
Payables:
Investment securities purchased..................................................... 655,048
Capital shares redeemed............................................................. 1,827
To affiliates....................................................................... 129,936
Distributions to shareholders........................................................ 2,583
Funds advanced by custodian.......................................................... 4,796
Other liabilities.................................................................... 72,262
-----------
Total liabilities................................................................ 866,452
-----------
Net assets, at value.................................................................. $57,091,034
===========
Net assets consist of:
Net unrealized appreciation.......................................................... $14,457,463
Accumulated net realized gain........................................................ 2,946,785
Capital shares....................................................................... 39,686,786
-----------
Net assets, at value.................................................................. $57,091,034
===========
CLASS I
Net asset value per share ($5,027,557 / 292,728 shares outstanding)....................... $17.17
======
Maximum offering price per share ($17.17 / 94.25%)........................................ $18.22
======
CLASS II
Net asset value per share ($52,063,477 / 3,025,879 shares outstanding)*................... $17.21
======
Maximum offering price per share ($17.21 / 99.00%)........................................ $17.38
======
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
16
<PAGE> 19
TEMPLETON AMERICAN TRUST, INC.
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $13,819)
Dividends.............................................................. $ 751,806
Interest............................................................... 300,173
----------
Total investment income............................................ $ 1,051,979
-----------
Expenses:
Management fees (Note 3)............................................... 365,732
Administrative fees (Note 3)........................................... 78,371
Distribution fees (Note 3)
Class I........................................................... 7,803
Class II.......................................................... 492,261
Transfer agent fees (Note 3)........................................... 60,500
Custodian fees......................................................... 4,943
Reports to shareholders................................................ 26,569
Registration and filing fees........................................... 34,700
Professional fees (Note 3)............................................. 31,467
Trustees' fees and expenses............................................ 4,600
Other.................................................................. 4,773
----------
Total expenses..................................................... 1,111,719
-----------
Net investment loss.............................................. (59,740)
-----------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments........................................................... 8,779,056
Foreign currency transactions......................................... (6,336)
----------
Net realized gain.................................................. 8,772,720
Net unrealized appreciation on investments......................... 1,234,510
-----------
Net realized and unrealized gain........................................ 10,007,230
-----------
Net increase in net assets resulting from operations.................... $ 9,947,490
===========
</TABLE>
See Notes to Financial Statements.
17
<PAGE> 20
TEMPLETON AMERICAN TRUST, INC.
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-----------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss)......................................... $ (59,740) $ 388,090
Net realized gain from investments and foreign currency
transactions....................................................... 8,772,720 2,956,343
Net unrealized appreciation on investments........................... 1,234,510 4,503,472
-----------------------------
Net increase in net assets resulting from operations............... 9,947,490 7,847,905
Distributions to shareholders from:
Net investment income:
Class I.............................................................. (34,067) (31,751)
Class II............................................................. (8,714) (360,732)
Net realized gains:
Class I.............................................................. (482,773) (89,244)
Class II............................................................. (6,135,485) (1,967,862)
Capital share transactions (Note 2):
Class I.............................................................. 2,906,521 997,883
Class II............................................................. 4,196,590 (4,758,459)
-----------------------------
Net increase in net assets......................................... 10,389,562 1,637,740
Net assets:
Beginning of year..................................................... 46,701,472 45,063,732
-----------------------------
End of year........................................................... $57,091,034 $46,701,472
=============================
Undistributed net investment income included in net assets:
End of year........................................................... $ -- $ --
=============================
</TABLE>
See Notes to Financial Statements.
18
<PAGE> 21
TEMPLETON AMERICAN TRUST, INC.
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton American Trust, Inc. (the Fund) is registered under the Investment
Company Act of 1940 as a diversified, open-end investment company. The Fund
seeks long-term total return through a flexible policy of investing primarily in
stocks and debt obligations of U.S. companies. The Fund may, however, invest up
to 35% of its assets in securities in any foreign country, developed or
underdeveloped. The following summarizes the Fund's significant accounting
policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Directors.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date. When
the Fund purchases or sells foreign securities it will customarily enter into a
foreign exchange contract to minimize foreign exchange risk from the trade date
to the settlement date of such transactions.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
c. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
19
<PAGE> 22
TEMPLETON AMERICAN TRUST, INC.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
(CONTINUED)
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
e. REPURCHASE AGREEMENTS:
The Fund may enter into repurchase agreements, which are accounted for as a loan
by the Fund to the seller, collateralized by securities which are delivered to
the Fund's custodian. The market value, including accrued interest, of the
initial collateralization is required to be at least 102% of the dollar amount
invested by the Funds, with the value of the underlying securities marked to
market daily to maintain coverage of at least 100%. At December 31, 1997, all
outstanding repurchase agreements held by the Fund had been entered into on that
date.
f. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. CAPITAL STOCK
The Fund offers two classes of shares: Class I and Class II. The shares differ
by their initial sales load, distribution fees, voting rights on matters
affecting a single class and the exchange privilege of each class.
At December 31, 1997, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996
----------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------
<S> <C> <C> <C> <C>
CLASS I:
Shares sold....................................................... 205,470 $ 3,717,827 96,004 $1,454,259
Shares issued on reinvestment of distributions.................... 27,495 464,649 6,973 108,639
Shares redeemed................................................... (68,378) (1,275,955) (36,706) (565,015)
----------------------------------------------------
Net increase...................................................... 164,587 $ 2,906,521 66,271 $ 997,883
====================================================
</TABLE>
20
<PAGE> 23
TEMPLETON AMERICAN TRUST, INC.
Notes to Financial Statements (continued)
2. CAPITAL STOCK (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996
-------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS II:
Shares sold..................................................... 336,921 $ 6,061,966 207,954 $ 3,182,096
Shares issued on reinvestment of distributions.................. 322,381 5,449,383 130,716 2,042,358
Shares redeemed................................................. (416,422) (7,314,759) (657,146) (9,982,913)
-------------------------------------------------------
Net increase (decrease)......................................... 242,880 $ 4,196,590 (318,476) $(4,758,459)
=======================================================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Fund are also directors or officers of Templeton
Investment Counsel, Inc. (TICI), Franklin Templeton Services, Inc. (FT
Services), Franklin/Templeton Distributors, Inc. (Distributors) and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Fund's
investment manager, administrative manager, principal underwriter, and transfer
agent, respectively.
