File No. 811-6243
As filed with the Securities and Exchange Commission on December 19, 1995
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. [ ] Post-Effective Amendment No.
FRANKLIN STRATEGIC SERIES
(Exact Name of Registrant as Specified in Charter)
Area Code and Telephone Number: (415) 312-2000
777 Mariners Island Blvd.
San Mateo, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Harmon E. Burns, Esq.
777 Mariners Island Blvd.
San Mateo, CA 94404
(Name and Address of Agent for Service)
Copies To: Jeffrey L. Steele, Esq.
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005
Approximate Date of Proposed Public Offering: As soon
as practicable after the effective date of this Registration
Statement.
The Registrant has registered an indefinite amount of
securities under the Securities Act of 1933 pursuant to Section 24(f) under the
Investment Company Act of 1940; accordingly, no fee is payable herewith. A Rule
24f-2 Notice for the Registrant's most recent fiscal year ended April 30, 1995
was filed with the Commission on or before June 29, 1995.
It is proposed that this filing become effective on January
18, 1996 pursuant to Rule 488 under the Securities Act of 1933.
<PAGE>
CROSS REFERENCE SHEET FOR
FRANKLIN STRATEGIC SERIES
FRANKLIN GLOBAL UTILITIES FUND
<TABLE>
<CAPTION>
Item of Part A Location in
OF FORM N-14 PROSPECTUS
<S> <C>
1 ................................ Cross Reference Sheet;
Cover Page
2 ................................ Table of Contents
3 ................................ Synopsis; Comparison of
Investment Objectives and
Policies
4 ................................ Reasons for the Transaction;
Information About the
Transaction
5 ................................ Information About the Funds
6 ................................ Information About the Funds
7 ................................ Voting Information
8 ................................ Synopsis
9 ................................ Inapplicable
Item of Part B Location in Statement
OF FORM N-14 OF ADDITIONAL INFORMATION
10 ................................ Cover Page
11 ................................ Cover Page
12 ................................ Statement of Additional
Information of Franklin
Global Utilities Fund dated
September 1, 1995
13 ................................ Inapplicable
14 ................................ Statement of Additional
Information of Franklin
Global Utilities Fund dated
September 1, 1995; Annual
Report of Franklin Strategic
Series for the fiscal year
ended April 30, 1995; Annual
Report of Templeton Global
Utilities, Inc. for the
fiscal year ended August 31,
1995; pro-forma financial
statements.
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</TABLE>
TEMPLETON GLOBAL UTILITIES, INC.
700 CENTRAL AVENUE
ST. PETERSBURG, FLORIDA 33701-3628
January ___, 1995
Dear Shareholder:
The Board of Directors of Templeton Global Utilities, Inc. (the
"Fund") has recently reviewed and unanimously endorsed a proposal for
reorganization of the Fund which they judge to be in the best interests of its
shareholders. This proposal calls for combining the assets of the Fund with
another fund which has similar investment objectives and investment policies.
We have therefore included the consideration of the proposal on the
agenda for the Annual Meeting of Shareholders to be held on February 20, 1995.
WE STRONGLY INVITE YOUR PARTICIPATION BY ASKING YOU TO REVIEW, COMPLETE AND
RETURN YOUR PROXY AS SOON AS POSSIBLE.
As a result of this transaction, your Fund would be combined with
Franklin Global Utilities, Inc. ("Franklin Global Utilities"), a mutual fund
managed by Franklin Advisers, Inc., and you would become a shareholder of
Franklin Global Utilities, receiving shares of Franklin Global Utilities, having
an aggregate net asset value equal to the aggregate net asset value of your
investment in the Fund. No sales charge will be imposed in the transaction and
the Closing of the transaction will be conditioned upon receiving an opinion of
counsel to the effect that the proposed transaction will qualify as a tax-free
reorganization for Federal income tax purposes.
Detailed information about the proposed transaction and the reasons
for it are contained in the enclosed materials. Please exercise your right to
vote by completing, dating and signing the enclosed proxy card. A
self-addressed, postage-paid envelope has been enclosed for your convenience. IT
IS VERY IMPORTANT THAT YOU VOTE AND THAT YOUR VOTING INSTRUCTIONS BE RECEIVED NO
LATER THAN FEBRUARY , 1995.
NOTE: You may receive more than one proxy package if you hold Fund
shares in more than one account. You must return separate proxy cards for
separate holdings. We have provided postage-paid return envelopes for each,
which requires no postage if mailed in the United States.
Sincerely,
Thomas M. Mistele
Secretary
<PAGE>
TEMPLETON GLOBAL UTILITIES, INC.
700 Central Avenue, St. Petersburg, Florida 33701-3628
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
FEBRUARY 20, 1996
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
Templeton Global Utilities, Inc. ("TGU" or the "Fund") will be held at the
Fund's offices, 700 Central Avenue, St. Petersburg, Florida 33701-3628 on
Tuesday, February 20, 1996 at 10:00 A.M. (Local Time) for the following
purposes:
I. To approve an Agreement and Plan of Reorganization providing
for the transfer of the assets and certain liabilities of the
Fund in exchange for Class I shares of Franklin Global
Utilities Fund, the distribution of such shares to
shareholders of the Fund in liquidation of the Fund and the
subsequent dissolution of the Fund;
II. To elect four Directors of the Fund to hold office for the
terms specified and until their successors are elected and
qualified, or until such earlier date as the Fund is dissolved
as set forth in Proposal I;
III. To ratify or reject the selection of McGladrey & Pullen,
L.L.P. as independent public accountants of the Fund for the
fiscal year ending August 31, 1996; and
IV. To transact such other business as may properly come before
the Annual Meeting or any adjournment or adjournments thereof.
Every shareholder of record as of the close of business on _____ will
be entitled to vote. By Order of the Board of Directors,
Thomas M. Mistele
Secretary
January ___, 1996
Many Shareholders hold shares in more than one
Templeton Fund and will have received proxy material
for each fund owned. Please sign and promptly return
each proxy card in the self-addressed envelope that
you receive regardless of the number of shares you
own.
<PAGE>
PROSPECTUS / PROXY STATEMENT
ACQUISITION OF THE ASSETS
OF TEMPLETON GLOBAL UTILITIES, INC.
700 Central Avenue
St. Petersburg, Florida 33701-3628
BY AND IN EXCHANGE FOR CLASS I SHARES
OF FRANKLIN GLOBAL UTILITIES FUND
777 Mariners Island Boulevard
San Mateo, California 94403-7777
-------------------
INTRODUCTION
This Prospectus/Proxy Statement relates to the solicitation of
shareholder approval for the proposed transfer of the assets and certain
liabilities of Templeton Global Utilities, Inc. ("TGU" or the "Fund"), a
diversified, closed-end management investment company, to Franklin Global
Utilities Fund ("Franklin Global Utilities"), a non-diversified series of
Franklin Strategic Series, an open-end management investment company, in
exchange for shares of Class I common stock of Franklin Global Utilities.
Following the exchange, Class I shares of Franklin Global Utilities will be
distributed to the shareholders of the Fund in liquidation of the Fund. As a
result of the proposed transaction, each holder of shares of the Fund will
receive that number of full and fractional Class I shares of Franklin Global
Utilities equal in net asset value at the close of business on the date of the
exchange to the net asset value of the Shareholder's shares of the Fund.
<PAGE>
Shareholders of the Fund will not be assessed any sales load or other
fee in connection with the proposed transaction. Class I shares of Franklin
Global Utilities distributed to the shareholders of the Fund as a result of the
proposed transaction that are redeemed or exchanged for shares of another mutual
fund managed by Franklin Advisers, Inc. ("Advisers") or its affiliates will be
subject to a redemption fee, determined as a percentage of the net asset value
of such shares as of the date of the redemption or exchange, of 1% through
August __, 1996. There will be no such fee on redemptions or exchanges made
after August __, 1996. The proceeds of the redemption fee will be retained by
Franklin Global Utilities to the benefit of the remaining shareholders of
Franklin Global Utilities. See "Information About the Transaction - Redemption
Fee" below.
THE BOARD OF DIRECTORS OF THE FUND
RECOMMENDS APPROVAL OF THE PLAN
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about Franklin Global Utilities
that a prospective investor should know before returning the enclosed proxy
card. This Prospectus/Proxy Statement is accompanied by the Prospectus of
Franklin Global Utilities dated September 1, 1995 (the "Franklin Global
Utilities Prospectus") and by the Annual Report of Franklin Strategic Series
dated April 30, 1995 (the "Strategic Series Annual Report"), which includes
information concerning Franklin Global Utilities. The information in the
Franklin Global Utilities Prospectus is incorporated herein by reference. A
Statement of Additional Information dated January __, 1996 (the "Supplementary
Information"), which provides a further discussion of certain matters discussed
herein, as well as additional matters, including information about Franklin
Global Utilities and the Fund, has been filed with the Securities and Exchange
Commission (the "Commission") and is also incorporated herein by reference. A
Statement of Additional Information of Franklin Global Utilities dated September
1, 1995 has been filed with the Commission as part of the Supplementary
Information and is further incorporated by reference herein. Copies of the
Supplementary Information may be obtained without charge by writing to Franklin
Templeton Investor Services, Inc., the transfer agent of Franklin Global
Utilities, at 777 Mariners Island Boulevard, P.O. Box 777, San Mateo, California
94403- 7777, or by calling the Transfer Agent toll free at 1-800-DIAL-BEN.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SYNOPSIS
This synopsis is qualified by reference to the more complete
information contained elsewhere in this Prospectus/Proxy Statement, the Franklin
Global Utilities Prospectus, the Strategic Series Annual Report and the
Agreement and Plan of Reorganization attached hereto as Exhibit A. Franklin
Global Utilities and the Fund are sometimes individually referred to herein as a
"Fund' and collectively as the "Funds."
PROPOSED TRANSACTION. At a meeting held on December 5, 1995, the
Directors of the Fund, including the Directors who are not "interested persons"
of the Fund (the "Independent Directors") within the meaning of the Investment
Company Act of 1940, as amended (the "1940 Act"), unanimously approved an
Agreement and Plan of Reorganization (the "Plan") between the Fund, a closed-end
investment company whose shares are traded on the American Stock Exchange, and
Franklin Strategic Series, an open-end investment company, on behalf of Franklin
Global Utilities, providing for the transfer of the assets of the Fund to
Franklin Global Utilities in exchange for Class I shares of Franklin Global
Utilities, the assumption by Franklin Global Utilities of certain liabilities of
the Fund and the distribution of the Class I shares of Franklin Global Utilities
to shareholders of the Fund in liquidation of the Fund (the "Transaction"). The
aggregate net asset value of the Class I shares of Franklin Global Utilities
issued in the Transaction will equal the aggregate net asset value of the shares
of the Fund then outstanding.
As a result of the Transaction, each holder of shares of the Fund
will receive that number of full and fractional Class I shares of Franklin
Global Utilities equal in net asset value, determined as of the close of trading
on the American Stock Exchange next
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preceding the closing of the Transaction, to the net asset value, determined as
of the same time, of such shareholder's shares of the Fund. Shareholders of the
Fund will not be assessed any sales load or other fee in connection with the
Transaction. Franklin Global Utilities Class I shares distributed to the
shareholders of the Fund as a result of the Transaction that are redeemed or
exchanged will be subject to a redemption fee, determined as a percentage of the
net asset value of such shares as of the date of the redemption or exchange, of
1% with respect to redemptions and exchanges occurring through August __, 1996.
The temporary redemption fee will be deducted from the amount otherwise payable
to holders of such Class I shares upon such redemption or exchange and, unlike a
contingent deferred sales charge, which is typically paid to a distributor, will
be retained by Franklin Global Utilities and, thereby, provide a benefit to the
remaining shareholders of Franklin Global Utilities. The level and duration of
the redemption fee may be reduced, or the fee may be terminated, at any time at
the discretion of Franklin Global Utilities. See "Information About the
Transaction - Redemption Fee" below. The Board of Directors of the Fund has
determined that the interests of existing shareholders of the Fund would not be
diluted as a result of the Transaction, concluded that the Transaction would be
in the best interests of the Fund and the shareholders of the Fund and
recommends approval of the Transaction. Approval of the Plan and Transaction
will require the affirmative vote of the holders of a majority of the
outstanding shares of the Fund.
Pursuant to the terms of the Plan, the Fund, Franklin Global Utilities,
Templeton, Galbraith & Hansberger Ltd. and Franklin Advisers, Inc. will each pay
one-fourth of the costs of the Transaction.
The Transaction is expected to occur shortly following shareholder
approval thereof. However, the Plan may be terminated at any time prior to the
closing of the Transaction by either Fund, whether or not shareholder approval
has been obtained, if the conditions precedent to that Fund's obligations under
the Plan have not been satisfied or if the Board of Directors of that Fund
determines that proceeding with the Plan would not be in the best interests of
that Fund's shareholders.
If the Transaction does not close, the Board of Directors will
consider what action, if any, would be appropriate. See "Reasons for the
Transaction" below.
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<PAGE>
FORM OF ORGANIZATION. Franklin Global Utilities is a non-diversified
series of Franklin Strategic Series, an open-end management investment company,
while the Fund is a diversified, closed-end management investment company. See
"Comparison of Open- End and Closed-End Investment Companies" below.
TAX CONSEQUENCES. As a condition to closing, the Fund and Franklin
Global Utilities will obtain an opinion of counsel, based on certain facts,
assumptions and representations made by the Fund and Franklin Global Utilities,
to the effect that the Transaction will qualify as a tax-free reorganization for
Federal income tax purposes. See "Information About the Transaction."
INVESTMENT OBJECTIVES AND POLICIES. The investment objective of
Franklin Global Utilities and that of the Fund are identical and their
investment policies are similar. Each Fund seeks to provide total return without
incurring undue risk by investing at least 65% of its total assets in securities
of companies in the utility industries. The investment policies of Franklin
Global Utilities and the Fund are discussed in detail below under "Comparison of
Investment Objectives and Policies."
ADVISORY, DISTRIBUTION AND OTHER FEES; EXPENSE RATIOS. Under an
investment advisory agreement with Advisers (the "Franklin Global Utilities
Advisory Agreement"), Franklin Global Utilities pays Advisers at the annual rate
of 0.625% of the value of average daily net assets, with breakpoints at various
asset levels. The fee is accrued daily and paid monthly. During the most recent
fiscal year, Franklin Global Utilities paid fees to Advisers amounting to 0.60%
of its average daily net assets. Under an investment management agreement with
Templeton, Galbraith & Hansberger Ltd. ("TGH") (the "TGU Advisory Agreement"),
the Fund pays monthly to TGH a fee at an annual rate of 0.60% of the Fund's
annual daily net assets. See "Additional Information About the Fund - Investment
Manager" below.
Franklin Global Utilities has adopted a Plan of Distribution pursuant
to Rule 12b- 1 under the 1940 Act, under which Franklin Global Utilities may
reimburse Franklin Templeton Distributors, Inc. ("FTD") for expenses incurred in
distributing its Class I shares. FTD is the principal underwriter of Franklin
Global Utilities' shares and an indirect subsidiary of Franklin Resources, Inc.
("Franklin"). Under the plan, the
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maximum amount which Franklin Global Utilities may pay to FTD or others is 0.25%
per annum of Class I's average daily net assets, payable on a quarterly basis.
As a closed-end investment company, the Fund does not distribute its shares and,
therefore, does not have a Rule 12b-1 plan.
Pursuant to a Business Management Agreement between the Fund and
Templeton Global Investors, Inc. ("TGI"), TGI performs certain administrative
services for the Fund for which the Fund pays TGI a monthly fee at an annual
rate of 0.15% of the Fund's average daily net assets. TGI is an indirect wholly
owned subsidiary of Franklin. Franklin Global Utilities does not have an
administration or business management agreement and, therefore, pays no separate
administrative fees. Certain administrative services are provided to Franklin
Global Utilities by Advisors pursuant to the Franklin Global Utilities Advisory
Agreement.
Franklin Templeton Investor Services, Inc., an indirect wholly owned
subsidiary of Franklin, serves as transfer agent and dividend paying agent for
Franklin Global Utilities. Chemical Mellon Shareholder Services serves as
transfer agent and dividend paying agent for the Fund.
For the year ended April 30, 1995, the ratio of expenses to average
daily net assets for the Class I shares of Franklin Global Utilities was 1.12%.
For the year ended August 31, 1995, the ratio of expenses to average daily net
assets for the Fund was 1.25%. Based on net asset, fee and expense levels as of
October 31, 1995, the pro forma ratio of operating expenses to average daily net
assets for the Class I shares of Franklin Global Utilities upon completion of
the Transaction would be 1.05%. The expense ratio of the Class I shares of
Franklin Global Utilities would be higher at lower levels of net assets. For
example, based on the net asset, fee and expense levels of the Class I shares of
Franklin Global Utilities as of October 31, 1995, if an amount representing
one-half of the net assets of the Fund as of October 31, 1995 were to be paid to
shareholders upon redemption of their Class I shares of Franklin Global
Utilities immediately following the closing of the Transaction, the pro forma
ratio of operating expenses to average daily net assets for the Class I shares
of the combined Fund would be 1.20%.
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DIVIDENDS AND DISTRIBUTIONS. the Fund's current policy is to make
monthly distributions to shareholders consisting on net investment income (and
which may include short-term capital gains and net realized gains from foreign
currency transactions, if any) and to pay net realized long-term capital gains
annually. Franklin Global Utilities' current policy is to make semi-annual
distributions of net investment income and to pay net short-term and net
long-term capital gains annually. The Funds have no fixed dividend rates. It is
the intention of each Fund to distribute each fiscal year all of its net
investment income and net realized capital gains, if any, for such year.
There is no sales or other charge in connection with the reinvestment
of dividends and capital gains distributions of Franklin Global Utilities.
Franklin Global Utilities permits its shareholders to make an election to
receive dividends and distributions in cash or in full or fractional shares of
the Fund.
The Fund offers its shareholders a Dividend Reinvestment Plan as
described below under "Additional Information About the Fund-Dividend
Reinvestment Plan."
PURCHASE PROCEDURES AND EXCHANGE PRIVILEGES. Class I shares of
Franklin Global Utilities are offered on a continuous basis at a price equal to
their net asset value, plus a maximum sales charge of 4.50% of the public
offering price. The sales charge does not apply to shares acquired through the
reinvestment of dividends. No sales load will be assessed to shareholders of the
Fund in connection with the Transaction. The sales charge on Class I shares of
Franklin Global Utilities may be reduced or eliminated in accordance with
Franklin Global Utilities' Rights of Accumulation, Letter of Intent, Group
Purchases and Purchases at Net Asset Value programs. Purchases of Class I shares
of Franklin Global Utilities of $1,000,000 or more are not subject to an initial
sales charge but may be subject to a contingent deferred sales charge under
certain circumstances. The minimum initial investment in shares of Franklin
Global Utilities is $100 and the minimum for subsequent investments is $25,
except in certain instances as described in the Franklin Global Utilities
Prospectus. See "How to Buy Shares of the Fund" in the Franklin Global Utilities
Prospectus.
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<PAGE>
Under a multi-class structure, Franklin Global Utilities offers
investors the choice of purchasing Class I shares, which generally bear a higher
front-end sales charge and lower ongoing Rule 12b-1 fees, and Class II shares,
which generally have a lower front-end sales charge and higher ongoing Rule
12b-1 fees. For more information about the classes of shares of Franklin Global
Utilities, see the Franklin Global Utilities Prospectus which accompanies this
Prospectus/Proxy Statement. Each share of Franklin Global Utilities represents
an interest in the same investment portfolio of Franklin Global Utilities. While
only Class I shares of Franklin Global Utilities are to be issued in the
Transaction, Class II shares are available for purchase in accordance with the
Franklin Global Utilities Prospectus.
Class I shares of Franklin Global Utilities may be exchanged for
shares of the same class of certain other open-end investment companies managed
by Advisers and its affiliates ("Franklin Templeton Funds"). See "Exchange
Privilege" in the Franklin Global Utilities Prospectus. Exchanges of shares are
made at the relative net asset values next determined, without sales or service
charges, except that exchanges of Class I shares of Franklin Global Utilities
received in the Transaction will be subject to a redemption fee through August
__, 1996. The entire amount of this redemption fee will be retained by Franklin
Global Utilities. See "Redemption Procedures" and "Information About the
Transaction-Redemption Fee" below.
The Fund is a closed-end investment company and, therefore, does not
continually issue new shares as does Franklin Global Utilities and does not have
distribution and purchase procedures or exchange privileges. The Fund's shares
currently are traded on the American Stock Exchange, at prices that may be less
or more than their net asset value. Shareholders currently pay brokerage
commissions in connection with purchases and sales of the Fund's shares. The
Fund has a Dividend Reinvestment Plan as described below under "Additional
Information about the Fund-Dividend Reinvestment Plan."
REDEMPTION PROCEDURES. Class I shares of Franklin Global Utilities
may be redeemed on any day the New York Stock Exchange is open for trading,
either directly or through a securities dealer. Class I shares are redeemed at
net asset value next calculated after Franklin Global Utilities receives a
redemption request in proper form
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and, except with respect to certain redemptions of Class I shares purchased in
amounts of $1,000,000 or more, without any contingent deferred sales charges. In
the case of repurchases through securities dealers, the redemption price is the
net asset value next calculated after the shareholder's dealer receives the
order, which is promptly transmitted to Franklin Global Utilities, rather than
on the day the Fund receives the shareholder's written request in proper form.
Proceeds of a redemption generally are sent within seven days. See "How to Sell
Shares of the Fund" in the Franklin Global Utilities Prospectus. There is no
sales charge or other fee for redemptions of shares of Franklin Global
Utilities, except that Class I shares of Franklin Global Utilities received in
the Transaction that are redeemed or exchanged will be subject to a redemption
fee, determined as a percentage of the net asset value of such shares as of the
date of the redemption or exchange, of 1% with respect to redemptions and
exchanges occurring through August __, 1996. The level and duration of the
redemption fee may be reduced, or the fee may be terminated, at any time at the
discretion of Franklin Global Utilities. See "Information About the
Transaction-Redemption Fee" below. As a closed-end investment company, the Fund
does not redeem its shares. See "Comparison of Closed- End and Open-End
Investment Companies" below.
FEE TABLE
The table below sets forth information with respect to Class I shares
of Franklin Global Utilities and shares of the Fund as well as pro forma
information for Class I shares of Franklin Global Utilities after giving effect
to the Transaction. The table was prepared by Advisers based on the net asset,
fee and expense levels of the Funds as of October 31, 1995.
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<TABLE>
<CAPTION>
Pro Forma
Combined Fund
(i.e., Class I
Shares of
Shares of Franklin Global Utilities)
Franklin Shares of Following
UTILITIES THE FUND THE TRANSACTION
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C>
Sales Load (as a percentage of offering price) 4.50%(a) N/A(b) 4.50%(a)
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, whichever
is lower)...................................................... None(a) N/A(b) None(a)
Redemption Fees
(as a percentage of amount redeemed)........................... None N/A 1% through
10/_/96(c)
ANNUAL EXPENSES
Advisory and Administrative Fees................................. .60% .75% .57%
12b-1 Fees....................................................... .23% N/A .24%
Other Expenses................................................... .29% .46% .24%
---- ---- ----
Total Fund Operating Expenses.................................. 1.12 %(d) 1.21% 1.05%(e)
==== ==== ====
</TABLE>
(a) No sales load or other fee will be charged in connection with the
Transaction. Purchases of Class I shares of $1,000,000 or more are not
subject to an initial sales charge but may be subject to a 1% deferred
sales charge on redemptions made within one year of purchase. See "How to
Sell Shares of the Fund - Contingent Deferred Sales Charge" in the
Franklin Global Utilities Prospectus.
(b) Shares of the Fund are generally available for purchase and sale only in
the secondary market. Brokerage commissions and other fees may be
incurred in connection with such transactions.
(c) The redemption fee is applicable only to redemptions and exchanges made
on or before August __, 1996 of Class I shares of Franklin Global
Utilities received in the Transaction.
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(d) This amount reflects current fees and expenses of Franklin Global
Utilities and, therefore, differs from the corresponding percentage
amount set forth in the current prospectus of Franklin Global
Utilities.
(e) The foregoing pro forma combined financial information assumes that all
of the Fund assets acquired by Franklin Global Utilities are retained.
If this is not the case (e.g., if there are substantial redemptions by
former shareholders of the Fund following the effective date of the
Transaction), the expense ratio of the Class I shares of Franklin
Global Utilities would be adversely affected. For example, based on the
net asset, fee and expense levels of the Class I shares of Franklin
Global Utilities as of October 31, 1995, if an amount representing
one-half of the net assets of the Fund as of October 31, 1995 were to
be paid to shareholders upon redemption of their Class I shares of
Franklin Global Utilities immediately following the closing of the
Transaction, the pro forma ratio of operating expenses to average daily
net assets of the Class I shares of Franklin Global Utilities would
increase to approximately 1.20%.
EXAMPLE
The Example below shows the cumulative expenses attributable to a $1,000
investment in Class I shares of Franklin Global Utilities, shares of the Fund
and Class I shares of the pro forma combined fund for the periods specified.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Franklin Global Utilities (Class I shares)......................... $56 $79 $104 $175
the Fund........................................................... $12 $38 $67 $147
Pro Forma Combined Fund (i.e., Class I shares of
Franklin Global Utilities received in the Transaction) $55 $77 $100 $167
$60*
</TABLE>
* Assumes redemption before August __, 1996.
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The purpose of the foregoing table is to assist the investor in
understanding the various costs and expenses that an investor in a Fund will
bear directly or indirectly, Long-term holders of Class I shares of Franklin
Global Utilities may pay aggregate sales charges totaling more than the economic
equivalent of the maximum initial sales charges permitted by the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. The Example
above assumes reinvestment of all dividends and distributions and utilizes a 5%
annual rate of return as mandated by Commission regulations. The Example is not
to be considered representative of past or future expenses; actual expenses may
be greater or less than those shown. Except as noted in the Example, the
cumulative expenses attributable to the hypothetical investment are the same
whether or not redemption at the end of the respective periods is assumed.
REASONS FOR THE TRANSACTION
At a December 5, 1995 meeting of the Board of Directors of the Fund,
TGH recommended to the Directors that they approve and recommend the Transaction
and the Plan to the shareholders of the Fund for their approval. The Directors
unanimously accepted TGH's recommendation, concluded that the Transaction and
the Plan would be in the best interests of the Fund and its shareholders, and
recommended that the shareholders approve the proposed Transaction.