The Fund pays an investment management fee to TICI of 0.70% per year of the
average daily net assets of the Fund.
The Fund pays an administrative fee to FT Services based on the Fund's average
daily net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- -------------------------------------------------------------------
<S> <C>
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
</TABLE>
The Fund reimburses Distributors up to 0.35% and 1.00% per year of the average
daily net assets of Class I and Class II, respectively, for costs incurred in
marketing the Fund's shares. Under the Class I distribution plan, costs
exceeding the maximum may be reimbursed in subsequent periods. At December 31
1997, there were no unreimbursed costs. Distributors received net commissions
from sales of fund shares and received contingent deferred sales charges for the
year of $8,432 and $2,996, respectively.
Included in professional fees are legal fees of $5,968 that were paid to a law
firm in which a partner is an officer of the Fund.
21
<PAGE> 24
TEMPLETON AMERICAN TRUST, INC.
Notes to Financial Statements (continued)
4. INCOME TAXES
The cost of securities for income tax purposes is the same as that shown in the
statement of investments. At December 31, 1997, the net unrealized appreciation
based on cost of investments for income tax purposes was as follows:
<TABLE>
<S> <C>
Unrealized appreciation...................................... $15,628,721
Unrealized depreciation...................................... (1,171,258)
-----------
Net unrealized appreciation.................................. $14,457,463
===========
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1997 aggregated $19,623,879 and $18,986,541, respectively.
22
<PAGE> 25
TEMPLETON AMERICAN TRUST, INC.
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Templeton American Trust, Inc.
We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of Templeton American Trust, Inc. as of December
31, 1997, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended and the financial highlights for the periods indicated in the accompanying
financial statements. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Templeton American Trust, Inc. as of December 31, 1997, the results of its
operations, the changes in its net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
New York, New York
January 30, 1998
23
<PAGE> 26
TEMPLETON AMERICAN TRUST, INC.
Tax Designation
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
100% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended December 31, 1997.
24
<PAGE> 27
LITERATURE REQUEST
For a free brochure and prospectus, which contain more complete information,
including charges and expenses, call Franklin Fund Information, toll free, at
1-800/DIAL BEN (1-800/342-5236). Please read the prospectus carefully before you
invest or send money. To ensure the highest quality of service, telephone calls
to or from our service departments may be monitored, recorded and accessed.
These calls can be determined by the presence of a regular beeping tone.
FRANKLIN TEMPLETON GROUP
GLOBAL GROWTH
Franklin Global Health Care Fund
Franklin Templeton Japan Fund
Templeton Developing
Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller
Companies Fund
Templeton Global
Infrastructure Fund
Templeton Global
Opportunities Trust
Templeton Global
Real Estate Fund
Templeton Global
Smaller Companies Fund
Templeton Greater European Fund
Templeton Growth Fund
Templeton Latin America Fund
Templeton Pacific Growth Fund
Templeton World Fund
GLOBAL GROWTH AND INCOME
Franklin Global Utilities Fund
Franklin Templeton German
Government Bond Fund
Franklin Templeton Global
Currency Fund
Mutual European Fund
Templeton Global Bond Fund
Templeton Growth and
Income Fund
GLOBAL INCOME
Franklin Global Government
Income Fund
Franklin Templeton Hard
Currency Fund
Franklin Templeton High Income
Currency Fund
Templeton Americas Government
Securities Fund
GROWTH
Franklin Biotechnology
Discovery Fund
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin DynaTech Fund
Franklin Equity Fund
Franklin Gold Fund
Franklin Growth Fund
Franklin MidCap Growth Fund
Franklin Small Cap
Growth Fund
Mutual Discovery Fund
GROWTH AND INCOME
Franklin Asset Allocation Fund
Franklin Balance Sheet
Investment Fund*
Franklin Convertible
Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Franklin MicroCap Value Fund*
Franklin Natural Resources Fund
Franklin Real Estate
Securities Fund
Franklin Rising Dividends Fund
Franklin Strategic Income Fund
Franklin Utilities Fund
Franklin Value Fund
Mutual Beacon Fund
Mutual Financial Services Fund
Mutual Qualified Fund
Mutual Shares Fund
Templeton American Trust, Inc.
Fund Allocator Series
Franklin Templeton Conservative
Target Fund
Franklin Templeton Moderate
Target Fund
Franklin Templeton Growth
Target Fund
INCOME
Franklin Adjustable Rate
Securities Fund
Franklin Adjustable U.S.
Government Securities Fund
Franklin's AGE High Income Fund
Franklin Investment Grade
Income Fund
Franklin Short-Intermediate
U.S. Government Securities Fund
Franklin U.S. Government
Securities Fund
Franklin Money Fund
Franklin Federal Money Fund
For Corporations
Franklin Corporate Qualified
Dividend Fund
FRANKLIN FUNDS SEEKING
TAX-FREE INCOME
Federal Intermediate-Term
Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund
Puerto Rico Tax-Free
Income Fund
Tax-Exempt Money Fund
FRANKLIN STATE-SPECIFIC
FUNDS SEEKING
TAX-FREE INCOME
Alabama
Arizona**
Arkansas***
California**
Colorado
Connecticut
Florida**
Georgia
Hawaii***
Indiana
Kentucky
Louisiana
Maryland
Massachusetts+
Michigan**
Minnesota+
Missouri
New Jersey
New York**
North Carolina
Ohio+
Oregon
Pennsylvania
Tennessee***
Texas
Virginia
Washington***
VARIABLE ANNUITIES++
Franklin Valuemark(R)
Franklin Templeton
Valuemark Income Plus
(an immediate annuity)
*These funds are now closed to new accounts, with the exception of retirement
accounts.
**Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured municipal securities, and/or a high yield
portfolio (CA) and a money market portfolio (CA and NY).
***The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.
+ Portfolio of insured municipal securities.
++ Franklin Valuemark and Franklin Templeton Valuemark Income Plus are issued by
Allianz Life Insurance Company of North America or by its wholly owned
subsidiary, Preferred Life Insurance Company of New York, and distributed by
NALAC Financial Plans, LLC.
10/97.1
SEMI ANNUAL
REPORT
JUNE 30, 1998
TEMPLETON AMERICAN TRUST, INC.
[LOGO]
FRANKLIN TEMPLETON(R)
<PAGE>
[50-YEAR SEAL]
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective and remember that all securities markets move
both up and down, as do mutual fund share prices. We appreciate your past
support and look forward to serving your investment needs in the years ahead.
In 1992, Sir John Templeton retired after a 50-year career of helping investors
manage their money. Currently he devotes all of his time and efforts to the John
Templeton Foundation. A major portion of his assets remain invested in the
Templeton funds which are managed by many of the investment professionals he
selected and trained.
[PHOTO OF PETER A. NORI]
Peter A. Nori
Portfolio Manager
Templeton American Trust, Inc.
<PAGE>
CONTENTS
Shareholder Letter................ 1
Performance Summaries
Class I........................ 5
Class II....................... 7
Financial Highlights &
Statement of Investments.......... 9
Financial Statements.............. 15
Notes to Financial
Statements........................ 18
[PYRAMID GRAPHIC]
SHAREHOLDER LETTER
Your Fund's Objective: Templeton American Trust seeks long-term total return (a
combination of capital growth and income) by investing at least 65% of its total
assets in the equity and debt securities of U.S. companies and the U.S.
government, its agencies and instrumentalities.
Dear Shareholder:
We are pleased to bring you this semiannual report of Templeton American Trust
for the six months ended June 30, 1998. During this period, concerns over the
impact of recession in Asia, which hurt the U.S. stock market in January, were
quickly overwhelmed by low interest rates and significant cash flows into the
market. The Asian turmoil seemingly redirected portfolio flows from "risky"
emerging markets toward the "safer" U.S. market. In the short run, investors in
the U.S. market generally profited from the fallout in Asia as it caused a
flight to the U.S. dollar, capped inflationary pressures and allowed the Federal
Reserve Board to hold interest rates steady.
You will find a complete listing of the Fund's portfolio holdings, including the
dollar value and number of shares or principal amount, beginning on page 11 of
this report.
<PAGE>
GEOGRAPHIC DISTRIBUTION
Based on Total Net Assets
6/30/98
[BAR GRAPH]
<TABLE>
<S> <C>
United States 73.5%
Europe 4.5%
Canada 3.3%
Latin America 1.3%
Australia & New Zealand 0.9%
Asia 0.9%
Short-Term Investments and Other Net Assets 15.6%
</TABLE>
However, data available at the close of the reporting period indicated that Asia
might not be recovering, and several regional stock markets and currencies were
approaching, or breaching, October 1997 lows. But many observers were not overly
concerned about the potential risk Asia presents to U.S. corporate profits, and
the Standard & Poor's(R) 500 Stock Index (S&P 500(R)) reached record highs as
investors appeared to focus on "stable growth" stocks, regardless of
valuation.(1) In such an environment, contrarian "value" investors have
difficulty performing in line with broad market indices, and Templeton American
Trust Class I shares turned in a 9.76% cumulative total return for the first six
months of the year, as discussed in the Performance Summary on page 5.
The Fund's performance was affected by its lack of exposure to the large-cap
growth names that dominate the S&P 500. With most of these shares trading above
our estimates of their true value, our underweighting will likely continue,
which may negatively affect the Fund's near-term relative performance. The Asian
financial crisis also hurt the Fund, as some of our more economically sensitive
holdings like 3Com Corp., whose near-term earnings outlook appeared weak,
underperformed the market.
Fund holdings performing well during the period included three companies subject
to merger activity: Bay Networks Inc., DSC Communications Corp., and Digital
Equipment Corporation (now a part of Compaq Computer Corp.). Spurred by low
interest rates and a strong stock market, our financial holdings, including
Morgan Stanley Dean Witter Discover & Co., American International Group Inc.,
and
1. An index is an unmanaged group of securities that is used to measure market
performance. One cannot invest directly in an index.
2
<PAGE>
TOP 10 INDUSTRIES
6/30/98
<TABLE>
<CAPTION>
% OF TOTAL
INDUSTRY NET ASSETS
- ----------------------------------------------
<S> <C>
Data Processing &
Reproduction 8.9%
Electronic Components &
Instruments 6.8%
Insurance 6.2%
Financial Services 5.7%
Energy Sources 5.5%
Industrial Components 4.9%
Electrical & Electronics 4.5%
Transportation 4.3%
Merchandising 3.9%
Telecommunications 3.7%
</TABLE>
American General Corp. also performed well. Home appliance maker
Windmere-Durable Holdings Inc., aided by its acquisition of a Black & Decker
unit, contributed positively to the Fund's performance, and American Stores Co.
(which hurt the Fund's performance last year) rebounded from an earnings
disappointment. Positions liquidated as their stock prices reached our target
levels included Fruit of the Loom Inc., Intuit Inc., Travelers Inc. and Pinnacle
West Capital Corp. During the period, the Fund purchased stock in companies hurt
by what we believed to be near-term earnings shortfalls. In doing so, we
initiated positions in ADC Telecommunications Inc. and Newbridge Networks Corp.,
and added to our position in Scholastic Corp.
We remain positive about the U.S. market on a long-term basis, but our analysis
of the Dow Jones(R) Industrial Average and the S&P 500 indicates that both
indices are trading well-above their 20-year average price-to-book,
price-to-sales, price-to-dividends and price-to-cash flow levels, and we are
concerned with short-term valuations. Please remember, this discussion reflects
our views, opinions and portfolio holdings as of June 30, 1998, the end of the
reporting period. However, market and economic conditions are changing
constantly, which may affect our strategies and the Fund's portfolio
composition. Although historic performance is no guarantee of future results,
these insights may help you understand our investment and management philosophy.