TGH made its recommendation to the Board of Directors with reference
to a provision in the Articles of Incorporation of the Fund which requires the
Fund's Board of Directors to submit to shareholders a proposal to convert the
Fund to an open-end investment company (the "Conversion Proposal") if its shares
trade on the American Stock Exchange at an average discount from net asset value
of 2% or more during the quarter immediately preceding August 31, 1995 (the
"Test Period"). During the Test Period, the Fund's shares traded at an average
discount of 9.28%.
The Conversion Proposal policy was designed to deter sustained market
discounts in the price of the Fund's shares. As stated in the prospectus of the
Fund dated May 23, 1990 for the initial public offering of the Fund's shares:
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The fact that the Fund's Articles of Incorporation provide for the
automatic submission to the Fund's shareholders of a proposal to
convert the Fund to an open-end investment company may enhance the
attractiveness of the Fund's shares to investors, thereby reducing
the excess of the net asset value over market price that might
otherwise exist. Sellers may be less inclined to accept a significant
discount if they have some prospect of being able to receive net
asset value if the Fund converted to an open-end investment company.
Since commencement of the Fund's operations, its shares have traded at both a
premium and a discount. For the period from commencement of operations through
August 31, 1995, the price relative to net asset value has ranged from a premium
of 25.36% to a discount of _____%, and has averaged a premium of _____%. See
"Additional Information About the Fund -- Sales Price and Net Asset Value
Information."
At the December 5 meeting, TGH informed the Directors that it had
given intensive consideration to the appropriate course of action the Board of
Directors might recommend to shareholders when submitting the Conversion
Proposal. TGH concluded that the Fund need no longer operate as a closed-end
investment company. After evaluating the alternatives for change, TGH advised
the Board of Directors of its view that Fund's shareholders could benefit most
by a reorganization of the Fund into Franklin Global Utilities, an existing
open-end investment company, rather than by converting the Fund to a stand-alone
open-end investment company. It is TGH's view that this course of action is the
best available accommodation of both the objectives of (i) providing liquidity
at net asset value to shareholders consistent with the purposes of the Fund's
Conversion Proposal policy and (ii) seeking a high level of total return without
incurring undue risk through investment in utilities industries securities. In
formulating its recommendation to the Board of Directors, TGH noted that the
Funds have the same investment objective and similar investment policies and
that, since the inception of Franklin Global Utilities, its performance has
exceeded that of the Fund.
In reaching its decision to recommend shareholder approval of the
Transaction, the Board of Directors considered the foregoing and a number of
other factors. The Board of Directors reviewed summaries of operating expenses
of the Fund and of Franklin Global Utilities. It was noted that the Fund had an
expense ratio of 1.25% for
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<PAGE>
its fiscal year ended August 31, 1995, compared to Franklin Global Utilities'
expense ratio of 1.12% for its fiscal year ended April 30, 1995. The Board also
considered the fact that the Transaction would permit the shareholders of the
Fund to pursue substantially the same investment goals in a larger fund. A
larger fund should enhance the ability of the investment adviser to effect
portfolio transactions on more favorable terms and give the investment adviser
greater investment flexibility and the ability to select a larger number of
portfolio securities for the combined funds, with the attendant ability to
spread investment risks among a larger number of portfolio securities. Higher
aggregate net assets may enable the combined entities to obtain the benefits of
economies of scale, permitting the reduction or elimination of certain duplicate
costs and expenses which may result in lower overall expense ratios through the
spreading of both fixed and variable costs of fund operations over a larger
asset base.
The Board of Directors also considered the imposition of a temporary
redemption fee, as proposed by TGH, on redemptions and exchanges of Franklin
Global Utilities shares to be distributed to Fund shareholders upon consummation
of the Transaction. In that regard, the Board of Directors noted that a high
level of redemptions and exchanges following the closing of the Transaction
would impose significant direct and indirect costs on Franklin Global Utilities,
to the detriment of its shareholders, in light of the nature and size of, and
liquidity of the market for, many of the positions that would be held by
Franklin Global Utilities after consummation of the Transaction. The Directors
considered the fact that the disposition of such securities would involve
various direct costs (such as commissions and custody fees). The Board of
Directors also considered the indirect costs of liquidating large portfolio
positions to meet significant redemptions and exchanges, such as the adverse
impact on prices received upon such liquidations. The Board of Directors
reviewed the recommendation of TGH that, in view of the size of, and liquidity
of the markets for, many of the positions to be held by Franklin Global
Utilities upon consummation of the Transaction, a temporary redemption fee of 1%
of the net asset value of the Franklin Global Utilities Class I shares received
in the Transaction that are redeemed or exchanged should be imposed through
August __, 1996. The Board of Directors noted that a number of other closed-end
funds that have converted to open-end status have imposed temporary redemption
fees to discourage high levels of redemptions and exchanges upon conversion to
such status, and that the proceeds of the proposed redemption fee would be
retained by Franklin Global Utilities
- 14 -
<PAGE>
and would tend to offset costs that would be incurred as a result of redemptions
and exchanges, to the benefit of the remaining shareholders of Franklin Global
Utilities. The Board of Directors determined in view of the considerations
described above that both the amount and duration of the temporary redemption
fee were reasonable.
The Board of Directors also considered, among other things: (i) the
terms and conditions of the Transaction; (ii) whether the Transaction would
result in the dilution of shareholders' interests; (iii) the fact that the
investment objectives of the Funds are identical and that their investment
policies are similar; (iv) the relative performance of the Fund and Franklin
Global Utilities; (v) the benefits of the Transaction to persons other than the
Fund and the fact that the Fund, Franklin Global Utilities, TGH and Advisers
will each bear one-fourth of the costs of the Transaction; (vi) the fact that
Franklin Global Utilities will assume certain liabilities of the Fund; (vii) the
expected Federal income tax consequences of the Transaction; and (viii) the
historical information referred to above.
During their consideration of the Transaction, the Independent
Directors met separately regarding the legal issues involved. Based on the
factors described above, the Board of Directors unanimously determined that the
Transaction would be in the best interests of the Fund and its shareholders and
would not result in dilution of shareholders' interests, and unanimously
recommended that the shareholders of the Fund approve the proposed Transaction.
In the event the shareholders of the Fund do not approve the
Transaction or the Transaction is not consummated for any other reason, the
Board of Directors will consider possible alternative courses of action,
including the possibility of submitting a proposal to convert the Fund to a
stand-alone open-end investment company.
COMPARISON OF OPEN-END AND CLOSED-END INVESTMENT COMPANIES
GENERAL. Open-end investment companies such as Franklin Global
Utilities, commonly referred to as mutual funds, issue redeemable securities.
The holders of redeemable securities have the right to surrender those
securities to the mutual fund and obtain in return an amount based on their
proportionate share of the value of the mutual
- 15 -
<PAGE>
fund's net assets. Most mutual funds also continually issue new shares to
investors at a price based on the fund's net asset value at the time of
issuance. Like that of other mutual funds, Franklin Global Utilities's net asset
value per share is determined by deducting the amount of its liabilities from
the value of its assets and dividing the difference by the number of shares
outstanding. Franklin Global Utilities shares do not trade on any exchange.
In contrast, closed-end investment companies such as the Fund
generally do not redeem their outstanding shares or engage in the continuous
sale of new securities, and thus operate with a relatively fixed capitalization.
The shares of closed-end investment companies are normally bought and sold in
securities markets. The Fund's shares are traded on the American Stock Exchange.
ELIMINATION OF DISCOUNT AND PREMIUM. Upon consummation of the
Transaction, shareholders who wish to realize the value of their shares will be
able to do so by redeeming their shares at prices based on their then current
net asset value (less the temporary redemption fee discussed below under
"Information About the Transaction- Redemption Fee." As a result, the discount
from net asset value at which the Fund's Shares currently trade on the American
Stock Exchange will be eliminated. Shareholders should note, however, that
Shareholder approval of Proposal 1 also will eliminate any possibility that the
Fund's Shares will trade at a premium over net asset value. If Proposal 1 is
approved by Shareholders, the discount may be reduced further before the
effective date of the Transaction.
VOTING RIGHTS. Shareholders of each Fund are entitled to one vote per
share. Neither Fund's shareholders have cumulative voting rights. Shareholders
of Franklin Global Utilities and of all other series of Franklin Strategic
Series vote as a group on matters that affect each series in substantially the
same manner. However, each series votes separately with respect to matters for
which separate series voting is appropriate under applicable law. In addition,
as discussed above, Franklin Global Utilities offers Class I and Class II
shares, which vote together on matters that affect each class in substantially
the same manner. However, each class of shares votes separately with respect to
its Rule 12b-1 plan and other matters for which separate class voting is
appropriate under applicable law.
- 16 -
<PAGE>
PORTFOLIO MANAGEMENT. Most open-end investment companies maintain
reserves of cash or cash equivalents in order to meet redemption requests as
they arise. Because closed-end investment companies generally are not required
to meet redemptions, their cash reserves can be substantial or minimal,
depending primarily on the investment adviser's perception of market conditions.
The maintenance of larger reserves of cash or cash equivalents may, at times of
rising markets, adversely affect a fund's performance. Furthermore, unlike
mutual funds, closed-end investment companies are not subject to pressures to
sell portfolio securities at disadvantageous times in order to meet net
redemptions.
SENIOR SECURITIES. The 1940 Act prohibits open-end investment
companies from issuing "senior securities" representing indebtedness (i.e.,
bonds, debentures, notes, preferred stock and other similar securities), other
than indebtedness to banks when there is asset coverage of at least 300% for all
borrowings. Closed-end investment companies, on the other hand, are permitted by
the 1940 Act to issue senior securities representing both indebtedness to any
lenders (subject to various limitations), as well as senior securities
representing equity. Pursuant to the 1940 Act, senior securities representing
equity issued by a closed-end investment company must be supported by asset
coverage of at least 200%. The ability to issue senior securities may give
closed-end investment companies more flexibility in "leveraging" their
shareholders' investments. Neither the Fund nor Franklin Global Utilities has
any outstanding indebtedness to banks or other lenders, nor has the Fund any
outstanding authorized class of senior securities representing equity.
PRINCIPAL UNDERWRITER. Mutual fund shares are normally purchased and
redeemed through a principal underwriter. As the principal underwriter of the
shares of Franklin Global Utilities, Franklin Templeton Distributors, Inc.
receives, and retains a portion of, the proceeds of any applicable sales charge
and the distribution fee payable under the Rule 12b-1 plan of Franklin Global
Utilities described above under "Synopsis-Advisory, Distribution and Other Fees;
Expense Ratios" and "Management of the Fund" in the Franklin Global Utilities
Prospectus.
- 17 -
<PAGE>
SALES CHARGES ON PURCHASES OF SHARES. Shareholders currently pay
brokerage commissions in connection with purchases and sales of the Fund's
Shares on the American Stock Exchange. Shares of Franklin Global Utilities are
offered at their net asset value plus any applicable sales charge which varies
with the amount purchased as follows:
<TABLE>
<CAPTION>
TOTAL SALES COMMISSION
AS A PERCENTAGE OF AS A PERCENTAGE OF NET
OFFERING PRICE OF THE ASSET VALUE OF THE
AMOUNT OF SINGLE SALE AT OFFERING PRICE SHARES PURCHASED SHARES PURCHASED
<S> <C> <C>
Less than $100,000 4.50% 4.71%
$100,000 but less than $250,000 3.75% 3.90%
$250,000 but less than $500,000 2.75% 2.83%
$500,000 but less than $1,000,000 2.25% 2.30%
$1,000,000 or more none none
</TABLE>
See "How to Buy Shares of the Fund" in the Franklin Global Utilities Prospectus.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
GENERAL. The investment objectives of the Funds are identical and the
investment policies of the Funds are similar. Franklin Global Utilities invests
at least 65% of its total assets in securities issued by companies which are, in
the opinion of Advisers, primarily engaged in the ownership or operation of
facilities used to generate, transmit or distribute electricity, telephone
communications, cable and other pay television services, wireless
telecommunications, gas or water. The Fund invests at least 65% of its assets in
securities issued by companies primarily engaged in the ownership or operation
of facilities used to generate, transmit or distribute electricity,
telecommunications, gas or water, or which provide products, services or
equipment to such companies. Under normal circumstances, each Fund invests at
least 65% of its total assets in issuers domiciled in at least three countries,
one of which may be the United States. Of course, there can be no assurance that
either Fund will achieve its investment objective.
- 18 -
<PAGE>
Neither Fund invests 25% or more of its total assets in any single
industry other than the utility industries. For this purpose, "industry does not
include the U.S. Government and agencies and instrumentalities of the U.S.
Government, although a foreign government is deemed to be an "industry."
The Fund may write (i.e., sell) covered call options on securities
and may write covered put and call options on futures contracts. As an operating
policy, the Fund neither purchases nor writes put options on securities nor
purchases call options on securities (except in connection with closing purchase
transactions). Franklin Global Utilities may write covered put and call options
and may purchase put and call options on securities, indices and stock index
futures. Franklin Global Utilities will not engage in any securities options or
securities index options if the option premiums paid regarding its open option
positions exceed 5% of the value of its total assets.
Both Funds may purchase and sell stock index futures contracts and
futures contracts on individual securities. Both Funds limit their use of
futures contracts and related options to hedging purposes, and do not use them
for speculation. As an operating policy, neither Fund will enter into any
futures contracts and/or options on futures contracts if, immediately
thereafter, the amount of initial margin deposits on all futures contracts and
options on futures contracts of that Fund and premiums paid on options on
futures contracts would exceed 5% of the market value of the total assets of the
Fund. In addition, Franklin Global Utilities will not enter into any futures
contract or related option if, immediately thereafter, more than one-third of
the Fund's net assets would be represented by futures contracts or related
options. Neither fund invests in commodities or commodity contracts, except that
the funds may engage in the futures and related options transactions discussed
above.
The Fund may enter into forward foreign currency exchange contracts
and foreign currency futures contracts, as well as purchase put or call options
on foreign currency. The Fund will not enter into such forward or futures
contracts if, as a result, the Fund would have more than 20% of the value of its
total assets committed to the consummation of such contracts. Franklin Global
Utilities may also enter into forward foreign currency exchange contracts and
foreign currency futures contracts, and may both
- 19 -
<PAGE>
purchase and sell put or call options on foreign currencies, subject to the
limits on futures and options transactions discussed above.
Each of the Funds may lend to banks and broker-dealers portfolio
securities with an aggregate market value of up to one-third 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 the
case of the Fund, the collateral must be maintained in an amount at least equal
(on a daily mark-to-market basis) to the current value of the securities loaned.
For Franklin Global Utilities, the collateral must have an initial market value
of at least 102% of the initial market value of the securities loaned, including
any accrued interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 100%.
The Fund may not issue senior securities, borrow money in excess of
30% of its total assets (not including the amount borrowed) or pledge its
assets, except that the Fund may pledge its assets to secure permitted
borrowings. The Fund may borrow from unaffiliated banks or other financial
institutions up to 30% of the value of its total assets to increase its holdings
of portfolio securities (I.E., leverage its portfolio). Franklin Global
Utilities does not borrow money, except that it may enter into reverse
repurchase agreements or borrow money from banks in an amount up to 33% of its
total assets for temporary or emergency purposes. While borrowings exceed 5% of
Franklin Global Utilities' total assets, it does not make additional
investments.
The Fund, as a diversified fund, may not purchase any security (other
than obligations of the U.S. Government, its agencies or instrumentalities) if,
as a result, as to 75% of the Fund's total assets (i) more than 5% of the Fund's
total assets would then be invested in securities of any single issuer, or (ii)
the Fund would then own more than 10% of the voting securities of any single
issuer. Franklin Global Utilities, as non-diversified fund, is permitted to
invest in a smaller number of individual issuers than is the Fund. Accordingly,
an investment in Franklin Global Utilities may, under certain circumstances,
present greater risk to an investor than would an investment in a diversified
investment company such as the Fund.
- 20 -
<PAGE>
The Fund may not purchase securities on margin, except such
short-term credits as may be necessary for clearance of transactions and the
maintenance of margin accounts with respect to futures contracts and options.
Franklin Global Utilities may not maintain a margin account with a securities
dealer.
The Fund may not make short sales of securities or maintain a short
position, except in connection with the use of options, futures contracts,
options thereon and forward currency contracts. Franklin Global Utilities may
not make short sales, unless at the time it owns securities equivalent in kind
and amount to those sold (which will normally be for deferring recognition of
gains or losses for tax purposes). Franklin Global Utilities does not currently
intend to employ this investment technique.
The Fund may not invest in securities which are not publicly traded
or which cannot be readily resold because of legal or contractual restrictions
("restricted securities"), or which are not otherwise readily marketable
(including repurchase agreements having more than seven days remaining to
maturity) if, regarding all such securities, more than 25% of its total assets
would be invested in such securities. Franklin Global Utilities may not invest
more than 5% of its assets in restricted securities (although Franklin Global
Utilities may invest in such securities to the extent permitted under the
federal securities laws), and may not invest more than 15% of its total assets
in securities that are not readily marketable.
The Fund may not purchase real estate or interests in real estate,
except that it may purchase securities that are secured by real estate and
securities of companies (including partnerships) which invest or deal in real
estate. Franklin Global Utilities may not invest directly in real estate, real
estate limited partnerships or illiquid securities issued by real estate
investment trusts.
Neither fund may underwrite the securities of other issuers except to
the extent that, in connection with the disposition of portfolio securities, it
may be deemed to be an underwriter under applicable securities laws. In
addition, neither fund may make investments for the purpose of exercising
control or management over the issuer.
- 21 -
<PAGE>
Detailed descriptions of Franklin Global Utilities's investment
policies and restrictions, and risks associated with an investment in Franklin
Global Utilities, are contained in the Franklin Global Utilities Prospectus.
INFORMATION ABOUT THE TRANSACTION
AGREEMENT AND PLAN OF REORGANIZATION. The following summary of the
proposed Plan is qualified in its entirety by reference to the Plan attached to
this Proxy Statement/Prospectus as Exhibit A. The Plan provides that Franklin
Global Utilities will acquire all or substantially all of the assets of the Fund
in exchange for Class I shares of Franklin Global Utilities and the assumption
by Franklin Global Utilities of certain identified liabilities of the Fund on
_____________, 1996 (the "Closing Date"), or such later date as provided for
pursuant to the Plan. Franklin Global Utilities will not assume any liabilities
or obligations of the Fund, other than those reflected in an unaudited statement
of assets and liabilities of the Fund as of the normal close of business of the
New York Stock Exchange (currently 4:30 p.m., New York City time) on the Closing
Date (the "Valuation Date"). The number of full and fractional Class I shares of
Franklin Global Utilities to be issued to shareholders of the Fund will be
determined on the basis of the relative net asset values per share and aggregate
net assets of Franklin Global Utilities and the Fund computed as of the close of
business on the New York Stock Exchange on the Valuation Date. The net asset
value per share for both Franklin Global Utilities and the Fund will be
determined by dividing their respective assets, less liabilities, by the total
number of their respective outstanding shares. Portfolio securities of both
Franklin Global Utilities and the Fund will be valued in accordance with the
valuation practices of Franklin Global Utilities as described under "Valuation
of Fund Shares" in its current prospectus.
The Board of Directors of the Fund and the Board of Trustees of
Franklin Global Utilities have each determined that the interests of existing
shareholders will not be diluted as a result of the transactions contemplated by
the Reorganization, and that participation in the Reorganization is in the best
interests of shareholders of the Fund and Franklin Global Utilities,
respectively.
- 22 -
<PAGE>
Prior to the Closing Date, the Fund will endeavor to discharge all of
its known liabilities and obligations. The liabilities assumed are expected to
relate generally to expenses incurred in the ordinary course of the Fund's
operations, such as accounts payable relating to custodian and transfer agency
fees, legal and accounting fees. Franklin Global Utilities will assume all
liabilities, expenses, costs, charges and reserves reflected on an unaudited
statement of assets and liabilities of the Fund as of the close of the New York
Stock Exchange on the Valuation Date prepared by Advisers in accordance with
generally accepted accounting principles consistently applied from the prior
audited period. Franklin Global Utilities will assume only those liabilities of
the Fund reflected in that unaudited statement of assets and liabilities and
will not assume any other liabilities.
As of or prior to the Closing Date, the Fund contemplates declaring
and paying a dividend or dividends which are intended to have the effect of
distributing to the Fund's shareholders all of the Fund's net income which has
not been distributed previously.
Immediately after the Closing, the Fund will distribute pro rata to
its shareholders of record as of the close of business on the Valuation Date the
full and fractional Class I shares of Franklin Global Utilities received by the
Fund, and the Fund will then terminate. Such distribution will be accomplished
by the establishment of accounts on the share records of Franklin Global
Utilities in the name of Fund shareholders, each representing the respective pro
rata number of full and fractional Class I shares of Franklin Global Utilities
due such shareholders. After the Closing Date, any outstanding certificates
representing shares of the Fund will represent Class I shares of Franklin Global
Utilities distributed to the record holders of the Fund. Share certificates of
the Fund will, upon presentation to Franklin/Templeton Investor Services, Inc.,
the transfer agent for Franklin Global Utilities, be exchanged for Class I
shares of Franklin Global Utilities. Certificates for Franklin Global Utilities
shares will be issued only upon written request.
The consummation of the Plan is subject to the conditions set forth
therein. The Plan may be terminated at any time prior to the Closing Date,
before or after approval by shareholders of the Fund, by resolution of the Board
of Directors of the Fund or the
- 23 -
<PAGE>
Board of Trustees of Franklin Global Utilities, if circumstances should develop
that, in the opinion of either Board, make proceeding with the Reorganization
inadvisable.
Approval of the Plan will require the affirmative vote of the holders
of a majority of the outstanding voting securities of the Fund. If the
Transaction is not approved by the shareholders of the Fund, the Board of
Directors of the Fund will consider other possible courses of action, including
submitting to shareholders a proposal to convert the Fund to a stand-alone
open-end investment company.
DESCRIPTION OF CLASS I SHARES OF FRANKLIN GLOBAL UTILITIES. Full and
fractional Class I shares of Franklin Global Utilities will be issued without
the imposition of a sales load or other fee to the shareholders of the Fund in
accordance with the procedures described above. As described immediately below,
Class I shares of Franklin Global Utilities received in the Transaction that are
redeemed or exchanged on or prior to August __, 1996 will be subject to a
redemption fee. Each Class I share of Franklin Global Utilities to be issued in
the Transaction will be fully paid and nonassessable when issued and will have
no preemptive or conversion rights.
REDEMPTION FEE. Class I shares of Franklin Global Utilities
distributed to shareholders of the Fund pursuant to the Plan that are redeemed
or exchanged for shares of other Franklin or Templeton Funds will be subject to
a redemption fee, determined as a percentage of the net asset value of such
shares at the time of such redemption or exchange, of 1% with respect to
redemptions and exchanges occurring on or prior to August __, 1996. The
redemption fee will be deducted from the amount otherwise payable to holders of
such Class I shares of Franklin Global Utilities upon redemption or exchange and
will be retained by Franklin Global Utilities. The redemption fee will not be
imposed with respect to other outstanding Class I shares of Franklin Global
Utilities or shares issued upon reinvestment of dividends paid on shares of
Franklin Global Utilities distributed pursuant to the Plan. In determining the
amount of the redemption fee with respect to a particular redemption or
exchange, it will be assumed that the redemption or exchange is first of any
shares to which the redemption fee does not apply and second of any shares to
which the redemption fee does apply. The redemption fee will be retained by
Franklin Global Utilities and, thereby, provide a benefit to the shareholders of
Franklin Global Utilities. The level and duration of the
- 24 -
<PAGE>
redemption fee may be reduced, or the fee may be terminated, at any time at the
discretion of Franklin Global Utilities. The rationale for imposition of the
redemption fee is discussed above under "Reasons for the Transaction."
FEDERAL INCOME TAX CONSEQUENCES. The Transaction is intended to
qualify for Federal income tax purposes as a tax-free reorganization under
Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the "Code"),
with no gain or loss recognized as a consequence of the Transaction by Franklin
Global Utilities, the Fund, or the shareholders of the Fund. As a condition to
the closing of the Transaction, the Fund and Franklin Global Utilities have
received an opinion from the law firm of Dechert Price & Rhoads to that effect.
That opinion will be based in part upon representations made by the Fund and
Franklin Global Utilities and certain facts and assumptions.
Shareholders of the Fund should consult their tax advisers regarding
the effect, if any, of the proposed Transaction in light of their individual
circumstances. SINCE THE FOREGOING DISCUSSION ONLY RELATES TO THE FEDERAL INCOME
TAX CONSEQUENCES OF THE TRANSACTION, SHAREHOLDERS OF THE FUND SHOULD ALSO
CONSULT THEIR TAX ADVISERS AS TO STATE, LOCAL, AND OTHER TAX CONSEQUENCES, IF
ANY, OF THE TRANSACTION.
CAPITALIZATION. The following table shows the capitalization and net
asset values per share of the common stock or class thereof of the Fund and
Franklin Global Utilities as of October 31, 1995 and on a pro forma basis as of
that date after giving effect to the proposed Transaction.
PRO FORMA
FRANKLIN GLOBAL UTILITIES THE FUND COMBINED
Net assets................... 122,747,485 42,636,817 165,384,302
Net asset value per share....
Class I shares........... 13.24 13.52 13.24
Class II shares.......... 13.20 13.20
Shares outstanding...........
Class I shares........... 9,194,912 3,153,664 12,415,215
Class II shares.......... 73,657 73,657
- 25 -
<PAGE>
INFORMATION ABOUT THE FUNDS
GENERAL. The Fund is organized as a Maryland corporation and is
governed by its Charter and By-Laws as well as by Maryland corporate law.
Franklin Global Utilities is a series of Franklin Strategic Series, a Delaware
business trust, which is governed by its Trust Instrument and By-Laws as well as
Delaware business trust law.
As an open-end investment company organized as a Delaware business
trust, Franklin Strategic Series is not required to hold annual shareholders'
meetings and does so only under certain specified circumstances or when required
under federal law. In contrast, as a closed-end investment company whose shares
currently are traded on an exchange, the Fund is required to hold annual
meetings of shareholders. The Fund's By- Laws currently provide that an annual
shareholders' meeting for the election of Directors and the transaction of other
proper business is to be held on a date between January 25th and February 25th
of every year, as fixed from time to time by the Board of Directors. Franklin
Global Utilities has procedures available to its shareholders for calling
shareholders' meetings for the removal of Trustees. Each Fund indemnifies its
Directors/Trustees and officers to the full extent permitted by applicable law.
Franklin Global Utilities has authorized an unlimited number of
shares of beneficial interest, with a par value of $.01 per share. The Fund has
authorized capital of one hundred million shares of common stock, each having a
par value of $.01 per share. The shares of each of the Funds have no preemptive
or conversion rights.