While the Fund invests primarily in securities of U.S. companies and the U.S.
government, its agencies and instrumentalities, it may also invest up to 35% of
its total assets in securities of issuers in any
3
<PAGE>
TOP 10 HOLDINGS
6/30/98
<TABLE>
<CAPTION>
% OF TOTAL
COMPANY, INDUSTRY NET ASSETS
- ----------------------------------------------
<S> <C>
ADC Telecommunications Inc.
Electronic Components &
Instruments 3.5%
Morgan Stanley Dean Witter
Discover & Co.
Financial Services 3.3%
Landstar System Inc.
Transportation 2.5%
American International Group Inc.
Insurance 2.5%
Scholastic Corp.
Broadcasting & Publishing 2.3%
Ford Motor Co.
Automobiles 2.3%
DSC Communications Corp.
Electrical & Electronics 2.1%
3Com Corp.
Data Processing & Reproduction 2.1%
American General Corp.
Insurance 2.0%
AT&T Corp.
Telecommunications 2.0%
</TABLE>
foreign country, developed or developing. There are, of course, special risks
involved with global investing related to market, currency, economic, social,
political and other factors. Emerging markets involve heightened risks related
to the same factors, in addition to those associated with their relatively small
size and lesser liquidity. These special risks and other considerations are
discussed in the Fund's prospectus. Investing in any emerging market means
accepting a certain amount of volatility and, in some cases, severe market
corrections. While short-term volatility can be disconcerting, declines of as
much as 40% to 50% are not unusual in emerging markets. For example, the Hong
Kong equity market has increased 785% in the last 15 years, but has suffered six
quarterly declines of more than 20% during that time(2).
As always, we thank you for your participation in Templeton American Trust.
Sincerely,
/s/ PETER A. NORI
Peter A. Nori
Portfolio Manager
Templeton American Trust, Inc.
2. Source: Bloomberg. Based on quarterly percentage change over 15 years ended
June 30, 1998. Market returns are measured in Hong Kong dollars.
4
<PAGE>
PERFORMANCE SUMMARY
CLASS I
Templeton American Trust - Class I produced a 9.76% cumulative total return for
the six-month period ended June 30, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of all distributions,
and does not include the sales charge. We have always maintained a long-term
perspective when managing the Fund, and we encourage you to view your
investments in a similar manner. As you can see from the table on page 6, the
Fund's Class I shares delivered a cumulative total return of more than 77% since
inception on May 1, 1995.
The Fund's share price, as measured by net asset value, increased 76 cents, from
$17.17 on December 31, 1997, to $17.93 on June 30, 1998. During the reporting
period, shareholders received per-share distributions of 33 cents ($0.33) in
short-term capital gains and 57 cents ($0.57) in long-term capital gains.
Distributions will vary depending on income earned by the Fund and any profits
realized from the sale of securities in the portfolio, as well as the level of
the Fund's operating expenses.
Past performance is not predictive of future results.
5
<PAGE>
CLASS I
Periods ended 6/30/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 3-YEAR (5/1/95)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 18.02% 69.00% 77.33%
Average Annual Total Return(2) 11.21% 16.78% 17.61%
Value of $10,000 Investment(3) $11,121 $15,927 $16,725
6/30/96 6/30/97 6/30/98
- --------------------------------------------------------------------------------
One-Year Total Return(4) 13.81% 25.81% 18.02%
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the maximum 5.75% initial
sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and include the maximum 5.75% initial sales
charge.
4. One-year total return represents the change in value of an investment over
the periods ended on the dates indicated and does not include the sales charge.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, currency volatility, and the economic, social
and political climates of countries where investments are made. Emerging markets
involve heightened risks related to the same factors, in addition to those
associated with their relatively small size and lesser liquidity. You may have a
gain or loss when you sell your shares.
Past performance is not predictive of future results.
6
<PAGE>
Class II
Templeton American Trust - Class II produced a 9.44% cumulative total return for
the six-month period ended June 30, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of all distributions,
and does not include sales charges. We have always maintained a long-term
perspective when managing the Fund, and we encourage you to view your
investments in a similar manner. As you can see from the table on page 8, the
Fund's Class II shares delivered a cumulative total return of more than 168%
since inception on February 27, 1991.
The Fund's share price, as measured by net asset value, increased 70 cents, from
$17.21 on December 31, 1997, to $17.91 on June 30, 1998. During the reporting
period, shareholders received per-share distributions of 33 cents ($0.33) in
short-term capital gains and 57 cents ($0.57) in long-term capital gains.
Distributions will vary depending on income earned by the Fund and any profits
realized from the sale of securities in the portfolio, as well as the level of
the Fund's operating expenses.
Past performance is not predictive of future results.
7
<PAGE>
CLASS II
Periods ended 6/30/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR (2/27/91)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 17.22% 103.47% 168.67%
Average Annual Total Return(2) 15.16% 15.03% 14.26%
Value of $10,000 Investment(3) $11,516 $20,141 $26,601
<CAPTION>
6/30/94 6/30/95 6/30/96 6/30/97 6/30/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) 7.25% 14.57% 13.02% 24.93% 17.22%
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and has been restated to include the
current maximum 1.0% initial sales charge and 1.0% contingent deferred sales
charge applicable to shares redeemed within 18 months of investment. Prior to
May 1, 1995, Class II shares were offered without an initial sales charge and
with a higher, but declining, contingent deferred sales charge; thus, actual
returns for investors who paid this higher charge would differ.
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and have been restated to include the current
maximum 1.0% initial sales charge and 1.0% contingent deferred sales charge
applicable to shares redeemed within 18 months of investment. Prior to May 1,
1995, Class II shares were offered without an initial sales charge and with a
higher, but declining, contingent deferred sales charge; thus, actual returns
for investors who paid this higher charge would differ.
4. One-year total return represents the change in value of an investment over
the periods ended on the dates indicated and does not include sales charges.
All calculations assume reinvestment of distributions at net asset value. Past
expense waivers by the Fund's Manager increased the Fund's total returns to
shareholders. Without these waivers, the Fund's total returns would have been
lower. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, currency volatility, and the
economic, social and political climates of countries where investments are made.
Emerging markets involve heightened risks related to the same factors, in
addition to those associated with their relatively small size and lesser
liquidity. You may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
8
<PAGE>
TEMPLETON AMERICAN TRUST, INC.
Financial Highlights
<TABLE>
<CAPTION>
CLASS I
----------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 --------------------------------
(UNAUDITED) 1997 1996 1995+
----------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net asset value, beginning of period........................ $17.17 $16.02 $14.23 $13.37
----------------------------------------------------
Income from investment operations:
Net investment income...................................... .04 .13 .20 .11
Net realized and unrealized gains.......................... 1.62 3.42 2.60 1.21
----------------------------------------------------
Total from investment operations............................ 1.66 3.55 2.80 1.32
----------------------------------------------------
Less distributions from:
Net investment income...................................... -- (.15) (.26) (.20)
Net realized gains......................................... (.90) (2.25) (.75) (.26)
----------------------------------------------------
Total distributions......................................... (.90) (2.40) (1.01) (.46)
----------------------------------------------------
Net asset value, end of period.............................. $17.93 $17.17 $16.02 $14.23
----------------------------------------------------
----------------------------------------------------
Total Return*............................................... 9.76% 22.66% 19.90% 9.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $6,703 $5,028 $2,053 $881
Ratios to average net assets:
Expenses................................................... 1.50%** 1.41% 1.57% 1.81%**
Net investment income...................................... .54%** .58% 1.53% 1.31%**
Portfolio turnover rate..................................... 17.10% 41.06% 15.93% 4.44%
</TABLE>
*Total return does not reflect sales commissions and is not annualized.
**Annualized.
+For the period May 1, 1995 (effective date) to December 31, 1995.
9
<PAGE>
TEMPLETON AMERICAN TRUST, INC.
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS II
-------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 -----------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the
period)
Net asset value, beginning of period..... $17.21 $16.04 $14.25 $12.49 $13.39 $11.77
-------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)............ (.01) (.03) .14 .14 .04 .04
Net realized and unrealized gains....... 1.61 3.45 2.54 2.04 .17 1.82
-------------------------------------------------------------------------------
Total from investment operations......... 1.60 3.42 2.68 2.18 .21 1.86
-------------------------------------------------------------------------------
Less distributions from:
Net investment income................... -- -- (.14) (.14) (.05) (.03)
Net realized gains...................... (.90) (2.25) (.75) (.28) (1.06) (.21)
-------------------------------------------------------------------------------
Total distributions...................... (.90) (2.25) (.89) (.42) (1.11) (.24)
-------------------------------------------------------------------------------
Net asset value, end of period........... $17.91 $17.21 $16.04 $14.25 $12.49 $13.39
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Total Return*............................ 9.44% 21.83% 18.91% 17.55% 1.63% 15.82%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........ $52,672 $52,063 $44,648 $44,183 $37,959 $34,418
Ratios to average net assets:
Expenses................................ 2.15%** 2.17% 2.26% 2.40% 2.47% 2.53%
Net investment income (loss)............ (.10)%** (.16)% .85% .95% .34% .31%
Portfolio turnover rate.................. 17.10% 41.06% 15.93% 4.44% 31.92% 14.10%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge and is not annualized.
**Annualized.
See Notes to Financial Statements.
10
<PAGE>
TEMPLETON AMERICAN TRUST, INC.
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
--------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 84.4%
AEROSPACE & MILITARY TECHNOLOGY 1.6%
Kaman Corp., A.............................................. United States 50,200 $ 955,369
-----------
AUTOMOBILES 3.4%
*Circuit City Stores Inc., Carmax Group..................... United States 63,200 643,850
Ford Motor Co............................................... United States 23,000 1,357,000
-----------
2,000,850
-----------
BANKING .4%
Credicorp, Ltd.............................................. Peru 15,840 232,650
-----------
BROADCASTING & PUBLISHING 2.3%
*Scholastic Corp............................................ United States 34,600 1,379,675
-----------
BUILDING MATERIALS & COMPONENTS 2.5%
Owens Corning............................................... United States 26,015 1,061,737
Pioneer International Ltd................................... Australia 175,000 417,219
-----------
1,478,956
-----------
BUSINESS & PUBLIC SERVICES 1.3%
Columbia HCA Healthcare Corp................................ United States 26,000 757,250
-----------
CHEMICALS .8%
Great Lakes Chemical Corp................................... United States 11,000 433,812
*Octel Corp................................................. United States 2,750 54,656
-----------
488,468
-----------
DATA PROCESSING & REPRODUCTION 8.9%
*3com Corp.................................................. United States 40,300 1,236,706
*Bay Networks Inc........................................... United States 35,000 1,128,750
Compaq Computer Corp........................................ United States 22,869 648,908
*NCR Corp................................................... United States 18,021 585,683
*Newbridge Networks Corp.................................... Canada 41,845 1,001,665
*Quantum Corp............................................... United States 32,300 670,225
-----------
5,271,937
-----------
ELECTRICAL & ELECTRONICS 4.5%
Ametek Inc.................................................. United States 31,100 911,619
*DSC Communications Corp.................................... United States 42,100 1,263,000
Motorola Inc................................................ United States 9,000 473,063
-----------
2,647,682
-----------
ELECTRONIC COMPONENTS & INSTRUMENTS 6.8%
*ADC Telecommunications Inc................................. United States 56,200 2,053,056
Harman International Industries Inc......................... United States 20,500 789,250
Intel Corp.................................................. United States 16,000 1,186,000
-----------
4,028,306
-----------
ENERGY EQUIPMENT & SERVICES 1.5%
Sun Co. Inc................................................. United States 23,300 904,331
-----------
</TABLE>
11
<PAGE>
TEMPLETON AMERICAN TRUST, INC.