PUBLIC INFORMATION. Information about Franklin Global Utilities is
included in the Franklin Global Utilities Prospectus dated September 1, 1995, a
copy of which is included herewith, and in the Franklin Strategic Series Annual
Report as of April 30, 1995 and Semi-Annual Report as of October 31, 1995,
copies of which have been filed as part of the Supplementary Information and are
incorporated herein by reference. The information in the Franklin Global
Utilities Prospectus pertaining to Franklin Global Utilities is incorporated
herein by reference. Additional information concerning Franklin Global Utilities
is included in its Statement of Additional Information dated September 1, 1995,
which has been filed as part of the Supplementary Information and is also
incorporated herein by reference. A copy of the Supplementary Information can be
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<PAGE>
obtained without charge by writing to Franklin Templeton Investor Services,
Inc., the transfer agent of Franklin Global Utilities, at 777 Mariners Island
Boulevard, P.O. Box 777, San Mateo, California 94403-7777, or by calling the
Transfer Agent toll free at 1- 800-DIAL-BEN. Information about the Fund is
included in its Annual Report as of August 31, 1995, which is included in the
Supplementary Information and copies of which also may be obtained without
charge by writing or calling Franklin Templeton Investor Services, Inc. Shares
of the Fund are listed on the American Stock Exchange and reports, proxy
statements and other information concerning the Fund can be inspected at the
offices of that Exchange. Franklin Global Utilities and the Fund both file
reports, proxy statements and other information with the Commission. These
documents and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such material can also be obtained from the
Public Reference Branch, Office of Filings and Information Services, Securities
and Exchange Commission, Washington, D.C. 20549 at prescribed rates.
ADDITIONAL INFORMATION ABOUT FRANKLIN GLOBAL UTILITIES
Information about Franklin Global Utilities comparable to that
provided immediately below with respect to the Fund is set forth in the Franklin
Global Utilities Prospectus which accompanies this Prospectus/Proxy Statement.
ADDITIONAL INFORMATION ABOUT THE FUND
FINANCIAL HIGHLIGHTS. The information set forth below presents per
share income and capital changes for a share outstanding throughout each period
indicated. The information in the following table has been audited by McGladrey
& Pullen, L.L.P., for the periods indicated in their report included in the
Supplementary Information. This information should be read in conjunction with
the financial statements and notes thereto included in the Supplementary
Information, copies of which can be obtained at no charge.
- 27 -
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
--------------------------------
1995 1994 1993 1992 1991
----- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 15.03 $ 15.01 $ 13.38 $ 11.85 $ 10.60
------- ------- ------- ------- -------
Income from investment operations:
Net investment income .54 .60 .60 .67 .61
Net realized and unrealized gain (loss) (.10) .73 1.90 1.47 1.32
------- ------- ------- ------- -------
Total from investment operations .44 1.33 2.50 2.14 1.93
------- ------- ------- ------- -------
Distributions:
Dividends from net investment income (.48) (.64) (.64) (.61) (.68)
Distributions from net realized gains (1.22) (.67) (.23) ---- ---
------- -------- ------- ------- -------
Total distributions (1.70) (1.31) (.87) (.61) (.68)
-------- -------- -------- -------- --------
Change in net asset value (1.26) .02 1.63 1.53 1.25
-------- ------- ------- ------- -------
Net asset value, end of year $ 13.77 $ 15.03 $ 15.01 $ 13.38 $ 11.85
======= ======= ======= ======= =======
TOTAL RETURN
Based on market value per share (9.88)% 3.78% 27.31% 25.97% 13.96%
Based on net asset value per share 3.66% 8.98% 19.57% 18.53% 18.91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000) $43,438 $47,317 $46,429 $40,702 $35,855
Ratio of expenses to average net assets 1.25% 1.21% 1.31% 1.44% 1.55%
Ratio of net investment income to average net assets 4.08% 4.00% 4.41% 5.28% 5.46%
Portfolio turnover rate 24.76% 40.34% 42.90% 15.21% 19.85%
</TABLE>
SALES PRICE AND NET ASSET VALUE INFORMATION. The outstanding shares
of common stock of the Fund are listed on the American Stock Exchange. The
following table shows, for each fiscal quarter of the Fund (i) the high and low
sales prices per share of common stock of the Fund, as reported in the
consolidated transaction reporting system, (ii) the net asset value per share of
the Fund as determined on the date closest to each
- 28 -
<PAGE>
such quotation and (iii) the percentage premium over, or discount from, net
asset value represented by each such quotation.
HIGH NET LOW NET
SALES ASSET PREMIUM SALES ASSET PREMIUM
PRICE VALUE (DISCOUNT) PRICE VALUE (DISCOUNT)
May 31, 1990....................
August 31, 1990.................
November 30, 1990...............
February 28, 1991...............
May 31, 1991....................
August 31, 1991.................
November 30, 1991...............
February 28, 1992...............
May 31, 1992....................
August 31, 1992.................
November 30, 1992...............
February 28, 1993...............
May 31, 1993....................
August 31, 1993.................
November 30, 1993...............
February 28, 1994...............
May 31, 1994....................
August 31, 1994.................
November 30, 1994...............
February 28, 1995...............
May 31, 1995....................
August 31, 1995.................
November 30, 1995...............
The shares of the Fund have generally traded at a premium over their
net asset values since the Fund's inception. At the close of business on
________ __, 1995, the Fund's net asset value was $____ per share while the
closing market price of the Fund's common stock was $____ per share, which
represented a discount from net asset value of (____)%.
- 29 -
<PAGE>
BOARD OF DIRECTORS. The business of the Fund is managed under the
direction of its Board of Directors, which formulates the general policies of
the Fund and meets periodically to review the investment performance of the
Fund, monitor investment activities and practices and discuss other matters
affecting the Fund. In addition, the Board, in its discretion, declares what, if
any, dividends are to be paid by the Fund and when they are to be paid.
INVESTMENT MANAGER. TGH, a Bahamas corporation with offices at
Nassau, Bahamas, serves as Investment Manager of the Fund. On November 11, 1994,
TGH assumed the investment management duties with respect to the Fund previously
performed by Templeton Investment Counsel, Inc. The TGU Advisory Agreement dated
October 30, 1992 was last approved by the Board of Directors, including the
Directors who are not parties to the Agreement or interested persons of any such
party, on December 5, 1995 to continue through December 31, 1996, unless sooner
terminated in connection with the dissolution of the Fund pursuant to the
Transaction. Otherwise, the TGU Advisory Agreement will continue from year to
year thereafter, subject to approval annually by the Board of Directors or by
vote of the holders of a majority of the outstanding Shares of the Fund (as
defined by the 1940 Act) and also, in either event, approval by a majority of
those Directors who are not parties to the Agreement or interested persons of
any such party in person at a meeting called for the purpose of voting on such
approval. The TGU Advisory Agreement requires TGH to manage the investment and
reinvestment of the Fund's assets. TGH is not required to furnish any personnel,
overhead items or facilities for the Fund, including pricing or trading desk
facilities, although such expenses are paid by investment advisers of some other
investment companies.
The Investment Management Agreement provides that TGH will select
brokers and dealers for execution of the Fund's portfolio transactions
consistent with the Fund's brokerage policies. Although the services provided by
broker-dealers in accordance with the brokerage policies incidentally may help
reduce the expenses of or otherwise benefit TGH and other investment advisory
clients of TGH and of its affiliates, as well as the Fund, the value of such
services is indeterminable and TGH's fee is not reduced by any offset
arrangement by reason thereof.
- 30 -
<PAGE>
TGH renders its services to the Fund from outside the United States.
When TGH determines to buy or sell the same securities for the Fund that TGH or
certain of its affiliates have recommended for one or more of TGH's other
clients or for clients of its affiliates, the orders for all such securities
trades may be placed for execution by methods determined by TGH, with approval
by the Fund's Board of Directors, to be impartial and fair, in order to seek
good results for all parties.
The TGU Advisory Agreement provides that TGH shall have no liability
to the Fund or any Shareholder of the Fund for any error of judgment, mistake of
law, or any loss arising out of any investment or other act or omission in the
performance by TGH of its duties under the Agreement, or for any loss or damage
resulting from the imposition by any government of exchange control restrictions
which might affect the liquidity of the Fund's assets, or from acts or omissions
of custodians or security depositories, or from any wars or political acts of
any foreign governments to which such assets might be exposed, except for any
liability, loss or damage resulting from willful misfeasance, bad faith or gross
negligence on TGH's part or reckless disregard of its duties under the
Agreement. The TGU Advisory Agreement will terminate automatically in the event
of its assignment, and may be terminated by the Fund at any time without payment
of any penalty on 60 days' written notice, with the approval of a majority of
the Directors of the Fund in office at the time or by vote of a majority of the
outstanding Shares of the Fund (as defined in the 1940 Act).
For its services, the Fund pays TGH a fee, calculated and paid
monthly, equal on an annual basis to 0.60% of the Fund's average daily net
assets payable in U.S. dollars at the end of each calendar month.
Currently, the lead portfolio manager for the Fund is Sean
Farrington, Vice President of the Fund. Mr. Farrington is a member of TGH's
research technology group and is responsible for the maintenance of TGH's
internal research database. He joined TGH in 1994.
During the fiscal year ended August 31, 1995, TGH received fees from
the Fund of $251,410. For additional information regarding the ownership and
control of TGH, see the Supplementary Information.
- 31 -
<PAGE>
BUSINESS MANAGER. Templeton Global Investors, Inc., Broward Financial
Centre, Suite 2100, Ft. Lauderdale, Florida 33394-3091, an indirect wholly owned
subsidiary of Franklin (the "Business Manager"), performs certain administrative
functions for the Fund pursuant to a Business Management Agreement.
The Business Management Agreement requires the Business Manager to be
responsible for various activities on behalf of the Fund, including:
o providing office space, telephone, office equipment and
supplies for the Fund;
o paying compensation to the Fund's officers;
o authorizing expenditures and approving bills for payment
on behalf of the Fund;
o supervising preparation of quarterly reports to
Shareholders, notices of dividends, capital gains
distributions and tax credits, and attending to
correspondence and other communications with individual
Shareholders;
o daily pricing of the Fund's investment portfolio and
preparing and supervising publication of the net asset
value of the Fund's Shares, earnings reports and other
financial data;
o providing trading desk facilities for the Fund;
o monitoring relationships with organizations serving the
Fund, including the custodian, transfer agent and printers;
o supervising compliance by the Fund with record-keeping
requirements under the 1940 Act and regulations promulgated
thereunder; and with state regulatory requirements;
maintaining books and records for the Fund (other than
those maintained by the custodian and transfer agent); and
- 32 -
<PAGE>
preparing and filing tax reports other than the Fund's
income tax returns; and
o providing executive, clerical and secretarial help needed
to carry out its responsibilities.
For its services, the Business Manager receives a fee equal on an
annual basis to 0.15% of the Fund's average daily net assets, reduced to 0.135%
of such daily net assets in excess of $200 million and 0.10% of such daily net
assets in excess of $700 million based upon the net asset value at the end of
each day and payable at the end of each calendar month. During the fiscal year
ended August 31, 1995, the Business Manager received fees of $62,850.
The Business Manager is relieved of liability to the Fund for any act
or omission in the course of its performance under the Business Management
Agreement in the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations. The Business Management Agreement may be
terminated by either party at any time on 60 days' written notice without
payment of penalty, provided that such termination by the Fund shall be directed
or approved by vote of a majority of the Directors of the Fund in office at the
time or by vote of a majority of the Fund's Shareholders (as defined in the 1940
Act), and shall terminate automatically and immediately in the event of its
assignment. The Business Management Agreement will continue through December 31,
1995, and thereafter from year to year, subject to approval by the Board of
Directors, and was last approved by the Board (including a majority of the
Directors who are not parties to the Agreement or interested persons of any such
party) on December 5, 1995.
CUSTODIAN, TRANSFER AGENT, DIVIDEND-PAYING AGENT AND REGISTRAR. The
Chase Manhattan Bank, N.A. is the custodian of the Fund's assets. Its address is
MetroTech Center, Brooklyn, New York 11245. The custodian employs subcustodians
outside the U.S. approved by the Board of Directors in accordance with
regulations under the 1940 Act. Chemical Mellon Shareholder Services is the
transfer agent and dividend paying agent and registrar for the Fund. Its address
is 85 Challenger Road, Ridgefield Park, N.J. 07660.
- 33 -
<PAGE>
CAPITAL STOCK. The Fund's only class of capital stock is its common
stock, $.01 par value per share. Each share of such common stock is entitled to
one vote with respect to all matters as to which shareholders are entitled to
vote. Upon liquidation of the Fund, its net assets would be distributed to its
shareholders. All shares of common stock issued by the Fund are deemed fully
paid and nonassessable and are not subject to further calls. No share is
entitled to any pre-emptive rights or conversion rights.
OUTSTANDING SECURITIES. The following information with respect to the
Fund's common stock is furnished as of October 31, 1995.
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------------------------------------------------------
TITLE OF CLASS AUTHORIZED OUTSTANDING
<S> <C> <C>
Common Stock par value $.01 per share............................. 100,000,000 3,153,664
</TABLE>
TAXATION. Until consummation of the Transaction, and if the
Transaction is not consummated, the Fund intends to continue to qualify to be
taxed as a "regulated investment company" under the Code. Thus, to the extent
that the Fund distributes its taxable income and net capital gain to its
shareholders as required by the Code, its qualification as a regulated
investment company relieves the Fund of Federal income and excise taxes on that
part of its taxable income including net capital gains which it pays out to its
shareholders. Dividends out of net ordinary income and distributions of net
short-term capital gains are taxable to the recipient shareholders as ordinary
income. The Fund's shareholders are advised annually as to the federal tax
status of dividends and capital gains distributions made by the Fund for the
preceding years.
DIVIDEND REINVESTMENT PLAN. Pursuant to the Fund's Dividend
Reinvestment Plan (the "Plan"), a shareholder whose Fund Shares are registered
in his own name will have all distributions reinvested automatically in
additional Shares of the Fund by Mellon Securities Trust Company (the "Plan
Agent") as agent under the Plan unless the
- 34 -
<PAGE>
shareholder elects to have distributions in cash. Shareholders whose Shares are
held by a broker or nominee that does not provide a dividend reinvestment
program may be required to have their Shares registered in their own name to
participate in the Plan. Investors who own Shares of the Fund registered in
street name should contact their broker or nominee for details. All
distributions to investors who do not participate in the Plan will be paid by
check mailed directly to the record holder (or, if the Shares are held in street
or other nominee name, then to such nominee) by Mellon Securities Trust Company
as dividend paying agent.
The Plan Agent serves as agent for the shareholders in administering
the Plan. When the Fund declares a dividend or capital gains distribution,
participants in the Plan will receive Shares of the Fund, as outlined below,
with the number of Shares determined as of the time of purchase (generally the
payable date of the dividend) or at such other date as the Board of Directors
may determine. Whenever market price is equal to or exceeds net asset value at
the time Shares are valued for the purpose of determining the number of Shares
to be received, participants will be issued Shares of the Fund at a price equal
to net asset value but not less than 95% of the then current market price of the
Fund's Shares. The Fund will not issue Shares under the Plan at a price below
net asset value. If net asset value determined as at the time of purchase
exceeds the market price of Fund Shares at such time, or if the Fund should
declare a dividend or other distribution payable only in cash (i.e., if the
Board of Directors should preclude reinvestment at net asset value), the Plan
Agent will, as agent for the participants, buy Fund Shares in the open market,
on the New York Stock Exchange or elsewhere, for the participants' accounts. If,
before the Plan Agent has completed its purchases, the market price exceeds the
net asset value of a Fund Share, the average per Share purchase price paid by
the Plan Agent may exceed the net asset value of the Fund's Shares, resulting in
the acquisition of fewer Shares than if the dividend or distribution had been
paid in Shares issued by the Fund valued at net asset value.
The Plan Agent maintains all shareholder accounts in the Plan and
furnishes written confirmation of all transactions in the accounts, including
information needed by shareholders for personal and tax records. Shares in the
account of each Plan participant
- 35 -
<PAGE>
will be held by the Plan Agent in noncertificated form in the name of the
participant, and each shareholder's proxy will include those Shares purchased
pursuant to the Plan.
In the case of shareholders, such as banks, brokers or nominees,
which hold Shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of Shares certified from time to
time by the record shareholders as representing the total amount registered in
the record shareholder's name and held for the account of beneficial owners who
are to participate in the Plan.
There is no charge to participants for reinvesting dividends or
capital gains distributions. The Plan Agent's fees for the handling of
reinvestment of dividends and distributions will be paid by the Fund. A $5.00
fee will be imposed for withdrawal from participation in the Plan. There will be
no brokerage charges with respect to Shares issued directly by the Fund as a
result of dividends or capital gains distributions payable either in Shares or
in cash. However, each participant will pay a pro rata share of brokerage
commissions incurred with respect to the Plan Agent's open market purchases in
connection with the reinvestment of dividends or capital gains distributions.
The automatic reinvestment of dividends and distributions will not
relieve participants of any U.S. income tax that may be payable on such
dividends or distributions.
Experience under the Plan may indicate that changes thereto may be
desirable. Accordingly, the Fund reserves the right to amend or terminate the
Plan as applied to any dividend or distribution paid (i) subsequent to notice of
the change sent to all shareholders of the Fund at least 90 days before the
record date for such dividend or distribution or (ii) otherwise in accordance
with the terms of the Plan. The Plan also may be amended or terminated by the
Plan Agent by at least 90 days' prior written notice to all shareholders of the
Fund. All correspondence concerning the Plan should be directed to the Plan
Agent at Mellon Securities Trust Company, Dividend Reinvestment Services, P.O.
Box 750, Pittsburgh, PA 15230.
- 36 -
<PAGE>
ANTI-TAKEOVER PROVISIONS IN THE ARTICLES OF INCORPORATION. The Fund's
Articles of Incorporation include provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the
Fund. The Board of Directors is divided into three classes, each having a term
of three years. At the annual meeting of shareholders in each year thereafter,
the term of one class will expire. This provision could delay for up to two
years the replacement of a majority of the Board of Directors. A Director may be
removed from office only by vote of the holders of at least two-thirds of the
Shares of the Fund entitled to be voted on the matter.
In addition, the Articles of Incorporation require the favorable vote
of the holders of at least 75% of the Shares of the Fund then entitled to be
voted to approve, adopt or authorize the following:
(i) a merger or consolidation of the Fund with another
corporation,
(ii) a sale of all or substantially all of the Fund's assets (other
than in the regular course of the Fund's investment
activities), or
(iii) a liquidation or dissolution of the Fund,
unless such action has been approved, adopted or authorized by the affirmative
vote of two-thirds of the total number of Directors fixed in accordance with the
Bylaws, in which case the affirmative vote of a majority of the outstanding
Shares is required.
The Board of Directors has determined that the 75% voting
requirements described above, which are greater than the minimum requirements
under Maryland law or the 1940 Act, are in the best interests of shareholders
generally. Reference should be made to the Articles of Incorporation on file
with the Commission for the full text of these provisions, which could have the
effect of depriving shareholders of an opportunity to sell their Shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Fund.
- 37 -
<PAGE>
SHARE OWNERSHIP. As of October 31, 1995, the officers and Trustees of
Franklin Global Utilities as a group beneficially owned less than 1% of the
outstanding shares of Franklin Global Utilities and, to the best of the
knowledge of Franklin Global Utilities, no person owned of record or
beneficially 5% or more of Franklin Global Utilities' outstanding shares. As of
October 31, 1995, the officers and Directors of the Fund as a group beneficially
owned less than 1% of the outstanding shares of the Fund and, to the best of the
knowledge of the Fund, no person of record or beneficially owned 5% or more of
the outstanding shares of the Fund.
THE BOARD OF DIRECTORS OF THE FUND
UNANIMOUSLY RECOMMENDS APPROVAL OF THE PLAN.
II. ELECTION OF DIRECTORS
The Board of Directors of the Fund is divided into three classes,
each class having a term of three years. Each year the term of office of one
class will expire. Betty P. Krahmer, Harris J. Ashton, S. Joseph Fortunato, and
Gordon S. Macklin have been nominated for three-year terms to expire at the 1999
Annual Meeting of Shareholders and Charles B. Johnson and John Wm. Galbraith
have been nominated for one-year terms to expire at the 1997 Annual Meeting of
Shareholders, and such terms to continue until their respective successors are
duly elected and qualified, or until such earlier date as the Fund is dissolved
pursuant to the Transaction discussed above.
All of the nominees listed below are available and have consented to
serve if elected. If any of the nominees should not be available, the persons
named in the proxy will vote in their discretion for another person or other
persons who may be nominated as Directors.
The persons named in the accompanying form of proxy intend to vote at
the Annual Meeting (unless directed not to vote) for the election of the
nominees named below. All of the nominees are presently members of the Board of
Directors of the Fund. In addition, all nominees are also directors or trustees
of other Templeton Funds for which TGH and/or its affiliates act as investment
manager.
- 38 -
<PAGE>
The following table provides information concerning each nominee for
election as Director and each Director of the Fund:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SHARES OWNED
BENEFICIALLY
AND % OF TOTAL
NAME, ADDRESS AND PRINCIPAL OCCUPATION DIRECTOR OUTSTANDING AS OF
OFFICES WITH THE FUND DURING PAST FIVE YEARS AND AGE SINCE DECEMBER __, 1995
- --------------------- ------------------------------ -------- -----------------
</TABLE>
NOMINEES TO SERVE UNTIL 1996 ANNUAL MEETING OF SHAREHOLDERS:
BETTY P. KRAHMER
2201 Kentmere Parkway
Wilmington, Delaware
Director Director or
trustee of various civic
associations; formerly economic
analyst, U.S. Government. Age 66.
1990
HARRIS J. ASHTON
Metro Center, 1 Station Place
Stamford, Connecticut
Director
Chairman of the Board,
president, and chief executive
officer of General Host
Corporation (nursery and
craft centers); and director of
RBC Holdings (U.S.A.) Inc.
(a bank holding company)
and Bar-S Foods. Age 63.
1992
S. JOSEPH FORTUNATO
12 Brannick Drive
Madison, New Jersey
Director Member of the law
firm of Pitney, Hardin,
Kipp & Szuch; and director
of General Host Corporation.
Age 63.
1992
GORDON S. MACKLIN
8212 Burning Tree Road
Bethesda, Maryland
Director
Chairman of White River
Corporation (information
services); director of Infovest
Corporation, Fund America
Enterprises Holdings, Inc.,
Fusion Systems Corporation,
Lockheed Martin
Corporation, MCI
Communications Corporation
Medimmune, Inc.; and
formerly held the following
positions: chairman of
Hambrecht and Quist Group;
director of H&Q Healthcare
Investors; and president of
the National Association of
Securities Dealers, Inc. Age 67.
1993
DIRECTORS TO SERVE UNTIL 1998 ANNUAL MEETING OF SHAREHOLDERS:
F. BRUCE CLARKE
19 Vista View Blvd.
Thornhill, Ontario
Director
Retired; formerly, credit
adviser of National Bank of
Canada, Toronto. Age 85.
1990
ANDREW H. HINES, JR.
150 2nd Avenue N.
St. Petersburg, Florida
Director Consultant for the Triangle Consulting Group; chairman of the board
and chief executive officer of Florida Progress Corporation (1982- February
1990) and director of various of its subsidiaries;
chairman and director of Precise Power Corporation; executive-in-residence of
Eckerd College (1991- present); and a director of Checkers Drive-In Restaurants,
Inc. Age 72.
1990
- 39 -
<PAGE>
CHARLES E. JOHNSON*
500 East Broward Blvd.
Fort Lauderdale, Florida
Director Senior vice president and director of Franklin Resources, Inc.;
chairman of the Board of Templeton Investment Counsel, Inc.; president and
director of Franklin Institutional Services Corporation and Templeton Worldwide,
Inc.; senior vice president of Franklin Templeton Distributors, Inc.; vice
president and/or director, as the case may be, for some of the subsidiaries of
Franklin Resources, Inc.; and an officer and/or a director, as the case may be,
of some of the investment companies in the Franklin Templeton Group. Age 39.
1992
NICHOLAS F. BRADY*
The Bullitt House
102 East Dover Street
Easton, Maryland
Director
Chairman of Templeton
Emerging Markets
Investment Trust PLC;
Chairman of Templeton
Latin America Investment
Trust PLC; chairman of
Darby Overseas Investments,
Ltd. (an investment firm)
(1994-present); director of
the Amerada Hess
Corporation, H.J. Heinz
Company, Capital
Cities/ABC, Inc. and the
Christiana Companies;
Secretary of the United
States Department of the
Treasury (1988-January
1993); chairman of the board
of Dillon, Read & Co. Inc.
(investment banking) prior
thereto. Age 65.
1993
DIRECTORS AND NOMINEES TO SERVE UNTIL 1997 ANNUAL MEETING OF SHAREHOLDERS:
HASSO-G VON
DIERGARDT-NAGLO
R.R. 3
Stouffville, Ontario
Director
Farmer; and president of
Clairhaven Investments, Ltd.
and other private investment
companies. Age 79.
1990
FRED R. MILLSAPS
2665 NE 37th Drive
Fort Lauderdale, Florida
Director
Manager of personal
investments (1978-present); chairman and chief executive officer of Landmark
Banking Corporation (1969-1978); financial vice president of Florida Power and
Light (1965-1969); vice president of The Federal Reserve Bank of Atlanta
(1958-1965); and director of various other business and nonprofit organizations.
Age 66.
1990
Charles B. Johnson* 777 Mariners Island Blvd. San Mateo, California Chairman of
the Board and Vice President, chief executive officer, and director of Franklin
Resources, Inc.; chairman of the board and director of Franklin Advisers, Inc.
and Franklin Templeton Distributors, Inc.; director of Franklin Administrative
Services, Inc., General Host Corporation, and Templeton Global Investors, Inc.;
and officer and director, trustee or managing general partner, as the case may
be, of most other subsidiaries of Franklin Resources, Inc. Age 62.
John Wm. Galbraith,
360 Central Avenue, Suite 1300,
St. Petersburg, Florida
Director
President of Galbraith
Properties, Inc. (personal
investment company);
director of Gulfwest Banks,
Inc. (bank holding company)
(1995-present) and
Mercantile Bank (1991-
present); vice chairman of
Templeton, Galbraith &
Hansberger, Ltd. (1986-
1992); and chairman of
Templeton Funds
Management, Inc. (1974-
1991). Age 74.
- --------------------
* Messrs. Charles E. Johnson, Charles B. Johnson and Brady are
"interested persons" of the Fund as that term is defined in the
Investment Company Act of 1940 (the "1940 Act"). Mr. Brady and Franklin
Resources are both limited partners of Darby Overseas Partners L.P.
("Darby Overseas"). Mr. Brady established Darby Overseas in February,
1994, and is Chairman and a shareholder of the corporate general
partner of Darby Overseas. In addition, Darby Overseas and Templeton,
Galbraith & Hansberger Ltd. are limited partners of Darby Emerging
Markets Fund, L.P. Mrs. Krahmer and Messrs. Clarke, von
Diergardt-Naglo, Hines, Ashton, Fortunato, Macklin, Millsaps and
Galbraith are not "interested persons" of the Fund.
REMUNERATION OF DIRECTORS AND OFFICERS
Each fund in the Templeton Family of Funds pays its independent
directors/trustees and Mr. Brady an annual retainer and/or fees for attendance
at board and committee meetings, the amount of which is based on the level of
assets in the fund.
- 40 -
<PAGE>
Accordingly, the Fund pays the Independent Directors and Mr. Brady an annual
retainer of $100 and no additional fees for attending meetings of the Board.
Committee members receive an additional annual fee of $2,000, pro rated among
the funds on whose committees they serve. Directors are reimbursed for any
expenses incurred in attending meetings, paid pro rata by each Franklin
Templeton Fund on which they serve. The direct aggregate and total remuneration
(including reimbursements of such expenses) paid to all Directors as a group for
the fiscal year ended August 31, 1995 was $____________. The Investment Manager
and its affiliates pay the salaries and expenses of the officers of the Fund. No
pension or retirement benefits are accrued as part of Fund expenses.
The following table shows the total compensation paid to the
Directors by the Fund and by all investment companies in the Franklin Templeton
Group for the fiscal year ended August 31, 1995:
NAME OF DIRECTOR
Harris J. Ashton
Nicholas F. Brady
F. Bruce Clarke
Hasso-G Von Diergardt-
Naglo
S. Joseph Fortunato
John Wm. Galbraith
Andrew H. Hines, Jr.
Betty P. Krahmer
Gordon S. Macklin
Fred R. Millsaps
AGGREGATE
COMPENSATION
FROM THE FUND
NUMBER OF FRANKLIN
TEMPLETON FUND
BOARDS ON WHICH
DIRECTOR SERVES
TOTAL COMPENSATION
FROM ALL FUNDS
IN FRANKLIN
TEMPLETON GROUP
Certain officers of the Fund are shareholders of Franklin Resources,
Inc. and may be deemed to receive indirect remuneration by virtue of their
participation in the management fees and other fees received by TGH and its
affiliates from the Templeton Funds.
Mr. Charles B. Johnson and Mr. Charles E. Johnson are father and son.
Under the securities laws of the United States, the Fund's Directors,
its officers, and any persons holding more than ten percent of the Fund's common
stock, as well as affiliated persons of the Investment Manager, are required to
report their ownership of the Fund's common stock and any changes in that
ownership to the Securities and Exchange Commission and the American Stock
Exchange. Specific due dates for these reports have been established and the
Fund is required to report in this Proxy Statement any failure to file by these
dates during 1995. All of these filing requirements were satisfied except the
Initial Statements of Beneficial Ownership of Securities filed on behalf of the
Investment Manager and certain of its affiliates, which were inadvertently filed
late. In making these statements, the Fund has relied on the written
representations of the persons affected and copies of the reports that they have
filed with the Commission.
The Fund has a standing Audit Committee presently consisting of
Messrs. Clarke, Millsaps, Hines, and Galbraith, all of whom are Directors and
non-interested persons of the Fund. The Audit Committee reviews both the audit
and nonaudit work of the Fund's independent public accountants, submits a
recommendation to the Board of Directors as to the selection of independent
public accountants, and reviews generally the maintenance of the Fund's records
and the safekeeping arrangements of the Fund's custodians. The Board also has
established a Nominating and Compensation Committee consisting of Messrs.
Macklin and Hines. The Nominating and Compensation Committee is responsible for
the selection, nomination for appointment and election of candidates to serve as
Independent Directors of the Fund. The Nominating and Compensation Committee is
prepared to review nominations from Shareholders to fill vacancies on the Board
in written communications addressed to the Committee at the Fund's
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headquarters, although the Committee expects to be able to identify from its own
resources an ample number of qualified candidates.
During the fiscal year ended August 31, 1995, there were four
meetings of the Board of Directors and two meetings each of the Audit Committee
and the Nominating and Compensation Committee. Each of the Directors then in
office attended at least 75% of the meetings of the Board of Directors held
throughout the year. There was 100% attendance at the meetings of the Audit
Committee and the Nominating and Compensation Committee.
As of November __, 1995, the Directors and officers of the Fund as a
group owned _______ shares, or less than 1% of the Fund's outstanding shares.
EXECUTIVE OFFICERS OF THE FUND
Officers of the Fund are appointed by the Directors and serve at the pleasure of
the Board. The executive officers are:
GARY P. MOTYL
500 East Broward Blvd.
Fort Lauderdale, Florida
President since 1993
Senior vice president of Templeton Investment Counsel, Inc.; director of
Templeton Global Investors, Inc.; and president or vice president of other
Templeton Funds. Age 43.
MARK G. HOLOWESKO
Lyford Cay
Nassau, Bahamas
Vice President since 1989 President and director of TGH; director of global
equity research for Templeton Worldwide, Inc.; president or vice president of
the Templeton Funds; formerly, investment administrator, Roy West Trust
Corporation (Bahamas) Limited (1984-1985). Age 35.
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<PAGE>
MARTIN L. FLANAGAN
777 Mariners Island Blvd.
San Mateo, California
Vice President since 1989 Senior vice president, treasurer, and chief
financial officer of Franklin Resources, Inc.; director and executive vice
president of TGH; director, president and chief executive officer of Templeton
Global Investors, Inc.; director or trustee, president or vice president of the
Templeton Funds; accountant, Arthur Andersen & Company (1982-1983); member of
the International Society of Financial Analysts and the American Institute of
Certified Public Accountants. Age 35.
SAMUEL J. FORESTER, JR.
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President since 1990 President of Templeton Global Bond Managers
Division of Templeton Investment Counsel, Inc.; president or vice president of
other Templeton Funds; formerly, founder and partner of Forester, Hairston
Investment Management (1989-1990); managing director (Mid-East Region) of
Merrill Lynch, Pierce, Fenner & Smith Inc. (1987-1988); advisor for Saudi
Arabian Monetary Agency (1982-1987).
Age 46.
R. SEAN FARRINGTON
Lyford Cay
Nassau, Bahamas
Vice President since 1994 Age 24.
JOHN R. KAY
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President since 1994 Vice president of the Templeton Funds; vice
president and treasurer of Templeton Global Investors, Inc. and Templeton
Worldwide, Inc.; assistant vice president of Franklin Templeton Distributors,
Inc.; former vice president and controller of the Keystone Group, Inc. Age 55.
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<PAGE>
JAMES R. BAIO
500 East Broward Blvd.
Fort Lauderdale, Florida
Treasurer since 1994
Certified public accountant; treasurer of the Templeton Funds; senior vice
president of Templeton Worldwide, Inc., Templeton Global Investors, Inc., and
Templeton Funds Trust Company; formerly senior tax manager of Ernst & Young
(certified public accountants) (1977- 1989). Age 41.
THOMAS M. MISTELE
700 Central Avenue
St. Petersburg, Florida
Secretary since 1989 Senior vice president of Templeton Global Investors,
Inc.; vice president of Franklin Templeton Distributors, Inc.; secretary of the
Templeton Funds; formerly, attorney, Dechert Price & Rhoads (1985-1988) and
Freehill, Hollingdale & Page (1988); judicial clerk, U.S. District Court
(Eastern District of Virginia) (1984-1985). Age 42.
III. RATIFICATION OR REJECTION OF APPOINTMENT
OF INDEPENDENT PUBLIC ACCOUNTANTS
McGladrey & Pullen, LLP 555 Fifth Avenue, New York, New York 10017,
have been the independent public accountants for the Fund since its inception
and have examined the Fund's financial statements for the fiscal year ended
August 31, 1995, and in connection therewith have reported on the financial
statements of the Fund and reviewed certain filings of the Fund with the
Securities and Exchange Commission. At a meeting held on October 21, 1995, upon
recommendation of the Audit Committee, the Board of Directors, including a
majority of those Directors who are not interested persons of the Fund, selected
McGladrey & Pullen, LLP as independent public accountants for the Fund for the
fiscal year ending August 31, 1996, subject to ratification by Shareholders at
the Annual Meeting.
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The Fund is advised that neither the firm of McGladrey & Pullen, LLP
nor any of its members has any material direct or indirect financial interest in
the Fund. Representatives of McGladrey & Pullen, LLP are not expected to be
present at the Annual Meeting, but have been given the opportunity to make a
statement if they so desire, and will be available should any matter arise
requiring their presence.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE IN FAVOR OF RATIFYING
THE SELECTION OF MCGLADREY & PULLEN, LLP AS INDEPENDENT PUBLIC ACCOUNTANTS FOR
THE FUND FOR THE FISCAL YEAR ENDING AUGUST 31, 1996.
IV. OTHER BUSINESS
The Board of Directors knows of no other business to be presented at
the Annual Meeting. If any additional matters should be properly presented, it
is intended that the enclosed proxy will be voted in accordance with the
judgment of the persons named in the proxy.
V. ADJOURNMENT
In the event that sufficient votes in favor of the proposals set
forth in the Notice of Annual Meeting and Proxy Statement are not received by
the time scheduled for the Annual Meeting, the persons named as proxies may move
one or more adjournments of the Annual Meeting to permit further solicitation of
proxies with respect to any such proposals. Any such adjournment will require
the affirmative vote of a majority of the Shares present at the Annual Meeting.
The persons named as proxies will vote in favor of such adjournment those Shares
which they are entitled to vote which have voted in favor of such proposals.
They will vote against any such adjournment those proxies required to be voted
against such proposal.
VI. VOTING INFORMATION
Proxies from the shareholders of the Fund are being solicited by the
Board of Directors of the Fund for the Annual Meeting to be held on February 20,
1996, at the
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Fund's offices at 700 Central Avenue, St. Petersburg, Florida 33701 at 10:00
A.M. (local time), or at such later time made necessary by adjournment. A proxy
may be revoked at any time at or before the meeting by oral or written notice to
the Secretary of the Fund. Unless revoked, all valid proxies will be voted in
accordance with the specifications thereon or, in the absence of such
specifications, for approval of the Plan and the Reorganization as set forth in
Proposal I, for the election of Directors named in Proposal II, and in favor of
Proposal III. For purposes of determining the presence of a quorum for
transacting business at the Meeting, abstentions and broker "non-votes" will be
treated as Shares that are present but which have not been voted. For this
reason abstentions and broker "non-votes" will have the effect of "no" votes for
purposes of Proposals I, II and III. Approval of the Plan and the
Reorganization, as set forth in Proposal I, will require the affirmative vote of
the holders of a majority of the Fund's outstanding voting securities. The
election of a Board of Directors, as set forth in Proposal II, will require the
vote of the holders of a plurality of the Fund's Shares present at the Annual
Meeting. Ratification of the selection of the independent public accountants, as
set forth in Proposal III, will require the vote of the holders of a majority of
the Fund's Shares present at the Annual Meeting.
Proxies are to be solicited by mail. Additional solicitations may be
made by telephone, telegraph or personal contact by officers, employees or
agents of Templeton, Galbraith & Hansberger Ltd. and its affiliates.
Shareholders of the Fund of record at the close of business on
________, 1995 ("Record Date") will be entitled to vote at the Annual Meeting or
any adjournment thereof. The holders of more than 50% of the shares of the Fund
outstanding at the close of business on the Record Date present in person or
represented by proxy will constitute a quorum for the meeting. Shareholders are
entitled to one vote for each share held and fractional votes for fractional
shares held. As of October 31, 1995, as shown on the books of the Fund, there
were issued and outstanding 3,153,664 shares of common stock of the Fund. As of
October 31, 1995, as shown on the books of Franklin Global Utilities, there were
issued and outstanding 9,194,912 Class I shares of beneficial interest.
The votes of the shareholders of Franklin Global Utilities are not
being solicited, since their approval or consent is not necessary for the
Reorganization to take place.
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<PAGE>
YOU ARE URGED TO FILL IN, DATE,
SIGN AND RETURN THE ENCLOSED PROXY PROMPTLY
By Order of the Board of Directors,
Thomas M. Mistele, Secretary
January ___, 1996
55432.2AF
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<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made
as of this ____ day of ______, 1996, by and between Franklin Strategic Series, a
Delaware business trust with its principal place of business at 777 Mariners
Island Blvd., San Mateo, CA 94403-7777, on behalf of its Franklin Global
Utilities Fund series of shares (the "Acquiring Fund"), and Templeton Global
Utilities, Inc., a Maryland corporation with its principal place of business at
700 Central Avenue, St. Petersburg, Florida 33701 (the "Acquired Fund").
This Agreement is intended to be and is adopted as a plan of
reorganization and liquidation within the meaning of Section 368(a) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of the transfer of all or
substantially all of the assets of the Acquired Fund to the Acquiring Fund in
exchange solely for Class I shares of beneficial interest ($ 0.01 par value per
share), of the Acquiring Fund (the "Acquiring Fund Shares"), the assumption by
the Acquiring Fund of certain identified liabilities of the Acquired Fund, and
the distribution of the Acquiring Fund Shares to the shareholders of the
Acquired Fund in complete liquidation of the Acquired Fund as provided herein,
all upon the terms and conditions hereinafter set forth in this Agreement.
WHEREAS, the Acquired Fund is a closed-end, registered investment
company of the management type, the Acquiring Fund is an open-end, registered
investment company of the management type and the Acquired Fund owns securities
which generally are assets of the character in which the Acquiring Fund is
permitted to invest;
WHEREAS, the Board of Trustees of the Acquiring Fund has determined
that the exchange of all or substantially all of the assets of the Acquired Fund
for Acquiring Fund Shares and the assumption of certain identified liabilities
of the Acquired Fund by the Acquiring Fund is in the best interests of the
Acquiring Fund and its shareholders and that the interests of the existing
shareholders of the Acquiring Fund would not be diluted as a result of this
transaction;
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WHEREAS, the Board of Directors of the Acquired Fund has determined
that the exchange of all or substantially all of the assets of the Acquired Fund
for Acquiring Fund Shares and the assumption of certain identified liabilities
of the Acquired Fund by the Acquiring Fund is in the best interests of the
Acquired Fund and its shareholders and that the interests of the existing
shareholders of the Acquired Fund would not be diluted as a result of this
transaction;
WHEREAS, the purpose of the Reorganization is to combine the assets
of the Acquiring Fund with those of the Acquired Fund in an attempt to achieve
greater operating economies and increased portfolio diversification;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND TO THE ACQUIRING
FUND IN EXCHANGE FOR THE ACQUIRING FUND SHARES, THE
ASSUMPTION OF CERTAIN IDENTIFIED ACQUIRED FUND LIABILITIES
AND THE LIQUIDATION OF THE ACQUIRED FUND
1.1 Subject to the terms and conditions herein set forth and on the
basis of the representations and warranties contained herein, the Acquired Fund
agrees to transfer all of the Acquired Fund's assets as set forth in paragraph
1.2 to the Acquiring Fund, and the Acquiring Fund agrees in exchange therefor
(i) to deliver to the Acquired Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, determined by dividing the value of
the Acquired Fund's net assets computed in the manner and as of the time and
date set forth in paragraph 2.1 by the net asset value of one Acquiring Fund
Share computed in the manner and as of the time and date set forth in paragraph
2.2; and (ii) to assume certain identified liabilities of the Acquired Fund, as
set forth in paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3.1 (the "Closing").
1.2 The assets of the Acquired Fund to be acquired by the Acquiring
Fund shall consist of all property, including, without limitation, all cash,
securities, commodities and futures interests and dividends or interest
receivable which are owned by the
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Acquired Fund and any deferred or prepaid expenses shown as an asset on the
books of the Acquired Fund on the closing date provided in paragraph 3.1 (the
"Closing Date").
1.3 The Acquired Fund will endeavor to discharge all of its known
liabilities and obligations prior to the Closing Date. The Acquiring Fund shall
assume all liabilities, expenses, costs, charges and reserves (expected to
include expenses incurred in the ordinary course of the Acquired Fund's
operations, such as accounts payable relating to custodian and transfer agency
fees, legal and audit fees, and expenses of state securities registration of the
Acquired Fund's shares) reflected on an unaudited statement of assets and
liabilities of the Acquired Fund prepared by Templeton Global Investors, Inc.,
the business manager of the Acquired Fund, as of the Valuation Date (as defined
in paragraph 2.1) in accordance with generally accepted accounting principles
consistently applied from the prior audited period. The Acquiring Fund shall
assume only those liabilities of the Acquired Fund reflected on that unaudited
statement of assets and liabilities and shall not assume any other liabilities.
1.4 Immediately after the transfer of assets provided for in
paragraph 1.1, the Acquired Fund will distribute pro rata to the Acquired Fund's
shareholders of record, determined as of immediately after the close of business
on the Closing Date (the "Acquired Fund Shareholders"), the Acquiring Fund
Shares received by the Acquired Fund pursuant to paragraph 1.1 and will
completely liquidate. Such distribution and liquidation will be accomplished by
the transfer of the Acquiring Fund Shares then credited to the account of the
Acquired Fund on the books of the Acquiring Fund to open accounts on the share
records of the Acquiring Fund in the names of the Acquired Fund Shareholders.
The aggregate net asset value of Acquiring Fund Shares to be so credited to
Acquired Fund Shareholders shall be equal to the aggregate net asset value of
the Acquired Fund shares owned by such shareholders as of immediately after the
close of business on the Closing Date. All issued and outstanding shares of the
Acquired Fund will simultaneously be canceled on the books of the Acquired Fund,
although share certificates representing interests in the Acquired Fund will
represent a number of Acquiring Fund Shares after the Closing Date as determined
in accordance with paragraph 2.3. The Acquiring Fund will not issue certificates
representing the Acquiring Fund Shares in connection with such exchange except
upon request by a shareholder of the Acquired Fund.
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<PAGE>
1.5 Ownership of Acquiring Fund Shares will be shown on the books of
the Acquiring Fund. Shares of the Acquiring Fund will be issued in the manner
described in the Acquiring Fund's then-current prospectus and statement of
additional information.
2. VALUATION
2.1 The value of the Acquired Fund's assets to be acquired by the
Acquiring Fund hereunder shall be the value of such assets computed as of the
normal close of business of the New York Stock Exchange on the Closing Date
(such time and date being hereinafter called the "Valuation Date"), using the
valuation procedures set forth in the Acquiring Fund's Trust Instrument and
then-current prospectus or statement of additional information.
2.2 The net asset value of an Acquiring Fund Share shall be the net
asset value per share computed as of immediately after the close of business of
the New York Stock Exchange on the Valuation Date, using the valuation
procedures set forth in the Acquiring Fund's Trust Instrument and then-current
prospectus or statement of additional information.
2.3 The number of the Acquiring Fund Shares to be issued (including
fractional shares, if any) in exchange for the Acquired Fund's assets shall be
determined by dividing the value of the net assets of the Acquired Fund
determined using the same valuation procedures referred to in paragraph 2.1 by
the net asset value of an Acquiring Fund Share determined in accordance with
paragraph 2.2.
2.4 All computations of value with respect to the Acquiring Fund
shall be made by Franklin Advisers, Inc.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be __________, 1996 or such later date as
the parties may agree in writing. All acts taking place at the Closing shall be
deemed to take place simultaneously as of immediately after the close of
business on the Closing Date unless otherwise agreed to by the parties. The
close of business on the Closing Date shall be as of 4:00 p.m., New York time.
The Closing shall be held at the offices of
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Dechert Price & Rhoads, Washington, D.C. or at such other place and time as the
parties shall mutually agree.
3.2 Bank of America NY&SA, as custodian for the Acquiring Fund (the
"Custodian"), shall deliver at the Closing a certificate of an authorized
officer stating that: (a) the Acquired Fund's portfolio securities, cash, and
any other assets shall have been delivered in proper form to the Acquiring Fund;
and (b) all necessary taxes including without limitation all applicable federal
and state stock transfer stamps, if any, shall have been paid, or provision for
payment shall have been made, in conjunction with the delivery of portfolio
securities.
3.3 Chemical Mellon Shareholder Services (the "Transfer Agent") on
behalf of the Acquired Fund shall deliver at the Closing a certificate of an
authorized officer stating that its records contain the names and addresses of
the Acquired Fund Shareholders and the number and percentage ownership of
outstanding shares owned by each such shareholder immediately prior to the
Closing. The Acquiring Fund shall issue and deliver a confirmation evidencing
the Acquiring Fund Shares to be credited on the Closing Date to the Acquired
Fund or provide evidence satisfactory to the Acquired Fund that such Acquiring
Fund Shares have been credited to the Acquired Fund's account on the books of
the Acquiring Fund. At the Closing each party shall deliver to the other such
bills of sale, checks, assignments, share certificates, if any, receipts or
other documents as such other party or its counsel may reasonably request.
4. REPRESENTATIONS AND WARRANTIES
4.1 The Acquired Fund represents and warrants to the Acquiring Fund as
follows:
(a) The Acquired Fund is a corporation duly organized, validly existing
and in good standing under the laws of the State of Maryland;
(b) The Acquired Fund is a registered closed-end investment company
and its registration with the Securities and Exchange Commission (the
"Commission") as an investment company under the Investment Company Act of 1940
(the "1940 Act") is in full force and effect;
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<PAGE>
(c) The Acquired Fund is not, and the execution, delivery and
performance of this Agreement will not result, in a material violation of its
Articles of Incorporation or By-Laws or of any agreement, indenture, instrument,
contract, lease or other undertaking to which the Acquired Fund is a party or by
which it is bound;
(d) The Acquired Fund has no material contracts or other commitments
(other than this Agreement) which will be terminated with liability to it prior
to the Closing Date;
(e) No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Acquired Fund or any properties or
assets held by it. The Acquired Fund knows of no facts which might form the
basis for the institution of such proceedings and is not a party to or subject
to the provisions of any order, decree or judgment of any court or governmental
body which materially and adversely affects its business or its ability to
consummate the transactions herein contemplated;
(f) The Statement of Assets and Liabilities of the Acquired Fund at
August 31, 1995 has been audited by McGladrey & Pullen, L.L.P., independent
certified public accountants, and is in accordance with generally accepted
accounting principles consistently applied, and such statement (a copy of which
has been furnished to the Acquiring Fund) presents fairly, in all material
respects, the financial position of the Acquired Fund as of such date, and there
are no known contingent liabilities of the Acquired Fund as of such date not
disclosed therein;
(g) Since August 31, 1995, there has not been any material adverse
change in the Acquired Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business, or any
incurrence by the Acquired Fund of indebtedness maturing more than one year from
the date such indebtedness was incurred, except as otherwise disclosed to and
accepted by the Acquiring Fund. For the purposes of this subparagraph (g), a
decline in net asset value per share of the Acquired Fund or the discharge of
Acquired Fund liabilities shall not constitute a material adverse change;
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<PAGE>
(h) At the Closing Date, all material Federal and other tax returns
and reports of the Acquired Fund required by law to have been filed by such date
shall have been filed and are or will be correct, and all Federal and other
taxes shown as due or required to be shown as due on said returns and reports
shall have been paid or provision shall have been made for the payment thereof,
and, to the best of the Acquired Fund's knowledge, no such return is currently
under audit and no assessment has been asserted with respect to such returns;
(i) For each taxable year of its operation, the Acquired Fund has met
the requirements of Subchapter M of the Code for qualification as a regulated
investment company and has elected to be treated as such;
(j) All issued and outstanding shares of the Acquired Fund are, and
at the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable. All of the issued and outstanding shares of the Acquired
Fund will, at the time of Closing, be held by the persons and in the amounts set
forth in the records of the Transfer Agent, as provided in paragraph 3.3. The
Acquired Fund does not have outstanding any options, warrants or other rights to
subscribe for or purchase any of the Acquired Fund shares, nor is there
outstanding any security convertible into any of the Acquired Fund shares;
(k) At the Closing Date, the Acquired Fund will have good and
marketable title to the Acquired Fund's assets to be transferred to the
Acquiring Fund pursuant to paragraph 1.2 and full right, power, and authority to
sell, assign, transfer and deliver such assets hereunder, and upon delivery and
payment for such assets, the Acquiring Fund will acquire good and marketable
title thereto, subject to no restrictions on the full transfer thereof,
including such restrictions as might arise under the Securities Act of 1933 (the
"1933 Act"), other than as disclosed to the Acquiring Fund;
(l) The execution, delivery and performance of this Agreement will
have been duly authorized prior to the Closing Date by all necessary action on
the part of the Acquired Fund's Directors, and, subject to the approval of the
Acquired Fund Shareholders, this Agreement will constitute a valid and binding
obligation of the Acquired Fund, enforceable in accordance with its terms,
subject, as to enforcement, to
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bankruptcy, insolvency, reorganization, moratorium and other laws relating to or
affecting creditors' rights and to general equity principles;
(m) The information to be furnished by the Acquired Fund for use in
registration statements, proxy materials and other documents which may be
necessary in connection with the transactions contemplated hereby shall be
accurate and complete in all material respects and shall comply in all material
respects with Federal securities and other laws and regulations thereunder
applicable thereto; and
(n) The proxy statement of the Acquired Fund (the "Proxy Statement")
to be included in the Registration Statement referred to in paragraph 5.6 (other
than information therein that relates to the Acquiring Fund) will, on the
effective date of the Registration Statement and on the Closing Date, 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, in
light of the circumstances under which such statements are made, not materially
misleading.