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
--------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
ENERGY SOURCES 5.5%
Norsk Hydro AS, ADR......................................... Norway 8,800 $ 388,300
Occidental Petroleum Corp................................... United States 32,150 868,050
Societe Elf Aquitaine SA.................................... France 4,000 562,355
Total SA, B................................................. France 7,000 910,023
YPF Sociedad Anonima, ADR................................... Argentina 18,000 541,125
-----------
3,269,853
-----------
FINANCIAL SERVICES 5.7%
Associates First Capital Corp., A........................... United States 6,027 463,326
Fannie Mae.................................................. United States 16,000 972,000
Morgan Stanley Dean Witter Discover & Co.................... United States 21,644 1,977,721
-----------
3,413,047
-----------
FOOD & HOUSEHOLD PRODUCTS .9%
IBP Inc..................................................... United States 30,000 543,750
-----------
FOREST PRODUCTS & PAPER 1.1%
Boise Cascade Corp.......................................... United States 20,300 664,825
-----------
HEALTH & PERSONAL CARE 2.4%
Aetna Inc................................................... United States 8,500 647,062
*Windmere-Durable Holdings Inc.............................. United States 21,400 766,388
-----------
1,413,450
-----------
INDUSTRIAL COMPONENTS 4.9%
Exide Corp.................................................. United States 43,000 722,937
Flowserve Corp.............................................. United States 20,904 514,761
Goodyear Tire & Rubber Co................................... United States 18,000 1,159,875
Walbro Corp................................................. United States 37,800 533,925
-----------
2,931,498
-----------
INSURANCE 6.2%
American General Corp....................................... United States 17,000 1,210,187
American International Group Inc............................ United States 10,025 1,463,650
Presidential Life Corp...................................... United States 47,100 1,006,763
-----------
3,680,600
-----------
MERCHANDISING 3.9%
American Stores Co.......................................... United States 48,888 1,182,478
*Gymboree Inc............................................... United States 73,800 1,118,531
-----------
2,301,009
-----------
METALS & MINING 3.4%
Birmingham Steel Corp....................................... United States 56,800 702,900
Oregon Steel Mills Inc...................................... United States 36,600 681,675
Reynolds Metals Co.......................................... United States 11,000 615,313
-----------
1,999,888
-----------
</TABLE>
12
<PAGE>
TEMPLETON AMERICAN TRUST, INC.
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
--------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MISCELLANEOUS MATERIALS & COMMODITIES 1.6%
Agrium Inc.................................................. Canada 75,000 $ 946,875
-----------
MULTI-INDUSTRY .9%
Hutchison Whampoa Ltd....................................... Hong Kong 100,000 527,837
-----------
REAL ESTATE 1.4%
LTC Properties Inc.......................................... United States 41,720 777,035
National Health Investors Inc............................... United States 1,800 59,625
-----------
836,660
-----------
TELECOMMUNICATIONS 3.7%
AT&T Corp................................................... United States 21,150 1,208,194
U.S. West Communications Group.............................. United States 21,200 996,400
-----------
2,204,594
-----------
TEXTILES & APPAREL 1.3%
Shaw Industries Inc......................................... United States 45,000 793,125
-----------
TRANSPORTATION 4.3%
*Fritz Companies............................................ United States 79,000 1,056,625
*Landstar System Inc........................................ United States 42,400 1,481,350
-----------
2,537,975
-----------
UTILITIES ELECTRICAL & GAS 3.0%
Iberdrola SA................................................ Spain 50,000 813,247
Potomac Electric Power Co................................... United States 37,650 943,603
-----------
1,756,850
-----------
WHOLESALE & INTERNATIONAL TRADE .2%
Brierley Investments Ltd.................................... New Zealand 225,000 112,126
-----------
TOTAL COMMON STOCKS ($35,726,901)........................... 50,079,436
-----------
</TABLE>
13
<PAGE>
TEMPLETON AMERICAN TRUST, INC.
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT** VALUE
-------------------------
<S> <C> <C> <C>
SHORT TERM INVESTMENTS 8.1%
Federal Farm Credit Banks, 5.53%, 10/01/98................................... $1,930,000 $ 1,930,216
U.S. Treasury Bills, 5.035% to 5.130% with maturities to 11/12/98............ 2,949,000 2,894,116
-----------
TOTAL SHORT TERM INVESTMENTS (COST $4,823,102)............................... 4,824,332
-----------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $40,550,003)............ 54,903,768
-----------
(a)REPURCHASES AGREEMENTS 9.4%
Merrill Lynch & Co. Inc., 5.80%, 7/01/98 (Maturity Value $2,800,451)
Collaterized by U.S. Treasury Notes........................................ 2,800,000 2,800,000
Morgan Stanley Inc., 5.75%, 7/01/98 (Maturity Value $2,800,447) Collaterized
by U.S. Treasury Notes..................................................... 2,800,000 2,800,000
-----------
TOTAL REPURCHASE AGREEMENTS (COST $5,600,000)................................ 5,600,000
-----------
TOTAL INVESTMENTS (COST $46,150,003) 101.9%.................................. 60,503,768
OTHER ASSETS, LESS LIABILITIES (1.9%)........................................ (1,128,864)
-----------
TOTAL NET ASSETS 100.0%...................................................... $59,374,904
-----------
-----------
</TABLE>
*Non-income producing.
**Securities traded in U.S. dollars.
(a)See Note 1(e) regarding repurchase agreements.
See Notes to Financial Statements.
14
<PAGE>
TEMPLETON AMERICAN TRUST, INC.