4.2 The Acquiring Fund represents and warrants to the Acquired Fund as
follows:
(a) The Acquiring Fund is a business trust duly organized, validly
existing and in good standing under the laws of the State of Delaware;
(b) The Acquiring Fund is a registered open-end investment company and
its registration with the Commission as an investment company under the 1940
Act, and the registration of its shares under the 1933 Act, are in full force
and effect;
(c) The current prospectus and statement of additional information of
the Acquiring Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations of
the Commission thereunder and do not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not materially misleading;
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(d) At the Closing Date, the Acquiring Fund will have good and
marketable title to the Acquiring Fund's assets;
(e) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result in a material violation of its
Trust Instrument or By-Laws or of any agreement, indenture, instrument,
contract, lease or other undertaking to which the Acquiring Fund is a party or
by which it is bound;
(f) No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently pending
or threatened against the Acquiring Fund or any of its properties or assets. The
Acquiring Fund knows of no facts which might form the basis for the institution
of such proceedings and is not a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body which materially and
adversely affects its business or its ability to consummate the transactions
herein contemplated;
(g) The Statement of Assets and Liabilities of the Acquiring Fund at
April 30, 1995 has been audited by Coopers & Lybrand L.L.P., independent
certified public accountants, and is in accordance with generally accepted
accounting principles consistently applied, and such statement (a copy of which
has been furnished to the Acquired Fund) presents fairly, in all material
respects, the financial position of the Acquiring Fund as of such date, and
there are no known contingent liabilities of the Acquiring Fund as of such date
not disclosed therein;
(h) Since April 30, 1995, there has not been any material adverse
change in the Acquiring Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business, or any
incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred. For the purposes of this
subparagraph (h), a decline in net asset value per share of the Acquiring Fund,
the discharge of Acquiring Fund liabilities, or the redemption of Acquiring Fund
shares by Acquiring Fund shareholders, shall not constitute a material adverse
change;
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(i) At the Closing Date, all material Federal and other tax returns
and reports of the Acquiring Fund required by law to have been filed by such
date shall have been filed and are or will be correct, and all Federal and other
taxes shown as due or required to be shown as due on said returns and reports
shall have been paid or provision shall have been made for the payment thereof,
and, to the best of the Acquiring Fund's knowledge no such return is currently
under audit and no assessment has been asserted with respect to such returns;
(j) All issued and outstanding Acquiring Fund Shares are, and at the
Closing Date will be, duly and validly issued and outstanding, fully paid and
non-assessable by the Acquiring Fund. The Acquiring Fund does not have
outstanding any options, warrants or other rights to subscribe for or purchase
any Acquiring Fund Shares, nor is there outstanding any security convertible
into any Acquiring Fund Shares;
(k) The execution, delivery and performance of this Agreement will
have been duly authorized prior to the Closing Date by all necessary action, if
any, on the part of the Trustees of the Acquiring Fund, and this Agreement will
constitute a valid and binding obligation of the Acquiring Fund enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights and to general equity principles;
(l) The Acquiring Fund Shares to be issued and delivered to the
Acquired Fund, for the account of the Acquired Fund Shareholders, pursuant to
the terms of this Agreement will at the Closing Date have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable by the Acquiring Fund;
(m) The information to be furnished by the Acquiring Fund for use in
registration statements, proxy materials and other documents which may be
necessary in connection with the transactions contemplated hereby shall be
accurate and complete in all material respects and shall comply in all material
respects with Federal securities and other laws and regulations applicable
thereto;
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(n) The Proxy Statement to be included in the Registration Statement
(only insofar as it relates to the Acquiring Fund) will, on the effective date
of the Registration Statement and on the Closing Date, 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, in light of the
circumstances under which such statements were made, not materially misleading;
(o) The Acquiring Fund agrees to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act, the 1940 Act and such
of the state blue sky or securities laws as may be necessary in order to
continue its operations after the Closing Date; and
(p) For each taxable year of its operation, the Acquiring Fund has
met the requirements of Subchapter M of the Code for qualification as a
regulated investment company and has elected to be treated as such.
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1 The Acquiring Fund and the Acquired Fund each will operate its
business in the ordinary course between the date hereof and the Closing Date, it
being understood that such ordinary course of business will include the
declaration and payment of customary dividends and distributions, and any other
distributions that may be advisable.
5.2 The Acquired Fund will call a meeting of the Acquired Fund
Shareholders to consider and act upon this Agreement and to take all other
action necessary to obtain approval of the transactions contemplated herein.
5.3 The Acquired Fund covenants that the Acquiring Fund Shares to be
issued hereunder are not being acquired for the purpose of making any
distribution thereof other than in accordance with the terms of this Agreement.
5.4 The Acquired Fund will assist the Acquiring Fund in obtaining
such information as the Acquiring Fund reasonably requests concerning the
beneficial ownership of the Acquired Fund Shares.
A-11
<PAGE>
5.5 Subject to the provisions of this Agreement, the Acquiring Fund
and the Acquired Fund will each take, or cause to be taken, all actions, and do
or cause to be done, all things reasonably necessary, proper or advisable to
consummate and make effective the transactions contemplated by this Agreement.
5.6 The Acquired Fund will provide the Acquiring Fund with
information reasonably necessary for the preparation of a prospectus (the
"Prospectus") which will include the Proxy Statement, referred to in paragraph
4.1(n), all to be included in a Registration Statement on Form N-14 of the
Acquiring Fund (the "Registration Statement"), in compliance with the 1933 Act,
the Securities Exchange Act of 1934 (the "1934 Act") and the 1940 Act in
connection with the meeting of the Acquired Fund Shareholders to consider
approval of this Agreement and the transactions contemplated herein.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED
FUND
The obligations of the Acquired Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations and warranties of the Acquiring Fund
contained in this Agreement shall be true and correct in all material respects
as of the date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force and
effect as if made on and as of the Closing Date;
6.2 The Acquiring Fund shall have delivered to the Acquired Fund a
certificate executed in its name by its President or Vice President and its
Treasurer or Assistant Treasurer, in a form reasonably satisfactory to the
Acquired Fund and dated as of the Closing Date, to the effect that the
representations and warranties of the Acquiring Fund made in this Agreement are
true and correct at and as of the Closing Date, except as they may be affected
by the transactions contemplated by this Agreement and as to such other matters
as the Acquired Fund shall reasonably request; and
A-12
<PAGE>
6.3 The Acquired Fund shall have received on the Closing Date the
opinion of Messrs. Stradley, Ronon, Stevens & Young, in a form reasonably
satisfactory to the Acquired Fund, and dated as of the Closing Date, that:
(a) The Acquiring Fund has been duly formed and is validly existing
and in good standing under the laws of the State of Delaware; (b) the Acquiring
Fund has the power to carry on its business as presently conducted; (c) the
Agreement has been duly authorized, executed and delivered by the Acquiring Fund
and constitutes a valid and legally binding obligation of the Acquiring Fund
enforceable against the Acquiring Fund in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and laws
of general applicability relating to or affecting creditors' rights and to
general equity principles; (d) the Registration Statement has been declared
effective under the 1933 Act and, to the knowledge of such counsel, no stop
order has been issued or threatened suspending its effectiveness; (e) to the
knowledge of such counsel, all regulatory consents, authorizations, approvals or
filings required to be obtained or made by the Acquiring Fund under the Federal
laws of the United States or the State of Delaware for the exchange of the
Acquired Fund's assets for shares of the Acquiring Fund, pursuant to the
Agreement have been obtained or made; and (f) the Acquiring Fund Shares to be
issued in the Reorganization have been duly authorized and upon issuance thereof
in accordance with this Agreement will be validly issued, fully paid and
nonassessable, and no shareholder of the Acquiring Fund has any preemptive right
to subscribe or purchase in respect thereof.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquired Fund of all of the obligations to be performed by it hereunder on or
before the Closing Date and, in addition thereto, the following conditions:
7.1 All representations and warranties of the Acquired Fund contained
in this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions contemplated
by this Agreement, as of
A-13
<PAGE>
the Closing Date with the same force and effect as if made on and as of the
Closing Date;
7.2 The Acquired Fund shall have delivered to the Acquiring Fund a
statement of the Acquired Fund's assets and liabilities, as of the Closing Date,
certified by the Treasurer of the Acquired Fund;
7.3 The Acquired Fund shall have delivered to the Acquiring Fund on
the Closing Date a certificate executed in its name by its President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
satisfactory to the Acquiring Fund and dated as of the Closing Date, to the
effect that the representations and warranties of the Acquired Fund made in this
Agreement are true and correct at and as of the Closing Date, except as they may
be affected by the transactions contemplated by this Agreement, and as to such
other matters as the Acquiring Fund shall reasonably request; and
7.4 The Acquiring Fund shall have received on the Closing Date the
opinion of Messrs. Dechert Price & Rhoads dated as of the Closing Date, that:
(a) The Acquired Fund has been duly formed and is validly existing
and in good standing under the laws of the State of Maryland; (b) the Acquired
Fund has the power to carry on its business as presently conducted; (c) the
Agreement has been duly authorized, executed and delivered by the Acquired Fund
and constitutes a valid and legally binding obligation of the Acquired Fund
enforceable against the Acquired Fund in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and laws
of general applicability relating to or affecting creditors' rights and to
general equity principles; (d) the Reorganization has been approved by the
requisite vote of the shareholders of the Acquired Fund; and (e) to the
knowledge of such counsel, all regulatory consents, authorizations, approvals or
filings required to be obtained or made by the Acquired Fund under the Federal
laws of the United States or the State of Maryland for the exchange of the
Acquired Fund's assets for shares of the Acquiring Fund, pursuant to the
Agreement have been obtained or made.
A-14
<PAGE>
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE
ACQUIRING FUND AND THE ACQUIRED FUND
If any of the conditions set forth below do not exist on or before
the Closing Date with respect to the Acquired Fund or the Acquiring Fund, the
other party to this Agreement shall, at its option, not be required to
consummate the transactions contemplated by this Agreement:
8.1 The Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Acquired Fund in accordance with the provisions of the Acquired Fund's
Articles of Incorporation and By-Laws and certified copies of the resolutions
evidencing such approval shall have been delivered to the Acquiring Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund nor
the Acquired Fund may waive the conditions set forth in this paragraph 8.1;
8.2 On the Closing Date, no action, suit or other proceeding shall be
threatened or pending before any court or governmental agency in which it is
sought to restrain or prohibit, or obtain damages or other relief in connection
with, this Agreement or the transactions contemplated herein;
8.3 All consents of other parties and all other consents, orders and
permits of Federal, state and local regulatory authorities deemed necessary by
the Acquiring Fund or the Acquired Fund to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain any such consent, order or permit would not
involve a risk of a material adverse effect on the assets or properties of the
Acquiring Fund or the Acquired Fund, provided that either party hereto may for
itself waive any of such conditions;
8.4 The Registration Statement shall have become effective under the
1933 Act and no stop orders suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act; and
A-15
<PAGE>
8.5 The parties shall have received the opinion of Messrs. Dechert
Price & Rhoads addressed to the Acquiring Fund and the Acquired Fund
substantially to the effect that the transaction contemplated by this Agreement
constitutes a tax-free reorganization for Federal income tax purposes. The
delivery of such opinion is conditioned upon receipt by Dechert Price & Rhoads
of representations it shall request of the parties. Notwithstanding anything
herein to the contrary, neither the Acquiring Fund nor the Acquired Fund may
waive the condition set forth in this paragraph 8.5.
9. BROKERAGE FEES AND EXPENSES
9.1 The Acquiring Fund and the Acquired Fund each represents and
warrants to the other that it has no obligations to pay any brokers or finders
fees in connection with the transactions provided for herein.
9.2 The expenses of entering into and carrying out the provisions of
this Agreement shall be borne as follows: Franklin Advisers, Inc. ("Franklin"),
Templeton, Galbraith & Hansberger Ltd. ("TGH"), the Acquiring Fund and the
Acquired Fund shall each pay one-fourth of the total expenses incurred in
connection with this Agreement. Following the consummation of the transaction,
Advisers and TGH will determine if such arrangement relating to the expenses is
disproportionate to either the Acquiring Fund or to the Acquired Fund in
relation to the benefits derived by each. In such event, Advisers and TGH will
assume responsibility for paying that portion of the expenses which is deemed to
be so disproportionate.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Acquired Fund agree that neither
party has made any representation, warranty or covenant not set forth herein and
that this Agreement constitutes the entire agreement between the parties.
10.2 The representations and warranties contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith shall not
survive the consummation of the transactions contemplated hereunder.
A-16
<PAGE>
11. TERMINATION
This Agreement and the transaction contemplated hereby may be
terminated and abandoned by either party by resolution of the party's Board of
Directors at any time prior to the Closing Date, if circumstances should develop
that, in the opinion of such Board, make proceeding with the Agreement
inadvisable.
A-17
<PAGE>
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such
manner as may be mutually agreed upon in writing by the authorized officers of
the Acquired Fund and the Acquiring Fund; provided, however, that following the
meeting of the Acquired Fund Shareholders called by the Acquired Fund pursuant
to paragraph 5.2 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Acquiring Fund Shares
to be issued to the Acquired Fund Shareholders under this Agreement to the
detriment of such shareholders without their further approval.
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be deemed duly given
if delivered or mailed by registered mail, postage prepaid, addressed to the
Acquired Fund, 700 Central Avenue, St. Petersburg, Florida 33701, Attention:
Thomas M. Mistele, Esq. or to the Acquiring Fund, 777 Mariners Island Blvd.,
P.O. Box 7777, San Mateo, California 94403- 7777, Attention: Deborah R. Gatzek,
Esq.
14. HEADINGS; COUNTERPARTS; ASSIGNMENT; LIMITATION OF
LIABILITY
14.1 The Article and paragraph headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original.
14.3 This Agreement shall bind and inure to the benefit of the
parties hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties
A-18
<PAGE>
hereto and their respective successors and assigns, any rights or remedies under
or by reason of this Agreement.
14.4 It is expressly agreed that the obligations of the Acquiring
Fund hereunder shall not be binding upon any of the Trustees, shareholders,
nominees, officers, agents, or employees of the Acquiring Fund personally, but
bind only the property of the Acquiring Fund. The execution and delivery of this
Agreement have been authorized by the Trustees of the Acquiring Fund and signed
by authorized officers of the Acquiring Fund acting as such, and neither such
authorization by such Trustees nor such execution and delivery by such officers
shall be deemed to have been made by any of them individually or to impose any
liability on any of them personally, but shall bind only the property of the
Acquiring Fund.
14.5 This Agreement shall be governed by and construed in accordance
with the laws of the State of Maryland.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed by its President or Vice President and its seal to be
affixed thereto and attested by its Secretary or Assistant Secretary.
Attest: FRANKLIN STRATEGIC SERIES
______________________________ By:___________________________
Attest: TEMPLETON GLOBAL UTILITIES, INC.
______________________________ By:___________________________
55432.2AF
A-19
<PAGE>
Franklin Global
Utilities Fund
Franklin Strategic Series
PROSPECTUS September 1, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin Global Utilities Fund (the "Fund") is a non-diversified series of
Franklin Strategic Series (the "Trust"), an open-end management investment
company, with the investment objective of seeking to provide total return
without incurring undue risk. The Fund seeks to accomplish its objective by
investing primarily, that is, at least 65% of its total assets, in securities
issued by companies which are, in the opinion of management, primarily engaged
in the ownership or operation of facilities used to generate, transmit or
distribute electricity, telephone communications, cable and other pay television
services, wireless telecommunications, gas or water.
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that a prospective investor should know before
investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which a prospective investor will find useful to have.
The Fund offers two classes of shares to its investors: Franklin Global
Utilities Fund - Class I ("Class I") and Franklin Global Utilities Fund - Class
II ("Class II"). Investors can choose between Class I shares, which generally
bear a higher front-end sales charge and lower ongoing Rule 12b-1 distribution
fees ("Rule 12b-1 fees"), and Class II shares, which generally have a lower
front-end sales charge and higher ongoing Rule 12b-1 fees. Investors should
consider the differences between the two classes, including the impact of sales
charges and Rule 12b-1 fees, in choosing the more suitable class given their
anticipated investment amount and time horizon. See "How to Buy Shares of the
Fund - Differences Between Class I and Class II."
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank; further, such shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
Shares of the Fund involve investment risks, including the possible loss of
principal.
A Statement of Additional Information (the "SAI") concerning the Fund, dated
September 1, 1995, as may be amended from time to time, provides a further
discussion of certain areas in this Prospectus and other matters which may be of
interest to some investors. It has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated herein by reference. A copy is available
without charge from the Fund or the Fund's principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or
telephone number shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This Prospectus is not an offering of the securities herein described in any
state 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 the underwriter.
ContentsPage
Expense Table.................................... 2
Financial Highlights............................. 4
About the Fund................................... 4
Investment Objective and
Policies of the Fund............................ 5
Management of the Fund........................... 13
Distributions to Shareholders.................... 14
Taxation of the Fund
and Its Shareholders............................ 16
How to Buy Shares of the Fund.................... 17
Purchasing Shares of the Fund
in Connection with Retirement Plans
Involving Tax-Deferred Investments.............. 25
Other Programs and Privileges
Available to Fund Shareholders.................. 25
Exchange Privilege............................... 27
How to Sell Shares of the Fund................... 30
Telephone Transactions........................... 34
Valuation of Fund Shares......................... 35
How to Get Information Regarding
an Investment in the Fund....................... 37
Performance...................................... 37
General Information.............................. 38
Account Registrations............................ 40
Important Notice Regarding
Taxpayer IRS Certifications..................... 41
Portfolio Operations............................. 41
Expense Table
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. These figures are based on aggregate
operating expenses of Class I shares of the Fund for the fiscal year ended April
30, 1995.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses Class I Class II
Maximum Sales Charge Imposed on Purchases
<S> <C> <C>
(as a percentage of offering price).............................................. 4.50% 1.00%*
Deferred Sales Charge............................................................. NONE** NONE***
Class I Class II
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees................................................................... 0.60% 0.60%
12b-1 Fees........................................................................ 0.23%+ 1.00%+
Other Expenses:...................................................................
Reports to shareholders......................................................... 0.08% 0.08%
Registration.................................................................... 0.09% 0.09%
Other expenses.................................................................. 0.12% 0.12%
Total Other Expenses.............................................................. 0.29% 0.29%****
Total Fund Operating Expenses..................................................... 1.12% 1.89%
</TABLE>
*Although Class II has a lower front-end sales charge than Class I, over time
the higher Rule 12b-1 fee for Class II may cause shareholders to pay more for
Class II shares than for Class I shares. Given the maximum front-end sales
charge and the rate of Rule 12b-1 fees of each class, it is estimated that this
will take less than six years for shareholders who maintain total shares valued
at less than $100,000 in the Franklin Templeton Funds. Shareholders with larger
investments in the Franklin Templeton Funds will reach the crossover point more
quickly. See "How to Buy Shares of the Fund - Purchase Price of Fund Shares" for
the definition of Franklin Templeton Funds and similar references.
**Class I investments of $1 million or more are not subject to a front-end sales
charge; however, a contingent deferred sales charge of 1% is generally imposed
on certain redemptions within a "contingency period" of 12 months of the
calendar month following such investments. See "How to Sell Shares of the Fund -
Contingent Deferred Sales Charge."
***Class II shares redeemed within a "contingency period" of 18 months of the
calendar month following such investments are subject to a 1% contingent
deferred sales charge. See "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."
+Consistent with National Association of Securities Dealers, Inc.'s rules, it is
possible that 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 those same rules.
****"Other Expenses" for Class II shares are estimates based on the actual
expenses incurred by Class I shares for the fiscal year ended April 30, 1995.
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.
Example
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge and applicable contingent deferred
sales charges, that apply to a $1,000 investment in the Fund over various time
periods assuming (1) a 5% annual rate of return and (2) redemption at the end of
each time period.
One Year Three Years Five Years Ten Years
Class I...................... $56* $79 $104 $175
Class II..................... $39 $69 $111 $229
*Assumes that a contingent deferred sales charge will not apply to Class I
shares.
A shareholder would pay the following expenses on the same investment, assuming
no redemption.
One Year Three Years Five Years Ten Years
Class II..................... $29 $69 $111 $229
This example is based on the aggregate annual operating expenses shown above and
should not be considered a representation of future expenses, which may be more
or less than those shown. The operating expenses are borne by the Fund and only
indirectly by shareholders as a result of their investment in the Fund. In
addition, federal securities regulations require the example to assume an annual
return of 5%, but the Fund's actual return may be more or less than 5%.
Financial Highlights
Set forth below is a table containing financial highlights for a Class I share
of the Fund from July 2, 1992 (effective date of registration) through April 30,
1993, and through the two fiscal years in the period ended April 30, 1995. The
information for each of the periods ended April 30, 1995, has been audited by
Coopers & Lybrand L.L.P., independent auditors, whose audit report appears in
the financial statements in the Trust's Annual Report to Shareholders dated
April 30, 1995. Information regarding Class II shares will be included in this
table after they have been offered to the public for a reasonable period of
time. See the discussion "Reports to Shareholders" under "General Information"
in this Prospectus.
<TABLE>
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data
______________________________________________________ __________________________
Net Distri Distri- Net Net Ratio of Net
Year Net Asset Net Realized & butions butions Asset Assets Ratio of Investment
Ended Value at Invest- Unrealized Total From From Net From Total Value at End Expenses Income to Portfolio
April Beginning ment Gain(Loss)on Investment Investment Capital Distri- End of Total of Year to Average Average Turnover
30 of Year Income Securities Operations Income Gains butions Year Return*(in 000's) Net Assets Net Assets Rate
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19931 $10.00 $0.22 $1.270 $1.490 $(0.130) $ - $ - $11.36 18.08%** $ 14,227 - %*** 3.89%** - %
1994 11.36 0.30 1.280 1.580 (0.299) (0.042) (0.341) 12.60 14.04 124,188 0.84*** 2.95 16.28
1995 12.60 0.42 (0.067) 0.353 (0.365) (0.358) (0.723) 12.23 3.17 119,250 1.12 3.47 16.65
</TABLE>
1For the period July 2, 1992 (effective date) to April 30, 1993.
*Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum front-end sales charge and assumes
reinvestment of dividends and capital gains, if any, at net asset value.
**Annualized
***During the period indicated, Franklin Advisers, Inc. agreed in advance to
waive a portion of its management fees and made payments of other expenses
incurred by the Fund. Had such action not been taken, the ratios of expenses to
average net assets for the periods ended April 30, 1993 and 1994 would have been
1.51% (annualized) and 1.28%, respectively.
About the Fund
The Fund is a non-diversified series of the Trust, an open-end management
investment Company, commonly called a "mutual fund." The Trust was organized in
Delaware as a Delaware business trust in January 1991 and registered with the
SEC under the Investment Company Act of 1940, as amended (the "1940 Act"). The
Trust issues its shares of beneficial interest under separate series, each with
its own investment objective and policies and totally separate investment
portfolios. The Fund is managed by Franklin Advisers, Inc. (the "Manager" or
"Advisers"). Because the Fund is non-diversified, it may have greater
investments in a single issuer than a diversified fund. Consequently, changes in
the financial condition of a single issuer may have a greater effect on the
Fund's share value than such changes would have on the performance of other
mutual funds, particularly those which invest in a broad range of issuers and
industries. The Fund has two classes ("multiclass structure") of shares of
beneficial interest: Franklin Global Utilities Fund - Class I and Franklin
Global Utilities Fund - Class II. All Fund shares outstanding before May 1,
1995, have been redesignated as Class I shares, and will retain their previous
rights and privileges, except for legally required modifications to shareholder
voting procedures, as discussed in "General Information - Organization and
Voting Rights."
Shares of the Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price. The current public
offering price of the Class I shares is equal to the net asset value (see
"Valuation of Fund Shares"), plus a variable sales charge not exceeding 4.50% of
the offering price depending upon the amount invested. The current public
offering price of the Class II shares is equal to the net asset value, plus a
sales charge of 1% of the amount invested. (See "How to Buy Shares of the
Fund.")
Investment Objective
and Policies of the Fund
The Fund seeks to provide total return, without incurring undue risk, by
investing at least 65% of its total assets in securities issued by companies
which are, in the opinion of the Manager, primarily engaged in the ownership or
operation of facilities used to generate, transmit or distribute electricity,
telephone communications, cable and other pay television services, wireless
telecommunications, gas or water. The Fund's total return consists of both
capital appreciation and current dividend and interest income. There is, of
course, no assurance that the Fund's objective will be achieved. The objective
is a fundamental policy of the Fund and may not be changed without shareholder
approval.
The Fund may use a variety of strategies to enhance income and to hedge against
market and currency risk, as described more fully under "Transactions in
Options, Future and Options on Financial Futures" in the SAI.
The Fund invests in common stocks, preferred stocks and debt securities
including preferred or debt securities convertible into common stocks. The
mixture of common stocks, debt securities and preferred stocks varies from time
to time based upon the Manager's assessment as to whether investments in each
category will contribute to meeting the Fund's investment objective. The Fund
may invest, without percentage limitation, in fixed-income securities having at
the time of purchase one of the four highest ratings of Moody's Investors
Service ("Moody's") (Aaa, Aa, A, Baa), Standard & Poor's Corporation ("S&P")
(AAA, AA, A, BBB), two nationally recognized statistical rating organizations
("NRSROs") or in securities which are not rated by any NRSRO, provided that, in
the opinion of the Fund's Manager, such securities are comparable in quality to
those within the four highest ratings. Securities rated within the four highest
ratings are considered to be "investment grade" securities, although bonds rated
Baa are regarded as having an adequate capacity to pay principal and interest
but with greater vulnerability to adverse economic conditions and some
speculative characteristics. The Fund's commercial paper investments at the time
of purchase will be rated "A-1" or "A-2" by S&P or "Prime-1" or "Prime-2" by
Moody's or, if not rated by any NRSRO, will be of comparable quality as
determined by Advisers. The Fund may also invest up to 5% of its total assets at
the time of purchase in lower rated fixed-income securities and unrated
securities of comparable quality (sometimes referred to as "junk bonds" in the
popular media). Such investments will be rated no lower than Caa by Moody's or
CCC by S&P. (See the SAI for a more complete discussion regarding these
investments.) In the event the rating on an issue held in the Fund's portfolio
is changed by the NRSRO, such event will be considered by the Fund in its
evaluation of the overall investment merits of that security but will not
necessarily result in an automatic sale of the security. A discussion of ratings
is contained in the Appendix to the SAI.
The Fund may invest in the securities of foreign issuers in the form of
sponsored or unsponsored American Depositary Receipts (ADRs) or other securities
convertible into securities of foreign issuers. ADRs are receipts typically
issued by an American bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. These securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. Generally, ADRs, which are issued in registered form, are
designed for use in the United States ("U.S.") securities markets. The issuers
of unsponsored ADRs are not obligated to disclose material information in the
U.S. and, therefore, there may be less information available to the investing
public than with sponsored ADRs. Advisers will attempt to independently
accumulate and evaluate information with respect to the issuers of the
underlying securities of sponsored and unsponsored ADRs to attempt to limit the
Fund's exposure to the market risk associated with such investments. For
purposes of the Fund's investment policies, investments in ADRs will be deemed
to be investments in the equity securities of the foreign issuers into which
they may be converted.