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $40,550,003)..... $54,903,768
Repurchase agreements, at value and cost................... 5,600,000
Cash....................................................... 999
Receivables:
Investment securities sold................................ 924,299
Capital shares sold....................................... 112,346
Dividends and interest.................................... 57,491
-----------
Total assets.......................................... 61,598,903
-----------
Liabilities:
Payables:
Investment securities purchased........................... 1,930,000
Capital shares redeemed................................... 132,526
To affiliates............................................. 139,869
Accrued liabilities........................................ 21,604
-----------
Total liabilities..................................... 2,223,999
-----------
Net assets, at value........................................ $59,374,904
===========
Net assets consist of:
Accumulated net investment loss............................ $ (9,433)
Net unrealized appreciation................................ 14,353,765
Accumulated net realized gain.............................. 5,406,569
Capital shares............................................. 39,624,003
-----------
Net assets, at value........................................ $59,374,904
===========
CLASS I:
Net asset value per share ($6,703,060 / 373,909 shares
outstanding)............................................. $17.93
===========
Maximum offering price per share ($17.93 / 94.25%)......... $19.02
===========
CLASS II:
Net asset value per share ($52,671,844 / 2,940,766 shares
outstanding)*............................................ $17.91
===========
Maximum offering price per share ($17.91 / 99.00%)......... $18.09
===========
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
15
<PAGE>
TEMPLETON AMERICAN TRUST, INC.
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $11,501)
Dividends.................................................. $ 376,678
Interest................................................... 224,770
----------
Total investment income............................... $ 601,448
Expenses:
Management fees (Note 3)................................... 205,236
Administrative fees (Note 3)............................... 43,979
Distribution fees (Note 3)
Class I................................................... 10,482
Class II.................................................. 263,291
Transfer agent fees (Note 3)............................... 32,000
Custodian fees............................................. 4,900
Reports to shareholders.................................... 15,500
Registration and filing fees............................... 16,493
Professional fees.......................................... 10,500
Directors' fees and expenses............................... 8,500
----------
Total expenses........................................ 610,881
----------
Net investment loss............................... (9,433)
----------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments............................................... 5,427,543
Foreign currency transactions............................. (1,706)
----------
Net realized gain..................................... 5,425,837
Net unrealized depreciation on investments............ (103,698)
----------
Net realized and unrealized gain............................ 5,322,139
----------
Net increase in net assets resulting from operations........ $5,312,706
----------
----------
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
TEMPLETON AMERICAN TRUST, INC.
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997
----------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment loss....................................... $ (9,433) $ (59,740)
Net realized gain from investments and foreign currency
transactions............................................ 5,425,837 8,772,720
Net unrealized appreciation (depreciation) on
investments............................................. (103,698) 1,234,510
----------------------------------------
Net increase in net assets resulting from operations.... 5,312,706 9,947,490
Distributions to shareholders from:
Net investment income:
Class I.................................................. -- (34,067)
Class II................................................. -- (8,714)
Net realized gains:
Class I.................................................. (293,518) (482,773)
Class II................................................. (2,672,535) (6,135,485)
Capital share transactions (Note 2):
Class I.................................................. 1,410,531 2,906,521
Class II................................................. (1,473,314) 4,196,590
----------------------------------------
Net increase in net assets.............................. 2,283,870 10,389,562
Net assets:
Beginning of period........................................ 57,091,034 46,701,472
----------------------------------------
End of period.............................................. $59,374,904 $57,091,034
----------------------------------------
----------------------------------------
Accumulated net investment loss included in net assets:
End of period.............................................. $ (9,433) $ --
----------------------------------------
----------------------------------------
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
TEMPLETON AMERICAN TRUST, INC.
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton American Trust, Inc. (the Fund) is registered under the Investment
Company Act of 1940 as a diversified, open-end investment company. The Fund
seeks long-term total return (a combination of capital growth and income) by
investing at least 65% of its total assets primarily in the equity and debt
securities of U.S. companies and the U.S. government, its agencies and
instrumentalities. The following summarizes the Fund's significant accounting
policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date. When
the Fund purchases or sells foreign securities it will customarily enter into a
foreign exchange contract to minimize foreign exchange risk from the trade date
to the settlement date of such transactions.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, and the difference between the recorded
amounts of dividends, interest, and foreign withholding taxes, and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in foreign exchange rates
on foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
c. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
18
<PAGE>
TEMPLETON AMERICAN TRUST, INC.
Notes to Financial Statements (unaudited) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONT.)
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
e. REPURCHASE AGREEMENTS:
The Fund may enter into repurchase agreements, which are accounted for as a loan
by the Fund to the seller, collateralized by securities which are delivered to
the Fund's custodian. The market value, including accrued interest, of the
initial collateralization is required to be at least 102% of the dollar amount
invested by the Fund, with the value of the underlying securities marked to
market daily to maintain coverage of at least 100%. At June 30, 1998, all
outstanding repurchase agreements held by the Fund had been entered into on that
date.
f. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. CAPITAL STOCK
The Fund offers two classes of shares: Class I and Class II shares. The shares
differ by their initial sales load, distribution fees, voting rights on matters
affecting a single class and the exchange privilege of each class.
At June 30, 1998, there were an unlimited number of shares authorized ($0.01 par
value). Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
-----------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------
<S> <C> <C> <C> <C>
CLASS I SHARES:
Shares sold................................................. 154,051 $ 2,705,086 205,470 $ 3,717,827
Shares issued on reinvestment of distributions.............. 14,989 260,929 27,495 464,649
Shares redeemed............................................. (87,859) (1,555,484) (68,378) (1,275,955)
-----------------------------------------------------
Net increase................................................ 81,181 $ 1,410,531 164,587 $ 2,906,521
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
19
<PAGE>
TEMPLETON AMERICAN TRUST, INC.
Notes to Financial Statements (unaudited) (continued)
2. CAPITAL STOCK (CONT.)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS II SHARES:
Shares sold................................................. 354,787 $ 6,198,815 336,921 $ 6,061,966
Shares issued on reinvestment of distributions.............. 136,912 2,385,007 322,381 5,449,383
Shares redeemed............................................. (576,812) (10,057,136) (416,422) (7,314,759)
------------------------------------------------------
Net increase (decrease)..................................... (85,113) $ (1,473,314) 242,880 $ 4,196,590
------------------------------------------------------
------------------------------------------------------
</TABLE>
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Fund are also directors or officers of Templeton
Investment Counsel, Inc. (TICI), Franklin Templeton Services, Inc. (FT
Services), Franklin/Templeton Distributors, Inc. (Distributors) and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Fund's
investment manager, administrative manager, principal underwriter, and transfer
agent, respectively.
The Fund pays an investment management fee to TICI of 0.70% per year of the
average daily net assets of the Fund. The Fund pays an administrative fee to FT
Services based on the Fund's average daily net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- ------------------------------------------------------------------
<S> <C>
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
</TABLE>
The Fund reimburses Distributors up to 0.35% and 1.00% per year of the average
daily net assets of Class I and Class II shares, respectively, for costs
incurred in marketing the Fund's Class I and Class II shares. Under the Class I
distribution plan, costs exceeding the maximum may be reimbursed in subsequent
periods. At June 30, 1998, there were unreimbursed costs of $622. Distributors
received net commissions from sales of fund shares and received contingent
deferred sales charges for the period of $5,839 and $3,245, respectively.
Legal fees of $21,751 were paid to a law firm in which a partner is an officer
of the Fund.
20
<PAGE>
TEMPLETON AMERICAN TRUST, INC.
Notes to Financial Statements (unaudited) (continued)
4. INCOME TAXES
The cost of securities for income tax purposes is the same as that shown in the
Statement of Investments. At June 30, 1998, the net unrealized appreciation
based on the cost of investments for income tax purposes was as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $16,593,952
Unrealized depreciation..................................... (2,240,187)
-----------
Net unrealized appreciation................................. $14,353,765
-----------
-----------
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended June 30, 1998 aggregated $8,686,574 and $10,832,976 respectively.
6. SUBSEQUENT EVENT
The Fund's Board of Directors is considering a tax-free merger of the Fund with
another fund affiliated with Franklin Resources, Inc., the parent company of the
Fund's investment manager.
21
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LITERATURE REQUEST
For a free brochure and prospectus, which contain more complete information,
including charges and expenses, call Franklin Templeton Fund Information at
1-800/DIAL BEN(R) (1-800/342-5236). Please read the prospectus carefully before
investing or sending money. To ensure the highest quality of service, telephone
calls to or from our service departments may be monitored, recorded and
accessed. These calls can be determined by the presence of a regular beeping
tone.
FRANKLIN TEMPLETON GROUP
GLOBAL GROWTH
Franklin Global Health Care Fund
Mutual Discovery Fund
Templeton Developing
Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller
Companies Fund
Templeton Global
Infrastructure Fund
Templeton Global
Opportunities Trust
Templeton Global
Real Estate Fund
Templeton Global
Smaller Companies Fund
Templeton Greater European Fund
Templeton Growth Fund
Templeton Latin America Fund
Templeton Pacific Growth Fund
Templeton World Fund
GLOBAL GROWTH AND INCOME
Franklin Global Utilities Fund
Mutual European Fund
Templeton Global Bond Fund
Templeton Growth and
Income Fund
GLOBAL INCOME
Franklin Global Government
Income Fund
Franklin Templeton Global
Currency Fund
Franklin Templeton Hard
Currency Fund
Templeton Americas Government
Securities Fund
GROWTH
Franklin Biotechnology
Discovery Fund
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin DynaTech Fund
Franklin Equity Fund
Franklin Gold Fund
Franklin Growth Fund
Franklin MidCap Growth Fund
Franklin Small Cap
Growth Fund
GROWTH AND INCOME
Franklin Asset Allocation Fund
Franklin Balance Sheet
Investment Fund*
Franklin Convertible
Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Franklin MicroCap Value Fund*
Franklin Natural Resources Fund
Franklin Real Estate
Securities Fund
Franklin Rising Dividends Fund
Franklin Strategic Income Fund
Franklin Utilities Fund
Franklin Value Fund
Mutual Beacon Fund
Mutual Financial Services Fund
Mutual Qualified Fund
Mutual Shares Fund
Templeton American Trust, Inc.
FUND ALLOCATOR SERIES
Franklin Templeton Conservative
Target Fund
Franklin Templeton Moderate
Target Fund
Franklin Templeton Growth
Target Fund
INCOME
Franklin Adjustable Rate
Securities Fund
Franklin Adjustable U.S.
Government Securities Fund
Franklin's AGE High Income Fund
Franklin Bond Fund
Franklin Floating Rate Trust
Franklin Investment Grade
Income Fund
Franklin Short-Intermediate
U.S. Government Securities Fund
Franklin U.S. Government
Securities Fund
Franklin Money Fund
Franklin Federal Money Fund
FRANKLIN FUNDS SEEKING
TAX-FREE INCOME
Federal Intermediate-Term
Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund
Puerto Rico Tax-Free
Income Fund
Tax-Exempt Money Fund
FRANKLIN STATE-SPECIFIC
FUNDS SEEKING
TAX-FREE INCOME
Alabama
Arizona**
Arkansas***
California**
Colorado
Connecticut
Florida**
Georgia
Hawaii***
Indiana
Kentucky
Louisiana
Maryland
Massachusetts+
Michigan**
Minnesota+
Missouri
New Jersey
New York**
North Carolina
Ohio+
Oregon
Pennsylvania
Tennessee***
Texas
Virginia
Washington***
VARIABLE ANNUITIES++
Franklin Valuemark(R)
Franklin Templeton
Valuemark Income Plus
(an immediate annuity)
*These funds are now closed to new accounts, with the exception of retirement
plan accounts.
**Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured municipal securities, and/or a high yield
portfolio (CA) and a money market portfolio (CA and NY).
***The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.
+Portfolio of insured municipal securities.
++Franklin Valuemark and Franklin Templeton Valuemark Income Plus are issued by
Allianz Life Insurance Company of North America or by its wholly owned
subsidiary, Preferred Life Insurance Company of New York, and distributed by
NALAC Financial Plans, LLC. The Franklin Valuemark Funds are managed by Franklin
Advisers, Inc. and its Templeton and Franklin affiliates.
07/98