Under normal circumstances, the Fund will invest at least 65% of its total
assets in issuers domiciled in at least three different countries, one of which
may be the U.S., although the Manager expects the Fund's portfolio to be more
geographically diversified. Under normal conditions, it is anticipated that the
percentage of assets invested in U.S. securities will be higher than that
invested in securities of any other single country. It is possible that at times
the Fund may have 65% or more of its total assets invested in foreign
securities. The Fund at all times, except during temporary defensive periods,
will maintain at least 65% of its total assets invested in securities issued by
companies in the utilities industries. The Fund reserves the right to hold, as a
temporary defensive measure or as a reserve for redemptions, short-term U.S.
government securities, high quality money market securities, including
repurchase agreements, or cash in such proportions as, in the opinion of the
Manager, prevailing market or economic conditions warrant.
The operating expense ratio of the Fund can be expected to be higher than that
of an investment company investing exclusively in U.S. securities because the
expenses of the Fund, such as custodial and brokerage costs, are higher.
The Fund is permitted to invest up to 35% of its assets in securities of issuers
that are outside the utility industries. Such investments will consist of common
stocks, debt securities or preferred stocks and will be selected to meet the
Fund's investment objective of providing total return without incurring undue
risk. These securities may be issued by either U.S. or non-U.S. companies,
governments, or governmental instrumentalities. Some of these issuers may be in
industries related to utility industries and, therefore, may be subject to
similar risks. Securities that are issued by foreign companies or are
denominated in foreign currencies are subject to the risks outlined below. See
"Special Considerations and Risk Factors."
Securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities ("U.S. Government Securities"), including U.S. Treasury bills,
notes and bonds as well as certain agency securities and mortgage-backed
securities issued or guaranteed by the Government National Mortgage Association
(GNMA), may be backed by the "full faith and credit" of the U.S. government. Any
such guarantee will extend to the payment of interest and principal due on the
securities and will not provide any protection from fluctuations in either the
securities' yield or value or to the yield or value of the Fund's shares. Other
securities issued by U.S. government agencies or instrumentalities are not
necessarily backed by the "full faith and credit" of the U.S. government, such
as certain securities issued by the Federal National Mortgage Association
(FNMA), the Federal Home Loan Mortgage Corporation, the Student Loan Marketing
Association and the Farm Credit Bank.
The Fund may invest in securities issued or guaranteed by foreign governments.
Such securities are typically denominated in foreign currencies and are subject
to the currency fluctuation and other risks of foreign securities investments
outlined below. See "Special Considerations and Risk Factors." The foreign
government securities in which the Fund intends to invest generally will consist
of obligations issued by national, state or local governments or similar
political subdivisions. Foreign government securities also include debt
obligations of supranational entities, including international organizations
designed or supported by governmental entities to promote economic
reconstruction or development and international banking institutions and related
government agencies. Examples include the International Bank of Reconstruction
and Development (the World Bank), the European Investment Bank, the Asian
Development Bank and the Inter-American Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units. An example of a multinational currency unit is the European
Currency Unit. A European Currency Unit represents specified amounts of the
currencies of certain of the 12 member states of the European Economic
Community. Debt securities of quasi-governmental agencies are issued by entities
owned by either a national or local government or are obligations of a political
unit that is not backed by the national government's full faith and credit and
general taxing powers. Foreign government securities also include
mortgage-related securities issued or guaranteed by national or local
governmental instrumentalities, including quasi-governmental agencies.
Utility Industries
Under normal circumstances, the Fund will invest at least 65% of its total
assets in common stocks, debt securities and preferred stocks including
preferred or debt securities convertible into common stocks of companies in the
utility industries, which may be domestic and/or foreign. To meet its objective,
the Fund may invest in domestic utility companies that pay higher than average
dividends, but have a lesser potential for capital appreciation. There can be no
assurance that the positive relative returns on utility securities that has
historically been the case will continue to occur in the future. The Manager
believes that the average dividend yields of common stocks issued by foreign
utility companies have also historically exceeded those of foreign industrial
companies' common stocks. To meet its objective of total return, without
incurring undue risk, the Fund may invest in foreign utility companies which pay
lower than average dividends, but have a greater potential for capital
appreciation.
The utility companies in which the Fund invests include companies primarily
engaged in the ownership or operation of facilities used to provide electricity,
telephone communications, cable and other pay television services, wireless
telecommunications, gas or water. "Primarily engaged," for this purpose, means
that (1) more than 50% of the company's assets are devoted to the ownership or
operation of one or more facilities as described above or (2) more than 50% of
the company's operating revenues are derived from the business or combination of
businesses described above. See "The Fund's Investment Objective and
Restrictions" in the SAI.
Some of the Fund's Other Investment Policies
When-Issued or Delayed Delivery Transactions. The Fund may purchase debt
obligations on a "when-issued" or "delayed delivery" basis. Such securities are
subject to market fluctuation prior to delivery to the Fund and generally do not
earn interest until their scheduled delivery date. Therefore, the value or
yields at delivery may be more or less than the purchase price or the yields
available when the transaction was entered into. When the Fund is the buyer in
such a transaction, it will maintain, in a segregated account with its
custodian, cash or high-grade marketable securities having an aggregate value
equal to the amount of such purchase commitments until payment is made. To the
extent the Fund engages in when-issued and delayed delivery transactions, it
will do so only for the purpose of acquiring portfolio securities consistent
with its investment objective and policies, and not for the purpose of
investment leverage. (See the SAI for a more complete discussion regarding
when-issued and delayed delivery transactions.)
Standby Commitment Agreements. The Fund may from time to time enter into standby
commitment agreements. Such agreements commit the Fund, for a stated period of
time, to purchase a stated amount of a fixed-income security which may be issued
and sold to the Fund at the option of the issuer. The price and coupon of the
security is fixed at the time of the commitment. At the time of entering into
the agreement, the Fund is paid a commitment fee, regardless of whether the
security is ultimately issued, which is typically approximately 0.5% of the
aggregate purchase price of the security which the Fund has committed to
purchase. The Fund will enter into such agreements only for the purpose of
investing in the security underlying the commitment at a yield and price which
is considered advantageous to the Fund. The Fund will not enter into a standby
commitment with a remaining term in excess of 45 days and will limit its
investment in such commitments so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale, will not exceed 15% of its
assets, taken at the time of acquisition of such commitment or security. The
Fund will at all times maintain a segregated account with its custodian bank of
cash, cash equivalents, U.S. Government Securities or other high grade liquid
debt securities denominated in U.S. dollars or non-U.S. currencies in an
aggregate amount equal to the purchase price of the securities underlying the
commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the Fund may bear the
risk of a decline in the value of such security and may not benefit from an
appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
Loans of Portfolio Securities. Consistent with procedures approved by the Board
of Trustees and subject to the following conditions, the Fund may lend its
portfolio securities to qualified securities dealers or other institutional
investors, provided that such loans do not exceed one-third of the value of the
Fund's total assets at the time of the most recent loan. The borrower must
deposit with the Fund's custodian collateral with an initial market value of at
least 102% of the initial market value of the securities loaned, including any
accrued interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 100%. Such
collateral shall consist of cash, securities issued by the U.S. Government, its
agencies or instrumentalities, or irrevocable letters of credit. The lending of
securities is a common practice in the securities industry. The Fund engages in
security loan arrangements with the primary objective of increasing the Fund's
income either through investing the cash collateral in short-term interest
bearing obligations or by receiving a loan premium from the borrower. Under the
securities loan agreement, the Fund continues to be entitled to all dividends or
interest on any loaned securities. As with any extension of credit, there are
risks of delay in recovery and loss of rights in the collateral should the
borrower of the securities fail financially.
Borrowing. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of its assets, except that the Fund may enter into reverse
repurchase agreements or borrow money from banks in an amount up to 33% of its
total asset value (computed at the time the loan is made) for temporary or
emergency purposes. While borrowings exceed 5% of the Fund's total assets, the
Fund will not make any additional investments.
Illiquid Investments. It is the policy of the Fund that illiquid securities
(securities that cannot be disposed of within seven days in the normal course of
business at approximately the amount at which the Fund has valued the
securities) may not constitute, at the time of purchase, more than 15% of the
value of the total net assets of the Fund. Subject to this limitation, the
Trust's Board of Trustees (the "Board") has authorized the Fund to invest in
restricted securities where such investment is consistent with the Fund's
investment objective and has authorized such securities to be considered to be
liquid to the extent the Manager determines on a daily basis that there is a
liquid institutional or other market for such securities. Notwithstanding the
Manager's determination in this regard, the Board will remain responsible for
such determinations and will consider appropriate action, consistent with the
Fund's objective and policies, if a security should become illiquid subsequent
to its purchase. To the extent the Fund invests in restricted securities that
are deemed liquid, the general level of illiquidity in the Fund may be increased
if qualified institutional buyers become uninterested in purchasing these
securities or the market for these securities contracts. See "The Fund's
Investment Objective and Restrictions - Short-Term Investments" in the SAI.
Notwithstanding the above policy and the federal securities laws, which permit
investments in illiquid securities up to 15% of the Fund's portfolio, the Fund
is aware that the securities laws in various states impose more restrictive
limits upon such investments. To comply with applicable state restrictions, the
Fund will limit its investments in illiquid securities, including securities of
unseasoned issuers, equity securities deemed not readily marketable and
securities subject to legal or contractual restrictions to 10% of the Fund's
Portfolio.
Short-Term Investments. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, temporarily in short-term debt
instruments, including high grade commercial paper, repurchase agreements and
other money market equivalents and, pursuant to an exemption from the
requirements of the 1940 Act, the shares of affiliated money market funds, which
invest primarily in short-term debt securities. To the extent the Fund invests
in affiliated money market funds, such as the Franklin Money Fund, the Manager
has agreed to waive its management fee on any portion of the Fund's assets
invested in such affiliated fund. Temporary investments will only be made with
cash held to maintain liquidity or pending investment. In addition, for
temporary defensive purposes in the event of, or when the Adviser anticipates, a
general decline in the market prices of stocks in which the Fund invests, the
Fund may invest an unlimited amount of its assets in short-term debt
instruments.
Repurchase Agreements. The Fund may engage in repurchase transactions, in which
the Fund purchases a U.S. government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked-to-market daily to maintain coverage of at least
100%. A default by the seller might cause the Fund to experience a loss or delay
in the liquidation of the collateral securing the repurchase agreement. The Fund
might also incur disposition costs in liquidating the collateral. The Fund,
however, intends to enter into repurchase agreements only with financial
institutions such as broker-dealers and banks which are deemed creditworthy by
the Fund's investment manager. A repurchase agreement is deemed to be a loan by
the Fund under the 1940 Act. The U.S. government security subject to resale (the
collateral) will be held on behalf of the Fund by a custodian approved by the
Board and will be held pursuant to a written agreement.
The Fund may also enter into reverse repurchase agreements. Such agreements
involve the sale of securities held by the Fund pursuant to an agreement to
repurchase the securities on an agreed upon price, date and interest payment.
When effecting reverse repurchase transactions, cash or high grade liquid debt
securities of a dollar amount equal in value to the Fund's obligation under the
agreement, including accrued interest, will be maintained in a segregated
account with the Fund's custodian bank, and the securities subject to the
reverse repurchase agreement will be marked-to-market each day. Although reverse
repurchase agreements are borrowings under Section 2(a)(23) of the 1940 Act, the
Fund does not treat these arrangements as borrowings under investment
restriction 2 (set forth in the SAI) so long as the segregated account is
properly maintained.
The Fund is subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders, which limit its
activities to some extent. For a list of these restrictions and more information
concerning the policies discussed herein, please see the SAI.
The Fund expects that its portfolio turnover rate will generally not exceed
100%, but this rate should not be construed as a limiting factor. High portfolio
turnover may increase transaction costs which must be paid by the Fund. High
turnover may also result in the realization of net capital gain, which is
taxable when distributed to shareholders.
Special Considerations and Risk Factors
Each prospective investor should take into account his or her investment
objectives as well as his or her other investments when considering the purchase
of shares of the Fund.
The Fund is designed for long-term investors and not as a trading vehicle, and
is not intended to present a complete investment program.
Investment in the Fund's shares requires consideration of certain factors that
are not normally involved in investment solely in U.S. securities. Among other
things, the financial and economic policies of a foreign country may not be as
stable as in the U.S. Furthermore, foreign issuers are not generally subject to
uniform accounting, auditing and financial standards and requirements comparable
to those applicable to U.S. corporate issuers. There may also be less government
supervision and regulation of foreign securities exchanges, brokers and issuers.
Some foreign securities markets have substantially less volume than the New York
Stock Exchange (the "Exchange") and some foreign government securities may be
less liquid and more volatile than U.S. government securities. Transaction costs
on foreign securities exchanges may be higher than in the U.S. and foreign
securities settlements may, in some instances, be subject to delays and related
administrative uncertainties. Furthermore, foreign securities may be subject to
withholding taxes, thus reducing net investment income available for
distribution to shareholders.
Utility companies in the U.S. and in foreign countries are generally subject to
substantial regulations. Such regulations are intended to ensure appropriate
standards of service and adequate ability to meet public demand. The nature of
regulations of utility industries is evolving both in the U.S. and in foreign
countries. Although certain companies may develop more profitable opportunities,
others may be forced to defend their core businesses and may be less profitable.
Electric utility companies have historically been subject to the risks
associated with increases in fuel and other operating costs, high interest costs
on borrowings, costs associated with compliance with environmental, nuclear
facility and other safety regulations and changes in the regulatory climate.
Increased scrutiny of electric utilities might result in higher costs and higher
capital expenditures, with the risk that regulators may disallow inclusion of
these costs in rate authorizations. Increasing competition due to past
regulatory changes in the telephone communications industry continues and,
whereas certain companies have benefited, many companies may be adversely
affected in the future. The cable television industry is regulated in most
countries and, although such companies typically have a local monopoly, emerging
technologies and pro-competitive legislation are combining to threaten these
monopolies and could change the future outlook. The wireless telecomunications
industry is in its early developmental stages, and is predominantly
characterized by emerging, rapidly growing companies. Gas transmission and
distribution companies continue to undergo significant changes as well. Many
companies have diversified into oil and gas exploration and development, making
returns more sensitive to energy prices. The water supply industry is highly
fragmented due to local ownership. Generally, such companies are more mature and
expect little or no per capita volume growth. There is no assurance that
favorable developments will occur in the utility industries generally or that
investment opportunities will continue to undergo significant changes or growth.
See "The Fund's Investment Objective and Restrictions - Utility Industries -
Description and Risk Factors" in the SAI.
The operating expense ratio of the Fund can be expected to be higher than that
of an investment company investing exclusively in U.S. securities because of the
additional expenses of the Fund attributable to its foreign investment activity,
such as custodial costs, valuation costs and communication costs, although the
Fund's expenses are expected to be similar to expenses of other investment
companies investing in a mix of U.S. securities and securities of one or more
foreign countries.
Investments of the Fund may be denominated in foreign currencies. Changes in the
relative values of these foreign currencies and the U.S. dollar, therefore, will
affect the value of investments in the Fund. However, the Fund will utilize
forward futures and options contracts to attempt to minimize these changes. For
a discussion of forward futures and options contracts, see the SAI.
The Fund is a non-diversified Fund under the federal securities laws. As a
non-diversified Fund, there is no restriction under the 1940 Act on the
percentage of assets that may be invested at any time in the securities of any
one issuer. However, the Fund intends to comply with the diversification and
other requirements of the Internal Revenue Code of 1986, as amended (the
"Code"), applicable to "regulated investment companies" so that it will not be
subject to U.S. federal income tax on income and capital gains. Accordingly, the
Fund will not purchase securities if, as a result, more than 25% of its total
assets would be invested in the securities of a single issuer or, with respect
to 50% of its total assets, more than 5% of such assets would be invested in the
securities of a single issuer. Because the Fund is non-diversified and
concentrates its investments in a limited group of related industries, the value
of the Fund's shares may fluctuate more widely, and the Fund may present greater
risk than other investments.
How Shareholders Participate in
the Results of the Fund's Activities
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
the shareholder owns will increase. If the securities owned by the Fund decrease
in value, the value of the shareholder's shares will also decline. In this way,
shareholders participate in any change in the value of the securities owned by
the Fund.
In addition to the factors which affect the value of individual securities, as
described in the preceding sections, a shareholder may anticipate that the value
of Fund shares will fluctuate with movements in the broader equity and bond
markets, as well.
A decline in the stock market of any country in which the Fund is invested may
also be reflected in declines in the Fund's share price. Changes in currency
valuations will also affect the price of Fund shares. Changes in the prevailing
rates of interest in any of the countries in which the Fund is invested will
likely affect the value of the Fund's holdings and thus the value of Fund
shares. Increased rates of interest which frequently accompany higher inflation
and/or a growing economy are likely to have a negative effect on the value of
Fund shares. History reflects both increases and decreases in interest rates in
individual countries and throughout the world, and in currency valuations, and
these may reoccur unpredictably in the future.
Management of the Fund
The Board has the primary responsibility for the overall management of the Fund
and for electing the officers of the Trust who are responsible for administering
its day-to-day operations.
The Board has carefully reviewed the multiclass structure to ensure that no
material conflict exists between the two classes of shares. Although the Board
does not expect to encounter material conflicts in the future, the Board will
continue to monitor the Fund and will take appropriate action to resolve such
conflicts if any should later arise.
In developing the multiclass structure the Fund has retained the authority to
establish additional classes of shares. It is the Fund's present intention to
offer only two classes of shares, but new classes may be offered in the future.
Advisers is a wholly-owned subsidiary of Franklin Resources, Inc. ("Resources"),
a publicly owned holding company, the principal shareholders of which are
Charles B. Johnson and Rupert H. Johnson, Jr., who own approximately 20% and
16%, respectively, of Resources' outstanding shares. Resources is engaged in
various aspects of the financial services industry through its various
subsidiaries (the "Franklin Templeton Group"). Advisers acts as investment
manager or administrator to 34 U.S. registered investment companies (112
separate series) with aggregate assets of over $76 billion.
Pursuant to the management agreement, the Manager supervises and implements the
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Fund's business.
During the fiscal year ended April 30, 1995, management fees totalling 0.60% of
the average daily net assets of the Fund were paid to Advisers.
Among the responsibilities of the Manager under the management agreement is the
selection of brokers and dealers through whom transactions in the Fund's
portfolio securities will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund,
as factors in selecting a broker. Further information is included under "The
Fund's Policies Regarding Brokers Used on Portfolio Transactions" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent"), in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
During the fiscal year ended April 30, 1995, expenses borne by Class I shares of
the Fund, including Fund fees paid to Advisers and to Investor Services, totaled
1.12% of the average net assets of such class.
Plans of Distribution
A separate Plan of Distribution has been approved and adopted for each class
("Class I Plan" and "Class II Plan", respectively, or "Plans") pursuant to Rule
12b-1 under the 1940 Act. The Rule 12b-1 fees charged to each class will be
based solely on the distribution and servicing fees attributable to that
particular class. Under each Plan the class may reimburse Distributors for
routine ongoing promotion and distribution expenses incurred with respect to
such class. Such expenses may include, but are not limited to, the printing of
prospectuses and reports used for sales purposes, expenses of preparing and
distributing sales literature and related expenses, advertisements, and other
distribution-related expenses, including a prorated portion of Distributors'
overhead expenses attributable to the distribution of Fund shares, as well as
any distribution or service fees paid to securities dealers or their firms or
others who have executed a servicing agreement with the Fund, Distributors or
its affiliates.
The maximum amount which the Fund may pay to Distributors or others under the
Class I Plan for such distribution expenses is 0.25% per annum of Class I's
average daily net assets, payable on a quarterly basis. All expenses of
distribution and marketing in excess of 0.25% per annum will be borne by
Distributors, or others who have incurred them, without reimbursement from the
Fund.
Under the Class II Plan, the Fund pays to Distributors for distribution expenses
and related expenses up to 0.75% per annum of Class II's daily net assets,
payable quarterly. Such fees may be used in order to compensate Distributors or
others for providing distribution and related services and bearing certain
expenses of the class. All expenses of distribution, marketing and related
services over that amount will be borne by Distributors or others who have
incurred them, without reimbursement by the Fund. In addition, the Class II Plan
provides for an additional payment by the Fund of up to 0.25% per annum of Class
II's average daily net assets as a servicing fee, payable quarterly. This fee
will be used to pay securities dealers or others for, among other things,
assisting in establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; receiving and answering
correspondence; monitoring dividend payments from the Fund on behalf of
customers, or similar activities related to furnishing personal services and/or
maintaining shareholder accounts.
During the first year following the purchase of Class II shares, Distributors
will retain a portion of Class II's Rule 12b-1 fees equal to 0.50% per annum of
Class II's average daily net assets to partially recoup fees Distributors pays
to securities dealers. Distributors, or its affiliates, may pay, from its own
resources, a commission of up to 1% of the amount invested to securities dealers
who initiate and are responsible for shareholders' purchases of Class II shares.
Both Plans also cover any payments to or by the Fund, Advisers, Distributors, or
other parties on behalf of the Fund, Advisers or Distributors, to the extent
such payments are deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by the Fund within the context
of Rule 12b-1. The payments under the Plans are included in the maximum
operating expenses which may be borne by each class of the Fund. For more
information, please see the SAI.
Distributions to Shareholders
There are two types of distributions which the Fund may make to its
shareholders:
1. Income dividends. The Fund receives income in the form of dividends, interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed net capital gains from the prior fiscal year. The Fund may
make more than one distribution derived from net short-term and net long-term
capital gain in any year or adjust the timing of these distributions for
operational or other reasons.
Distributions To Each Class of Shares
According to the requirements of the Code, dividends and capital gains will be
calculated and distributed in the same manner for Class I and Class II shares.
The per share amount of any income dividends will generally differ only to the
extent that each class is subject to different Rule 12b-1 fees.
Distribution Date
Although subject to change by the Board, without prior notice to or approval by
shareholders, the Fund's current policy is to declare income dividends
semiannually in June and December for shareholders of record generally on the
first business day preceding the 15th of the month, payable on or about the last
business day of such months. The amount of income dividend payments by the Fund
is dependent upon the amount of net income received by the Fund from its
portfolio holdings, is not guaranteed, and is subject to the discretion of the
Board. Fund shares are quoted ex-dividend on the first business day following
the record date. The Fund does not pay "interest" or guarantee any fixed rate of
return on an investment in its shares.
In order to be entitled to a dividend, an investor must have acquired Fund
shares prior to the close of business on the record date. An investor
considering purchasing Fund shares shortly before the record date of a
distribution should be aware that because the value of the Fund's shares is
based directly on the amount of its net assets, rather than on the principle of
supply and demand, any distribution of income or capital gain will result in a
decrease in the value of the Fund's shares equal to the amount of the
distribution. While a dividend or capital gain distribution received shortly
after purchasing shares represents, in effect, a return of a portion of the
shareholder's investment, it may be taxable as dividend income or capital gain.
Dividend Reinvestment
Unless otherwise requested, income dividends and capital gain distributions, if
any, will be automatically reinvested in the shareholder's account in the form
of additional shares, valued at the closing net asset value (without a sales
charge) on the dividend reinvestment date. Except as otherwise noted herein,
dividend and capital gain distributions are only eligible for reinvestment at
net asset value in the same class of shares of the Fund or the same class of
another of the Franklin Templeton Funds. Shareholders in Class II funds may, if
they choose, direct that their dividends and capital gain distributions be paid
to a Class I Franklin Templeton Money Market Fund. Shareholders have the right
to change their election with respect to the receipt of distributions by
notifying the Fund, but any such change will be effective only as to
distributions for which the record date is seven or more business days after the
Fund has been notified. See the SAI for more information.
Many of the Fund's shareholders receive their distributions in the form of
additional shares. This is a convenient way to accumulate additional shares and
maintain or increase the shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
Distributions in Cash
A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to the
same class of another fund in the Franklin Templeton Funds, to a Class I
Franklin Templeton money market fund, to another person, or directly to a
checking account. If the bank at which the account is maintained is a member of
the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If this last option is requested, the shareholder
should allow at least 15 days for initial processing. Dividends which may be
paid in the interim will be sent to the address of record. Additional
information regarding automated fund transfers may be obtained from Franklin's
Shareholder Services Department.
Taxation of the Fund and Its Shareholders
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Fund and its shareholders is included in the section entitled
"Additional Information Regarding Taxation" in the SAI.
The Fund intends to continue to qualify for treatment as a regulated investment
company under Subchapter M of the the Code. By distributing all of its net
investment income, net foreign currency gains recharacterized as ordinary income
and net realized short-term and long-term capital gain and by meeting certain
other requirements relating to the sources of its income and diversification of
its assets, the Fund will not be liable for federal income or excise taxes.
For federal income tax purposes, any income dividends which the shareholder
receives from the Fund, as well as any distributions derived from the excess of
net short-term capital gain over net long-term capital loss, are treated as
ordinary income whether the shareholder has elected to receive them in cash or
in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time the shareholder has owned Fund shares and regardless of whether
such distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December, but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated for tax purposes as if
received by the shareholder on December 31 of the calendar year in which they
are declared.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on sale or exchange of
the Fund's shares, held for six months or less, will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares.
For corporate shareholders, 70.15% of the income dividends paid by the Fund for
the fiscal year ended April 30, 1995, qualified for the corporate
dividends-received deduction, subject to certain holding period and debt
financing restrictions imposed under the Code on the corporation claiming the
deduction. These restrictions are discussed in the SAI.
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 its fiscal year are invested in securities of foreign corporations, the
Fund may elect to pass-through to its shareholders the pro rata share of foreign
taxes paid by the Fund. If this election is made, shareholders will be (i)
required to include in their gross income their pro rata share of foreign source
income (including any foreign taxes paid by the fund), and (ii) entitled either
to deduct their share of such foreign taxes in computing their taxable income or
to claim a credit for such taxes against their U.S. income tax, subject to
certain limitations under the Code. Shareholders will be informed by the Fund at
the end of each calendar year regarding the availability of any credits and the
amount of foreign source income (including any foreign taxes paid by the Fund)
to be included on their income tax returns.
The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and, after the close of each calendar
year, will promptly advise them of the tax status for federal income tax
purposes of such dividends
and distributions.
Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding or other taxes to distributions received by them from the
Fund and the application of foreign tax laws to these distributions.
Shareholders should also consult their tax advisors with respect to the
applicability of any state and local intangible property or income taxes to
their shares of the Fund and distributions and redemption proceeds received from
the Fund.
How to Buy Shares of the Fund
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall include other financial
institutions which, pursuant to an agreement with Distributors (directly or
through affiliates), handle customer orders and accounts with the Fund. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be waived when the shares
are purchased through plans established by the Franklin Templeton Group. The
Fund and Distributors reserve the right to refuse any order for the purchase of
shares. The Fund currently does not permit investment by market timing or
allocation services ("Timing Accounts"), which generally include accounts
administered so as to redeem or purchase shares based upon certain predetermined
market indicators.
Differences Between Class I and Class II. The differences between Class I and
Class II shares are primarily in their front-end and contingent deferred sales
charges and Rule 12b-1 fees as described below. Generally Class I shares have a
higher front-end sales charge than Class II and comparatively lower Rule 12b-1
fees. Class II shares have lower front-end sales charges than Class I shares and
comparatively higher Rule 12b-1 fees. Voting rights of each class will be the
same on matters affecting the Fund as a whole, but each will vote separately on
matters affecting its class.
Class I. All Fund shares outstanding before the implementation of the multiclass
structure have been redesignated as Class I shares, and will retain their
previous rights, and privileges. Class I shares are generally subject to a
variable sales charge upon purchase and not subject to any sales charge upon
redemption. Class I shares are also subject to Rule 12b-1 fees of up to a
maximum of 0.25% per annum of the average daily net assets of Class I shares.
Class I shares may be purchased at a reduced front-end sales charge or at net
asset value if certain conditions are met. In most circumstances, contingent
deferred sales charges will not be assessed against redemptions of Class I
shares. See "Management of the Fund" and "How to Sell Shares of the Fund" for
more information.
Class II. Class II shares are subject to a front-end sales charge of 1% of the
amount invested and a contingent deferred sales charge of 1% if shares are
redeemed within 18 months of the calendar month following purchase. In addition,
Class II shares are subject to Rule 12b-1 fees of up to a maximum of 0.75% per
annum of average daily net assets of Class II shares, 0.25% of which will be
retained by Distributors during the first year of investment. See "Contingent
Deferred Sales Charge" under "How to Sell Shares of the Fund".
Purchases of Class II shares are limited to purchases below $1 million. Any
purchase of $1 million or more will automatically be invested in Class I shares,
since that is considered more beneficial to the investor. A purchase of $1
million or more in Class I shares, however, may be subject to a contingent
deferred sales charge. Investors may exceed $1 million in Class II shares by
cumulative purchases over a period of time. Investors who intend to make
investments exceeding $1 million, however, should consider purchasing Class I
shares through a Letter of Intent instead of purchasing Class II shares.
Deciding Which Class To Purchase. Investors should carefully evaluate their
anticipated investment amount and time horizon prior to determining which class
of shares to purchase. Generally, an investor who expects to invest less than
$100,000 in the Franklin Templeton Funds and who expects to make substantial
redemptions within approximately six years or less of investment should consider
purchasing Class II shares. However, the higher annual Rule 12b-1 fees on the
Class II shares will result in slightly higher operating expenses and lower
income dividends for Class II shares, which will accumulate over time to
outweigh the difference in front-end sales charges. For this reason, Class I
shares may be more attractive to long-term investors even if no sales charge
reductions are available to them.
Investors who qualify to purchase Class I shares at reduced sales charges should
seriously consider purchasing Class I shares, especially if they intend to hold
their shares approximately six years or more. Investors who qualify to purchase
Class I shares at reduced sales charges but who intend to hold their shares less
than approximately six years should evaluate whether it is more economical to
purchase Class I shares through a Letter of Intent or under Rights of
Accumulation or other means, rather than purchasing Class II shares. Investors
investing $1 million or more in a single payment and other investors who qualify
to purchase Class I shares at net asset value may not purchase Class II shares.
See "Purchases at Net Asset Value" and "Description of Special Net Asset Value
Purchases" below for a discussion of when shares may be purchased at net asset
value.
Each class represents the same interest in the investment portfolio of the Fund
and has the same rights, except that each class has a different sales charge,
bears the separate expenses of its Rule 12b-1 distribution plan, and has
exclusive voting rights with respect to such plan. The two classes also have
separate exchange privileges.
Each class also has a separate schedule for compensating securities dealers for
selling Fund shares. Investors should take all of the factors regarding an
investment in each class into account before deciding which class of shares to
purchase. There are no conversion features attached to either class of shares.
Purchase Price of Fund Shares
Shares of both classes of the Fund are offered at their respective public
offering prices, which are determined by adding the net asset value per share
plus a front-end sales charge, next computed (1) after the shareholder's
securities dealer receives the order which is promptly transmitted to the Fund,
or (2) after receipt of an order by mail from the shareholder directly in proper
form (which generally means a completed Shareholder Application accompanied by a
negotiable check).
Class I. The sales charge for Class I shares is a variable percentage of the
offering price depending upon the amount of the sale. The offering price will be
calculated to two decimal places using standard rounding criteria. A description
of the method of calculating net asset value per share is included under the
caption "Valuation of Fund Shares."
Set forth below is a table of front-end sales charges or underwriting
commissions and dealer concessions for Class I shares.
<TABLE>
<CAPTION>
Total Sales Charge
As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price Invested of Offering Price*,***
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more none none (see below)**
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of $1 million or more: 1.00% on sales of $1 million but less than $2 million,
plus 0.80% on sales of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.
***At the discretion of Distributors, all front-end sales charges may at times
be allowed to the securities dealer. If 90% or more of the sales commission is
allowed, such securities dealer may be deemed to be an underwriter as that term
is defined in the Securities Act of 1933, as amended.
No front-end sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of all
or a portion of investments of $1 million or more within 12 months of the
calendar month following such investment ("contingency period"). See "How to
Sell Shares of the Fund - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Class I shares is determined by adding the amount of the
shareholder's current purchase plus the cost or current value (whichever is
higher) of a shareholder's existing investment in one or more of the many funds
in the Franklin Group of Funds(R) and the Templeton Group of Funds. Included for
these aggregation purposes are (a) the mutual funds in the Franklin Group of
Funds except Franklin Valuemark Funds and Franklin Government Securities Trust
(the "Franklin Funds"), (b) other investment products underwritten by
Distributors or its affiliates (although certain investments may not have the
same schedule of sales charges and/or may not be subject to reduction), and (c)
the U.S. registered mutual funds in the Templeton Group of Funds except
Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and
Templeton Variable Products Series Fund (the "Templeton Funds"). (Franklin Funds
and Templeton Funds are collectively referred to as the "Franklin Templeton
Funds.") Sales charge reductions based upon aggregate holdings of (a), (b) and
(c) above ("Franklin Templeton Investments") may be effective only after
notification to Distributors that the investment qualifies for a discount.
Other Payments to Securities Dealers - Class I.
Distributors, or one of its affiliates, may make payments, out of its own
resources, of up to 1% of the amount purchased to securities dealers who
initiate and are responsible for purchases made at net asset value by certain
designated retirement plans (excluding IRA and IRA rollovers), certain
non-designated plans, certain trust companies and trust departments of banks and
certain retirement plans of organizations with collective retirement plan assets
of $10 million or more. See "Description of Special Net Asset Value Purchases"
and the SAI.
Class II. Unlike Class I shares, the front-end sales charges and dealer
concessions for Class II shares do not vary depending on the amount of purchase.
See table below:
<TABLE>
<CAPTION>
Class II Shares - Total Sales Charge
As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Net Offering Price Invested of Offering Price*
<S> <C> <C> <C>
any amount (less than $1 million) 1.00% 1.01% 1.00%
</TABLE>
*Distributors, or one of its affiliates, may make additional payments to
securities dealers, from its own resources, of up to 1% of the amount invested.
During the first year following a purchase of Class II shares, Distributors will
keep a portion of the Rule 12b-1 fees assessed to those shares to partially
recoup fees Distributors pays to securities dealers.
Class II shares redeemed within 18 months of their purchase will be assessed a
contingent deferred sales charge of 1.0% on the lesser of the then-current net
asset value or the net asset value of such shares at the time of purchase,
unless such charge is waived as described under "How to Sell Shares of the Fund
- - Contingent Deferred Sales Charge."
Class I and Class II. Distributors, or one of its affiliates, out of its own
resources, may also provide additional compensation to securities dealers in
connection with sales of shares of the Franklin Templeton Funds. Compensation
may include financial assistance to securities dealers in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising, sales campaigns and/or shareholder services, and programs
regarding one or more of the Franklin Templeton Funds and other dealer-sponsored
programs or events. In some instances, this compensation may be made available
only to certain securities dealers whose representatives have sold or are
expected to sell significant amounts of shares of the Franklin Templeton Funds.
Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Securities dealers may not
use sales of the Fund's shares to qualify for this compensation to the extent
such may be prohibited by the laws of any state or any self-regulatory agency,
such as the National Association of Securities Dealers, Inc. None of the
aforementioned additional compensation is paid for by the Fund or its
shareholders.
Additional terms concerning the offering of the Fund's shares are included in
the SAI.
Certain officers and trustees of the Fund are also affiliated with Distributors.
A detailed description is included in the SAI.
Quantity Discounts in Sales Charges -
Class I Shares Only
Class I shares may be purchased under a variety of plans which provide for a
reduced sales charge. To be certain to obtain the reduction of the sales charge,
the investor or the securities dealer should notify Distributors at the time of
each purchase of shares which qualifies for the reduction. In determining
whether a purchase qualifies for any discount, an investment in any of the
Franklin Templeton Investments may be combined with those of the investor's
spouse, children under the age of 21, and grandchildren under the age of 21. The
value of Class II shares owned by the investor may also be included for this
purpose.
In addition, an investment in Class I shares may qualify for a reduction in the
sales charge under the following programs:
1. Rights of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin Templeton Investments may be combined with
the amount of the current purchase in determining the sales charge to be paid.
2. Letter of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of Class I shares by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which, if made at one time, would qualify for
a reduced sales charge and grants to Distributors a security interest in the
reserved shares and irrevocably appoints Distributors as attorney-in-fact with
full power of substitution to surrender for redemption any or all shares for the
purpose of paying any additional sales charge due. Purchases under the Letter
will conform with the requirements of Rule 22d-1 under the 1940 Act. The
investor or the investor's securities dealer must inform Investor Services or
Distributors that this Letter is in effect each time a purchase is made.
An investor (except for certain employee benefit plans which are listed under
"Description of Special Net Asset Value Purchases") acknowledges and agrees to
the following provisions by completing the Letter of Intent section of the
Shareholder Application: Five percent (5%) of the amount of the total intended
purchase will be reserved in Class I shares registered in the investor's name,
to assure that the full applicable sales charge will be paid if the intended
purchase is not completed. The reserved shares will be included in the total
shares owned as reflected on periodic statements; income and capital gain
distributions on the reserved shares will be paid as directed by the investor.
The reserved shares will not be available for disposal by the investor until the
Letter of Intent has been completed or the higher sales charge paid. For more
information see "Additional Information Regarding Purchases" in the SAI.
Although the sales charges on Class II shares cannot be reduced through these
programs, the value of Class II shares owned by the investor may be included in
determining a reduced sales charge to be paid on Class I shares pursuant to the
Letter of Intent and Rights of Accumulation programs.
Group Purchases of Class I Shares
An individual who is a member of a qualified group may also purchase Class I
shares of the Fund at the reduced sales charge applicable to the group as a
whole. The sales charge is based upon the aggregate dollar value of shares
previously purchased and still owned by the members of the group, plus the
amount of the current purchase. For example, if members of the group had
previously invested and still held $80,000 of Fund shares and now were investing
$25,000, the sales charge would be 3.75%. Information concerning the current
sales charge applicable to a group may be obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, agree to include
sales and other materials related to the Fund in its publications and mailings
to members at reduced or no cost to Distributors, and seek to arrange for
payroll deduction or other bulk transmission of investments to the Fund.
If an investor selects a payroll deduction plan, subsequent investments will be
automatic and will continue until such time as the investor notifies the Fund
and the investor's employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of the payroll
deduction and the time the money reaches the Fund. The investment in the Fund
will be made at the offering price per share determined on the day that both the
check and payroll deduction data are received in required form by the Fund.
Purchases at Net Asset Value
Class I shares may be purchased without the imposition of a front-end sales
charge ("net asset value") or a contingent deferred sales charge by (1)
officers, trustees, directors, and full-time employees of the Fund, any of the
Franklin Templeton Funds, or of the Franklin Templeton Group, and by their
spouses and family members, including any investments made by such parties after
cessation of employment; (2) companies exchanging shares or selling assets
pursuant to a merger, acquisition or exchange offer; (3) insurance company
separate accounts for pension plan contracts; (4) accounts managed by the
Franklin Templeton Group; (5) shareholders of Templeton Institutional Funds,
Inc. reinvesting redemption proceeds from that fund under an employee benefit
plan qualified under Section 401 of the Code, in shares of the Fund; (6) certain
unit investment trusts and unit holders of such trusts reinvesting their
distributions from the trusts in the Fund; (7) registered securities dealers and
their affiliates, for their investment account only; and (8) registered
personnel and employees of securities dealers and by their spouses and family
members, in accordance with the internal policies and procedures of the
employing securities dealer.
For either Class I or Class II, the same class of shares of the Fund may be
purchased at net asset value by persons who have redeemed, within the previous
365 days, their shares of the Fund or another of the Franklin Templeton Funds
which were purchased with a front-end sales charge or assessed a contingent
deferred sales charge on redemption. If a different class of shares is
purchased, the full front-end sales charge must be paid at the time of purchase
of the new shares. An investor may reinvest an amount not exceeding the
redemption proceeds. While credit will be given for any contingent deferred
sales charge paid on the shares redeemed and subsequently repurchased, a new
contingency period will begin. Matured shares will be reinvested at net asset
value and will not be subject to a new contingent deferred sales charge. Shares
of the Fund redeemed in connection with an exchange into another fund (see
"Exchange Privilege") are not considered "redeemed" for this privilege. In order
to exercise this privilege, a written order for the purchase of shares of the
Fund must be received by the Fund or the Fund's Shareholder Services Agent
within 365 days after the redemption. The 365 days, however, do not begin to run
on redemption proceeds placed immediately after redemption in a Franklin Bank
Certificate of Deposit ("CD") until the CD (including any rollover) matures.
Reinvestment at net asset value may also be handled by a securities dealer or
other financial institution, who may charge the shareholder a fee for this
service. The redemption is a taxable transaction but reinvestment without a
sales charge may affect the amount of gain or loss recognized and the tax basis
of the shares reinvested. If there has been a loss on the redemption, the loss
may be disallowed if a reinvestment in the same fund is made within a 30-day
period. Information regarding the possible tax consequences of such a
reinvestment is included in the tax section of this Prospectus and the SAI.
For either Class I or Class II, the same class of shares of the Fund or of
another of the Franklin Templeton Funds may be purchased at net asset value and
without a contingent deferred sales charge by persons who have received
dividends and capital gains distributions in cash from investments in that class
of shares of the Fund within 365 days of the payment date of such distribution.
To exercise this privilege, a written request to reinvest the distribution must
accompany the purchase order. Additional information may be obtained from
Shareholder Services at 1-800/632-2301. See "Distributions in Cash" under
"Distributions to Shareholders."
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by investors who have, within the past 60
days, redeemed an investment in a mutual fund which is not part of the Franklin
Templeton Funds and which was subject to a front-end sales charge or a
contingent deferred sales charge and which has investment objectives similar to
those of the Fund.
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by broker-dealers who have entered into a
supplemental agreement with Distributors, or by registered investment advisors
affiliated with such broker-dealers, on behalf of their clients who are
participating in a comprehensive fee program (sometimes known as a wrap fee
program).
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by anyone who has taken a distribution from
an existing retirement plan already invested in the Franklin Templeton Funds,
including former participants of the Franklin Templeton Profit Sharing 401(k)
plan, to the extent of such distribution. In order to exercise this privilege a
written order for the purchase of shares of the Fund must be received by
Franklin Templeton Trust Company (the "Trust Company"), the Fund or Investor
Services, within 365 days after the plan distribution.
Class I shares may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or city,
or any instrumentality, department, authority or agency thereof which has
determined that the Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its investment manager on arbitrage rebate
calculations. If an investment by an eligible governmental authority at net
asset value is made through a securities dealer who has executed a dealer
agreement with Distributors, Distributors or one of its affiliates may make a
payment, out of its own resources, to such securities dealer in an amount not to
exceed 0.25% of the amount invested. Contact the Franklin Templeton
Institutional Services Department for additional information.
Description of Special Net Asset Value Purchases
Class I shares may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by certain designated
retirement plans, including profit sharing, pension, 401(k) and simplified
employee pension plans ("designated plans"), subject to minimum requirements
with respect to number of employees or amount of purchase, which may be
established by Distributors. Currently those criteria require that the employer
establishing the plan have 200 or more employees or that the amount invested or
to be invested during the subsequent 13-month period in the Fund or in any of
the Franklin Templeton Investments totals at least $1,000,000. Employee benefit
plans not designated above or qualified under Section 401 of the Code
("non-designated plans") may be afforded the same privilege if they meet the
above requirements as well as the uniform criteria for qualified groups
previously described under "Group Purchases" which enable Distributors to
realize economies of scale in its sales efforts and sales related expenses.
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by trust companies and bank trust departments
for funds over which they exercise exclusive discretionary investment authority
and which are held in a fiduciary, agency, advisory, custodial or similar
capacity. Such purchases are subject to minimum requirements with respect to
amount of purchase, which may be established by Distributors. Currently, those
criteria require that the amount invested or to be invested during the
subsequent 13-month period in this Fund or any of the Franklin Templeton
Investments must total at least $1,000,000. Orders for such accounts will be
accepted 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 such order.
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by trustees or other fiduciaries purchasing
securities for certain retirement plans of organizations with collective
retirement plan assets of $10 million or more, without regard to where such
assets are currently invested.
Refer to the SAI for further information regarding net asset value purchases of
Class I shares.
Purchasing Class I and Class II Shares
When placing purchase orders, investors should clearly indicate which class of
shares they intend to purchase. A purchase order that fails to specify a class
will automatically be invested in Class I shares. There are no conversion
features attached to either class of shares.
General
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Fund shares may be required to register as dealers pursuant
to state law.
Purchasing Shares of the Fund
in Connection with Retirement Plans
Involving Tax-Deferred Investments
Shares of the Fund may be used for individual or employer-sponsored retirement
plans involving tax-deferred investments. The Fund may be used as an investment
vehicle for an existing retirement plan, or the Trust Company may provide the
plan documents and serve as custodian or trustee. A plan document must be
adopted in order for a retirement plan to be in existence.
The Trust Company, an affiliate of Distributors, can serve as custodian or
trustee for various types of retirement plans. Brochures for the Trust Company
plans contain important information regarding eligibility, contribution and
deferral limits and distribution requirements. Please note that an application
other than the one contained in this Prospectus must be used to establish a
retirement plan account with the Trust Company. To obtain a retirement plan
brochure or application, call 1-800/DIAL BEN (1-800/342-5236).
Please see "How to Sell Shares of the Fund" for specific information regarding
redemptions from retirement plan accounts. Specific forms are required to be
completed for distributions from Trust Company retirement plans.
Individuals and plan sponsors should consult with legal, tax or benefits and
pension plan consultants before choosing a retirement plan. In addition,
retirement plan investors should consider consulting their investment
representatives or advisers concerning investment decisions within their plans.
Other Programs and Privileges
Available to Fund Shareholders
Certain of the programs and privileges described in this section may not be
available directly from the Fund to shareholders whose shares are held, of
record, by a financial institution or in a "street name" account or networked
account through the National Securities Clearing Corporation ("NSCC") (see the
section captioned "Account Registrations" in this Prospectus).
Share Certificates
Shares for an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by the shareholder, can be 2% or more of the value of
the lost, stolen or destroyed certificate. A certificate will be issued if
requested by the shareholder or by the securities dealer.
Confirmations
A confirmation statement will be sent to each shareholder semi-annually to
reflect the dividends reinvested during that period and after each other
transaction which affects the shareholder's account. This statement will also
show the total number of shares owned by the shareholder, including the number
of shares in "plan balance" for the account of the shareholder.
Automatic Investment Plan
Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Automatic Investment Plan Application
included with this Prospectus contains the requirements applicable to this
program. In addition, shareholders may obtain more information concerning this
program from their securities dealers or from Distributors.
The market value of each class of the Fund's shares is subject to fluctuation.
Before undertaking any plan for systematic investment, the investor should keep
in mind that such a program does not assure a profit or protect against a loss.
Systematic Withdrawal Plan
A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw is $50 per withdrawal transaction, although
this is merely the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. Retirement plans subject to mandatory
distribution requirements are not subject to the $50 minimum. The plan may be
established on a monthly, quarterly, semiannual or annual basis. If the
shareholder establishes a plan, any capital gain distributions and income
dividends paid by the Fund will be reinvested for the shareholder's account in
additional shares at net asset value. Payments will then be made from the
liquidation of shares at net asset value on the day of the transaction (which is
generally the first business day of the month in which the payment is scheduled)
with payment generally received by the shareholder three to five days after the
date of liquidation. By completing the "Special Payment Instructions for
Distributions" section of the Shareholder Application included with this
Prospectus, a shareholder may direct the selected withdrawals to another of the
Franklin Templeton Funds, to another person, or directly to a checking account.
If the bank at which the account is maintained is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If this last option is requested, the shareholder should allow at
least 15 days for initial processing. Payments which may be paid in the interim
will be sent to the address of record. Liquidation of shares may reduce or
possibly exhaust the shares in the shareholder's account, to the extent
withdrawals exceed shares earned through dividends and distributions,
particularly in the event of a market decline. If the withdrawal amount exceeds
the total plan balance, the account will be closed and the remaining balance
will be sent to the shareholder. As with other redemptions, a liquidation to
make a withdrawal payment is a sale for federal income tax purposes. Because the
amount withdrawn under the plan may be more than the shareholder's actual yield
or income, part of the payment may be a return of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of the sales
charge on the additional purchases. Also, redemptions of Class I shares and
Class II shares may be subject to a contingent deferred sales charge if the
shares are redeemed within 12 months (Class I shares) or 18 months (Class II
shares) of the calendar month following the original purchase date. The
shareholder should ordinarily not make additional investments of less than
$5,000 or three times the annual withdrawals under the plan during the time such
a plan is in effect.
With respect to Class I shares, the contingent deferred sales charge is waived
for redemptions through a Systematic Withdrawal Plan set up prior to February 1,
1995. With respect to Systematic Withdrawal Plans set up on or after February 1,
1995, however, the applicable contingent deferred sales charge is waived for
Class I and Class II share redemptions of up to 1% monthly of an account's net
asset value (12% annually, 6% semiannually, 3% quarterly). For example, if a
Class I account maintained an annual balance of $1,000,000, only $120,000 could
be withdrawn through a once-yearly Systematic Withdrawal Plan free of charge;
any amount over that $120,000 would be assessed a 1% (or applicable) contingent
deferred sales charge. Likewise, if a Class II account maintained an annual
balance of $10,000, only $1,200 could be withdrawn through a once-yearly
Systematic Withdrawal Plan free of charge.
A Systematic Withdrawal Plan may be terminated on written notice by the
shareholder or the Fund, and it will terminate automatically if all shares are
liquidated or withdrawn from the account, or upon the Fund's receipt of
notification of the death or incapacity of the shareholder. Shareholders may
change the amount (but not below the specified minimum) and schedule of
withdrawal payments or suspend one such payment by giving written notice to
Investor Services at least seven business days prior to the end of the month
preceding a scheduled payment. Share certificates may not be issued while a
Systematic Withdrawal Plan is in effect.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
the Franklin Templeton Institutional Services Department at 1-800/321-8563.
Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these mutual funds are
offered to the public with a sales charge. If a shareholder's investment
objective or outlook for the securities markets changes, the Fund shares may be
exchanged for the same class of shares of other Franklin Templeton Funds which
are eligible for sale in the shareholder's state of residence and in conformity
with such fund's stated eligibility requirements and investment minimums. Some
funds, however, may not offer Class II shares. Class I shares may be exchanged
for Class I shares of any Franklin Templeton Funds. Class II shares may be
exchanged for Class II shares of any Franklin Templeton Funds. No exchanges
between different classes of shares will be allowed. A contingent deferred sales
charge will not be imposed on exchanges. If, however, the exchanged shares were
subject to a contingent deferred sales charge in the original fund purchased and
shares are subsequently redeemed within 12 months (Class I shares) or 18 months
(Class II shares) of the calendar month following the original purchase date, a
contingent deferred sales charge will be imposed. Before making an exchange,
investors should review the prospectus of the fund they wish to exchange from
and the fund they wish to exchange into for all specific requirements or
limitations on exercising the exchange privilege, for example, minimum holding
periods or applicable sales charges.
Exchanges may be made in any of the following ways:
Exchanges by Mail
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
Exchanges by Telephone
Shareholders, or their investment representative
of record, if any, may exchange shares of the
Fund by telephone by calling Investor Services at 1-800/632-2301 or the
automated Franklin TeleFACTS(R) system (day or night) at 1-800/247-1753. If the
shareholder does not wish this privilege extended to a particular account, the
Fund or Investor Services should be notified.
The Telephone Exchange Privilege allows a shareholder to effect exchanges from
the Fund into an identically registered account of the same class of shares in
one of the other available Franklin Templeton Funds. The Telephone Exchange
Privilege is available only for uncertificated shares or those which have
previously been deposited in the shareholder's account. The Fund and Investor
Services will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Please refer to "Telephone Transactions -
Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
Telephone Exchange Privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, shareholders should follow the other
exchange procedures discussed in this section, including the procedures for
processing exchanges through securities dealers.
Exchanges Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "Exchanges by Telephone"
above. Such a dealer-ordered exchange will be effective only for uncertificated
shares on deposit in the shareholder's account or for which certificates have
previously been deposited. A securities dealer may charge a fee for handling an
exchange.
Additional Information Regarding Exchanges
Exchanges of the same class of shares are made on the basis of the net asset
values of the class involved, except as set forth below. Exchanges of shares of
a class which were originally purchased without a sales charge will be charged a
sales charge in accordance with the terms of the prospectus of the fund and the
class of shares being purchased, unless the original investment on which no
sales charge was paid originated from a fund on which the investor paid or was
subject to a front-end or deferred contingent sales charge. Exchanges of Class I
shares of the Fund which were purchased with a lower sales charge into a fund
which has a higher sales charge will be charged the difference in sales charges,
unless the shares were held in the Fund for at least six months prior to
executing the exchange.
When an investor requests the exchange of the total value of the Fund account,
declared but unpaid income dividends and capital gain distributions will be
transferred to the fund being exchanged into and will be invested at net asset
value. Because the exchange is considered a redemption and purchase of shares,
the shareholder may realize a gain or loss for federal income tax purposes.
Backup withholding and information reporting may also apply. Information
regarding the possible tax consequences of such an exchange is included in the
tax section in this Prospectus and in the SAI.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate 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 should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money market
instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objectives exist immediately.
Subsequently, this money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The Exchange Privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
Exchanges of Class I Shares
The contingency period during which a contingent deferred sales charge may be
assessed for Class I shares will be tolled (or stopped) for the period such
shares are exchanged into and held in a Franklin or Templeton Class I money
market fund. If a Class I account has shares subject to a contingent deferred
sales charge, Class I shares will be exchanged into the new account on a
"first-in, first-out" basis. See "How to Sell Shares of the Fund - Contingent
Deferred Sales Charge" for a discussion of investments subject to a contingent
deferred sales charge.
Exchanges of Class II Shares
When an account is composed of Class II shares subject to the contingent
deferred sales charge, and Class II shares that are not, the shares will be
transferred proportionately into the new fund. Shares received from reinvestment
of dividends and capital gains are referred to as "free shares," shares which
were originally subject to a contingent deferred sales charge but to which the
contingent deferred sales charge no longer applies are called "matured shares,"
and shares still subject to the contingent deferred sales charge are referred to
as "CDSC liable shares." CDSC liable shares held for different periods of time
are considered different types of CDSC liable shares. For instance, if a
shareholder has $1,000 in free shares, $2,000 in matured shares, and $3,000 in
CDSC liable shares, and the shareholder exchanges $3,000 into a new fund, $500
will be exchanged from free shares, $1,000 from matured shares, and $1,500 from
CDSC liable shares. Similarly, if CDSC liable shares have been purchased at
different periods, a proportionate amount will be taken from shares held for
each period. If, for example, a shareholder holds $1,000 in shares bought 3
months ago, $1,000 bought 6 months ago, and $1,000 bought 9 months ago, and the
shareholder exchanges $1,500 into the new fund, $500 from each of these shares
will be deemed exchanged into the new fund.
The only money market fund exchange option available to Class II shareholders is
the Franklin Templeton Money Fund II ("Money Fund II"), a series of the Franklin
Templeton Money Fund Trust. No drafts (checks) may be written on Money Fund II
accounts, nor may shareholders purchase shares of Money Fund II directly. Class
II shares exchanged for shares of Money Fund II will continue to age and a
contingent deferred sales charge will be assessed if CDSC liable shares are
redeemed. No other money market funds are available for Class II shareholders
for exchange purposes. Class I shares may be exchanged for shares of any of the
money market funds in the Franklin Templeton Funds except Money Fund II. Draft
writing privileges and direct purchases are allowed on these other money market
funds as described in their respective prospectuses.
To the extent shares are exchanged proportionately, as opposed to another
method, such as first-in first-out, or free-shares followed by CDSC liable
shares, the exchanged shares may, in some instances, be CDSC liable even though
a redemption of such shares, as discussed elsewhere herein, may no longer be
subject to a CDSC. The proportional method is believed by management to more
closely meet and reflect the expectations of Class II shareholders in the event
shares are redeemed during the contingency period. For federal income tax
purposes, the cost basis of shares redeemed or exchanged is determined under the
Code without regard to the method of transferring shares chosen by the Fund.
Retirement Plan Accounts
Franklin Templeton IRA and 403(b) retirement plan accounts may accomplish
exchanges directly. Certain restrictions may apply, however, to other types of
retirement plans. See "Restricted Accounts" under "Telephone Transactions."
Restrictions on Exchanges
The Fund currently will not accept investments from Timing Accounts.
Transfers
Transfers between identically registered accounts in the same fund and class are
treated as non-monetary and non-taxable events, and are not subject to a
contingent deferred sales charge. The transferred shares will continue to age
from the date of original purchase. Shares of each class will be transferred on
the same basis as described above for exchanges.
Conversion Rights
It is not presently anticipated that Class II shares will be convertible to
Class I shares. A shareholder may, however, sell the Class II shares and use the
proceeds to purchase Class I shares, subject to all applicable sales charges.
How to Sell Shares of the Fund
A shareholder may at any time liquidate shares owned and receive from the Fund
the value of the shares. Shares may be redeemed in any of the following ways:
Redemptions by Mail
Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the class of shares redeemed based upon the net asset value
per share (less a contingent deferred sales charge, if applicable) next computed
after the written request in proper form is received by Investor Services.
Redemption requests received after the time at which the net asset value is
calculated, i.e., at the scheduled close of the New York Stock Exchange
("Exchange"), generally 1:00 p.m. Pacific time, each day that the Exchange is
open for business, will receive the price calculated on the following business
day. Shareholders are requested to provide a telephone number(s) where they may
be reached during business hours, or in the evening if preferred. Investor
Services' ability to contact a shareholder promptly when necessary will speed
the processing of the redemption.
To be considered in proper form, signature(s) must be guaranteed if the
redemption request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage firm
account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions, including,
for example, when (a) the current address of one or more joint owners of an
account cannot be confirmed, (b) multiple owners have a dispute or give
inconsistent instructions to the Fund, (c) the Fund has been notified of an
adverse claim, (d) the instructions received by the Fund are given by an agent,
not the actual registered owner, (e) the Fund determines that joint owners who
are married to each other are separated or may be the subject of divorce
proceedings, or (f) the authority of a representative of a corporation,
partnership, association, or other entity has not been established to the
satisfaction of the Fund.
Signature(s) must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced above. Shareholders
are advised, for their own protection, to send the share certificate and
assignment form in separate envelopes if they are being mailed in for
redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officer(s) of the corporation, and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and
(2) a copy of the pertinent pages of the trust document listing the trustee(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.
Redemptions by Telephone
Shareholders who complete the Franklin Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus, may
redeem shares of the Fund by telephone, subject to the Restricted Account
exception noted under "Telephone Transactions - Restricted Accounts."
Information may also be obtained by writing to the Fund or Investor Services at
the address shown on the cover or by calling 1-800/632-2301. The Fund and
Investor Services will employ reasonable procedures to confirm that instructions
given by telephone are genuine. Shareholders, however, bear the risk of loss in
certain cases as described under "Telephone Transactions - Verification
Procedures."
For shareholder accounts with the completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before the scheduled close of
the Exchange (generally 1:00 p.m. Pacific time) on any business day will be
processed that same day. The redemption check will be sent within seven days,
made payable to all the registered owners on the account, and will be sent only
to the address of record. Redemption requests by telephone will not be accepted
within 30 days following an address change by telephone. In that case, a
shareholder should follow the other redemption procedures set forth in this
Prospectus. Institutional accounts (certain corporations, bank trust
departments, government entities, and qualified retirement plans which qualify
to purchase shares at net asset value pursuant to the terms of this Prospectus)
which wish to execute redemptions in excess of $50,000 must complete an
Institutional Telephone Privileges Agreement which is available from the
Franklin Templeton Institutional Services Department by telephoning
1-800/321-8563.
Redeeming Shares Through Securities Dealers
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if the
shareholder redeems shares through a dealer, the redemption price will be the
net asset value next calculated after the shareholder's dealer receives the
order which is promptly transmitted to the Fund, rather than on the day the Fund
receives the shareholder's written request in proper form. The documents
described under "Redemptions by Mail" above, as well as a signed letter of
instruction, are required regardless of whether the shareholder redeems shares
directly or submits such shares to a securities dealer for repurchase. After
receipt of a repurchase order from the dealer, the Fund will still require a
signed letter of instruction and all other documents set forth above. A
shareholder's letter should reference the Fund and the class, the account
number, the fact that the repurchase was ordered by a dealer and the dealer's
name. Details of the dealer-ordered trade, such as trade date, confirmation
number, and the amount of shares or dollars, will help speed processing of the
redemption. The seven-day period within which the proceeds of the shareholder's
redemption will be sent will begin when the Fund receives all documents required
to complete ("settle") the repurchase in proper form. The redemption proceeds
will not earn dividends or interest during the time between receipt of the
dealer's repurchase order and the date the redemption is processed upon receipt
of all documents necessary to settle the repurchase. Thus, it is in a
shareholder's best interest to have the required documentation completed and
forwarded to the Fund as soon as possible. The shareholder's dealer may charge a
fee for handling the order. The SAI contains more information on the redemption
of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers, Class I investments
of $1 million or more and any Class II investments redeemed within the
contingency period of 12 months (Class I) or 18 months (Class II) of the
calendar month following their purchase will be assessed a contingent deferred
sales charge, unless one of the exceptions described below applies. The charge
is 1% of the lesser of the value of the shares redeemed (exclusive of reinvested
dividends and capital gain distributions) or the net asset value at the time of
purchase of such shares, and is retained by Distributors. The contingent
deferred sales charge is waived in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) A calculated number of shares representing amounts
attributable to capital appreciation of those shares held less than the
contingency period (12 months in the case of Class I shares and 18 months in the
case of Class II shares); (ii) shares purchased with reinvested dividends and
capital gain distributions; (iii) other shares held longer than the contingency
period; and (iv) followed by any shares held less than the contingency period,
on a "first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge on each class of shares is waived, as
applicable, for: exchanges; any account fees; distributions to participants or
their beneficiaries in Trust Company individual retirement plan accounts due to
death, disability or attainment of age 591/2; tax-free returns of excess
contributions from employee benefit plans; distributions from employee benefit
plans, including those due to termination or plan transfer; redemptions through
a Systematic Withdrawal Plan set up for shares prior to February 1, 1995, and
for Systematic Withdrawal Plans set up thereafter, redemptions of up to 1%
monthly of an account's net asset value (3% quarterly, 6% semiannually or 12%
annually); redemptions initiated by the Fund due to a shareholder's account
falling below the minimum specified account size; and redemptions following the
death of the shareholder or the beneficial owner.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Requests for redemptions for a specified dollar amount, unless otherwise
specified, will result in additional shares being redeemed to cover any
applicable contingent deferred sales charge, while requests for redemption of a
specific number of shares will result in the applicable contingent deferred
sales charge being deducted from the total dollar amount redeemed.
Additional Information Regarding Redemptions
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption. In addition, the right of redemption may be suspended or
the date of payment postponed if the Exchange is closed (other than customary
closing) or upon the determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it, by order, for the
protection of shareholders. Of course, the amount received may be more or less
than the amount invested by the shareholder, depending on fluctuations in the
market value of securities owned by the Fund.
Retirement Plan Accounts
Retirement plan account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To liquidate a
retirement plan account, a shareholder or securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from such plans to a
participant under age 591/2, unless the distribution meets one of the exceptions
set forth in the Internal Revenue Code.
Other Information
Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Fund nor its affiliates will be liable for any loss to the shareholder caused by
the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.
Telephone Transactions
Shareholders of the Fund and their investment representative of record, if any,
may be able to execute various transactions by calling Investor Services at
1-800/632-2301.
All shareholders will be able to execute various telephone transactions,
including: (i) effect a change in address, (ii) change a dividend option (see
"Restricted Accounts" below), (iii) transfer Fund shares in one account to
another identically registered account in the Fund, (iv) request the issuance of
certificates (to be sent to the address of record only) and (v) exchange Fund
shares as described in this Prospectus by telephone. In addition, shareholders
who complete and file the Agreement as described under "How to Sell Shares of
the Fund - Redemptions by Telephone" will be able to redeem shares of the Fund.
Verification Procedures
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder caused by an unauthorized transaction.
The Fund and Investor Services may be liable for any losses due to unauthorized
or fraudulent instructions in the event such reasonable procedures are not
followed. Shareholders are, of course, under no obligation to apply for or
accept telephone transaction privileges. In any instance where the Fund or
Investor Services is not reasonably satisfied that instructions received by
telephone are genuine, the requested transaction will not be executed, and
neither the Fund nor Investor Services will be liable for any losses which may
occur because of a delay in implementing a transaction.
Restricted Accounts
Telephone redemptions and dividend option changes may not be accepted on
Franklin Templeton retirement accounts. To assure compliance with all applicable
regulations, special forms are required for any distribution, redemption, or
dividend payment. While the telephone exchange privilege is extended to
Franklin/Templeton IRA and 403(b) retirement accounts, certain restrictions may
apply to other types of retirement plans.
To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call to speak
to a Retirement Plan Specialist at 1-800/527-2020.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance, or to send written instructions to the
Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
The telephone transaction privilege may be modified or discontinued by the Fund
at any time upon 60 days' written notice to shareholders.
Valuation of Fund Shares
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the Exchange (generally 1:00 p.m. Pacific time) each day that
the Exchange is open for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and "ask" (offering price,
which includes the maximum front-end sales charge of each class of shares of the
Fund).
The net asset value per share for each class of the Fund is determined in the
following manner: The aggregate of all liabilities, is deducted from the
aggregate gross value of all assets, and the difference is divided by the number
of shares of the respective class of the Fund outstanding at the time.
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. 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 scheduled closing of trading on the Exchange, if that is
earlier, and that 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
mean between the current bid and ask price is used. Occasionally, events which
affect the values of foreign securities and foreign exchange rates may occur
between the times at which values and rates are determined and the close of the
Exchange and will, therefore, not be reflected in the computation of the Fund's
net asset value. If events materially affecting the value of these foreign
securities occur during such periods, then these securities will be valued in
accordance with procedures established by the Board.
Over-the-counter portfolio securities for which market quotations are readily
available are valued within the range of the most recent bid and ask prices as
obtained from one or more dealers that make markets in the securities. Portfolio
securities which 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 prior to the time when assets are valued. Lacking any sales that day or
if the last sale price is outside the bid and ask prices, the options are valued
within the range of the current closing bid and ask prices if such valuation is
believed to fairly reflect the contract's market value. 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 of Trustees. With the approval of trustees, the Fund may
utilize a pricing service, bank or securities dealer to perform any of the above
described functions.
Each of the Fund's classes will bear, pro rata, all of the common expenses of
the Fund, except that the Class I and Class II shares will bear the Rule 12b-1
expenses payable under their respective plans. The net asset value of all
outstanding shares of each class of the Fund will be computed on a pro rata
basis for each outstanding share based on the proportionate participation in the
Fund represented by the value of shares of such classes. Due to the specific
distribution expenses and other costs that will be allocable to each class, the
dividends paid to each class of the Fund may vary.
How to Get Information Regarding an Investment in the Fund
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.
From a touch-tone phone, Franklin and Templeton shareholders may access an
automated system (day or night) which offers the following features:
By calling the Franklin TeleFACTS(R) system at 1-800/247-1753, shareholders may
obtain Class I and Class II account information, current price and, if
available, yield or other performance information specific to the Fund or any
Franklin Templeton Fund. In addition, Franklin Class I shareholders may process
an exchange, within the same class, into an identically registered Franklin
account and request duplicate confirmation or year-end statements, money fund
checks, if applicable, and deposit slips.
Franklin Class I and Class II share codes for the Fund, which will be needed to
access system information are 197 and 297, respectively. The system's automated
operator will prompt the caller with easy to follow step-by-step instructions
from the main menu. Other features may be added in the future.
To assist shareholders and securities dealers wishing to speak directly with a
representative, the following is a list of the various Franklin or Templeton
departments, telephone numbers and hours of operation to call. The same numbers
may be used when calling from a rotary phone:
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.
8:30 a.m. to 5:00 p.m.
(Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
Performance
Advertisements, sales literature and communications to shareholders may contain
several measures of a class' performance, including various expressions of total
return, current yield, and current distribution rate. They may occasionally cite
statistics to reflect its volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent applicable, through the end
of the most recent calendar quarter, assuming reinvestment of all distributions.
The Fund may also furnish total return quotations for each class for other
periods or based on investments at various sales charge levels or at net asset
value. For such purposes total return equals the total of all income and capital
gain paid to shareholders, assuming reinvestment of all distributions, plus (or
minus) the change in the value of the original investment, expressed as a
percentage of the purchase price.
Current yield for each class reflects the income per share earned by the Fund's
portfolio investments; it is calculated for each class by dividing that class'
net investment income per share during a recent 30-day period by the maximum
public offering price for that class of shares on the last day of that period
and annualizing the result.
Yield for each class, which is calculated according to a formula prescribed by
the SEC (see the SAI), is not indicative of the dividends or distributions which
were or will be paid to the Fund's shareholders. Dividends or distributions paid
to shareholders of a class are reflected in the current distribution rate, which
may be quoted to shareholders. The current distribution rate is computed by
dividing the total amount of dividends per share paid by a class during the past
12 months by a current maximum offering price for that class of shares. Under
certain circumstances, such as when there has been a change in the amount of
dividend payout, or a fundamental change in investment policies, it might be
appropriate to annualize the dividends paid during the period such policies were
in effect, rather than using the dividends during the past 12 months. The
current distribution rate differs from the current yield computation because it
may include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing and short-term capital
gain, and is calculated over a different period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against a class' income and will assume the payment of the
maximum front-end sales charge on the purchase of that class of shares. When
there has been a change in the sales charge structure, the historical
performance figures will be restated to reflect the new rate. The investment
results of each class, like all other investment companies, will fluctuate over
time; thus, performance figures should not be considered to represent what an
investment may earn in the future or what a class' total return, current yield
or distribution rate may be in any future period.
Because Class II shares were not offered prior to May 1, 1995, no performance
data is available for these shares. After a sufficient period of time has
passed, Class II performance data will be available.
General Information
Reports to Shareholders
The Fund's fiscal year ends April 30. Annual Reports containing audited
financial statements of the Trust, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to one household as well
as to reduce Fund expenses, Investor Services, when legally permissible, will
attempt to identify related shareholders within a household, and send only one
copy of the report. Additional copies may be obtained, without charge, upon
request to the Trust at the telephone number or address set forth on the cover
page of this Prospectus.
Additional information on Fund performance is included in the Fund's Annual
Report to Shareholders and the SAI.
Organization and Voting Rights
The Trust is authorized to issue an unlimited number of shares of beneficial
interest, with a par value of $.01 per share in various series and classes. Each
series, in effect, represents a separate mutual fund with its own investment
objective and policies. All shares have one vote and, when issued, are fully
paid, non-assessable, and redeemable. The Trust currently has eight series: the
Fund, the Franklin California Growth Fund, the Franklin Small Cap Growth Fund,
the Franklin Global Health Care Fund, the Franklin Strategic Income Fund, the
Franklin Natural Resources Fund, the Franklin Institutional MidCap Growth Fund
and the Franklin MidCap Growth Fund. Additional series and classes may be added
in the future by the Board. All shares of the Fund have equal voting, dividend
and liquidation rights. Shares have no preemptive or subscription rights and are
fully transferable. There are no conversion rights; however, holders of shares
of the Fund may reinvest all or any portion of the proceeds from the redemption
or repurchase of such shares into shares of any other fund in the Franklin
Templeton Funds as described under "Exchange Privilege."
The Trust's shareholders will vote together to elect trustees and on other
matters affecting the entire Trust, but will vote separately on matters
affecting separate series. The shares have noncumulative voting rights, which
means that in all elections of trustees, the holders of more than 50% of the
shares voting can elect 100% of the trustees if they choose to do so and in such
event, the holders of the remaining shares voting will not be able to elect any
person or persons to the Board of Trustees.
Shares of each class of a Fund represent proportionate interests in the assets
of the Fund and have the same voting and other rights and preferences as the
other classes and series of the Trust for matters that affect the Trust as a
whole. For matters that only affect a certain class of a Fund's shares, however,
only shareholders of that class will be entitled to vote. Therefore each class
of shares of a Fund will vote separately on matters (1) affecting only that
class of such Fund, (2) expressly required to be voted on separately by state
business trust law, or (3) required to be voted on separately by the 1940 Act,
or the rules adopted thereunder. For instance, if a change to the Rule 12b-1
plan relating to Class I shares of a Fund requires shareholder approval, only
shareholders of Class I of that Fund may vote on the change to the Rule 12b-1
plan affecting that class. Similarly, if a change to the Rule 12b-1 plan
relating to Class II shares requires approval, only shareholders of Class II of
such Fund may vote on changes to such plan. On the other hand, if there is a
proposed change to the investment objective of a Fund, this affects all
shareholders of that Fund, regardless of which class of shares they hold and,
therefore, each share has the same voting rights.
The Fund does not intend to hold annual shareholders meetings. The Fund may,
however, hold a special meeting for such purposes as changing fundamental
investment restrictions, approving a new management agreement or any other
matters which are required to be acted on by shareholders under the 1940 Act. A
meeting may also be called by a majority of the Board of Trustees or by
shareholders holding at least ten percent of the shares entitled to vote at the
meeting. Shareholders will receive assistance in communicating with other
shareholders in connection with the election or removal of trustees such as that
provided in Section 16(c) of the 1940 Act.
Redemptions by the Fund
The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50, but only where the value
of such account has been reduced by the shareholder's prior voluntary redemption
of shares and has been inactive (except for the reinvestment of distributions)
for a period of at least six months, provided advance notice is given to the
shareholder. More information is included in the SAI.
Account Registrations
An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, a shareholder may transfer an account in the Fund carried
in "street" or "nominee" name by the shareholder's securities dealer to a
comparably registered Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealer must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not process the
transfer and will so inform the shareholder's delivering securities dealer. To
effect the transfer, a shareholder should instruct the securities dealer to
transfer the account to a receiving securities dealer and sign any documents
required by the securities dealer(s) to evidence consent to the transfer. Under
current procedures, the account transfer may be processed by the delivering
securities dealer and the Fund after the Fund receives authorization in proper
form from the shareholder's delivering securities dealer. In the future it may
be possible to effect such transfers electronically through the services of the
NSCC.
The Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by the Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available include the NSCC's "Networking," "Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
Important Notice Regarding
Taxpayer IRS Certifications
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the Internal Revenue Service ("IRS") any taxable dividend, capital
gain distribution, or other reportable payment (including share redemption
proceeds) and withhold 31% of any such payments made to individuals and other
non-exempt shareholders who have not provided a correct taxpayer identification
number ("TIN") and made certain required certifications that appear in the
Shareholder Application. A shareholder may also be subject to backup withholding
if the IRS or a securities dealer notifies the Fund that the number furnished by
the shareholder is incorrect or that the shareholder is subject to backup
withholding for previous under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.
Portfolio Operations
The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio: Sally Edwards Haff and Gregory Johnson since the Fund's
inception in 1992 and Ian Link since February 1995.
Sally Edwards Haff, Portfolio Manager of Advisers - Ms. Haff holds a B.A. degree
in economics from the University of California at Santa Barbara and joined
Advisers in 1986. She is a Chartered Financial Analyst and a member of
industry-related associations.
Gregory Johnson, Vice President of Advisers - Mr. Johnson has a B.S. degree in
accounting and business administration from Washington and Lee University and
holds a certificate as a Certified Public Accountant. He joined Advisers in
1986.
Ian Link, Portfolio Manager of Advisers - Mr. Link has a Bachelor of Arts degree
in economics from the University of California at Davis and recently became a
Chartered Financial Analyst. Mr. Link joined Advisers in 1989. He is a member of
several securities industry-related committees and associations.
STATEMENT OF ADDITIONAL INFORMATION
ACQUISITION OF THE ASSETS OF
Templeton Global Utilities, Inc.
700 Central Avenue
St. Petersburg, Florida 33701
Telephone: (800) 354-9191
BY AND IN EXCHANGE FOR SHARES OF
Franklin Global Utilities Fund
777 Mariners Island Blvd.
San Mateo, California 94403
Telephone: (800) DIAL BEN
This Statement of Additional Information, relating specifically to
the proposed acquisition of all of the assets of Templeton Global Utilities,
Inc. (the "Fund") by the Franklin Global Utilities Fund series of Franklin
Strategic Series ("Franklin Utilities"), in exchange for shares of Franklin
Utilities, consists of this cover page and the following described documents,
each of which is attached hereto and incorporated by reference herein:
(1) The Statement of Additional Information of Franklin
Utilities dated September 1, 1995.
(2) Annual Report of the Fund for the fiscal year ended
August 31, 1995.
(3) Annual Report of Franklin Utilities for the fiscal year
ended April 30, 1995 and Semi-Annual Report of Franklin
Utilities for the period ended October 31, 1995.
(4) Pro forma financial statements reflecting the financial
situation of Franklin Utilities following the
Transaction.
This Statement of Additional Information is not a prospectus. A Proxy
Statement/Prospectus dated ___________, 1995 relating to the above-referenced
matter may be obtained from the Fund or Franklin Utilities. This Statement of
Additional Information relates to, and should be read in conjunction with, such
Proxy Statement/Prospectus.
The date of this Statement of Additional Information is
______________, 1995.
FRANKLIN
GLOBAL
UTILITIES FUND
STATEMENT OF
ADDITIONAL INFORMATION
777 Mariners Island Blvd., P.O. Box 7777 SEPTEMBER 1, 1995
San Mateo, CA 94403-7777 1-800/DIAL BEN
Contents Page
About the Fund (See also the Prospectus
"About the Fund," "General Information")................. 2
The Fund's Investment Objective and
Restrictions (See also the Prospectus
"Investment Objective and Policies of the
Fund").................................................... 2
Special Considerations and Risk Factors................... 11
Officers and Trustees..................................... 17
Investment Advisory and Other Services
(See also the Prospectus "Management
of the Fund")............................................. 21
The Fund's Policies Regarding
Brokers Used on Portfolio Transactions................... 22
Additional Information Regarding
Fund Shares (See also the Prospectus
"How to Buy Shares of the Fund,"
"How to Sell Shares of the Fund,"
"Valuation of Fund Shares")............................... 23
Additional Information
Regarding Taxation....................................... 26
The Fund's Underwriter.................................... 29
General Information....................................... 30
Appendix.................................................. 34
Financial Statements...................................... 35
Franklin Global Utilities Fund (the "Fund") is a non-diversified series of
Franklin Strategic Series (the "Trust"), an open-end management investment
company. The Fund seeks to provide total return without incurring undue risk
through investment primarily in securities issued by companies which are, in the
opinion of management, primarily engaged in the ownership or operation of
facilities used to generate, transmit or distribute electricity, telephone
communications, cable and other pay television services, wireless
telecommunications, gas or water.
A Prospectus for the Fund, dated September 1, 1995, as may be amended from time
to time, which provides the basic information investors should know before
investing in the Fund, may be obtained without charge from the Fund or from its
principal underwriter, Franklin/Templeton Distributors, Inc. ("Distributors"),
at the address shown above.
This Statement of Additional Information (the "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 investors with additional
information regarding the activities and operations of the Fund, and should be
read in conjunction with the Fund's Prospectus.
About the Fund
The Fund is a non-diversified series of the Trust, an open-end management
investment company, commonly called a mutual fund, and registered as such under
the Investment Company Act of 1940, as amended ("1940 Act"). The Trust is a
Delaware business trust organized on January 25, 1991.
The Fund's Investment
Objective and Restrictions
As noted in the Prospectus, the Fund seeks to provide total return, without
incurring undue risk. The Fund seeks to accomplish its objective by primarily
investing in securities issued by companies which are, in the opinion of
management, primarily engaged in the ownership or operation of facilities used
to generate, transmit or distribute electricity, telephone communications, cable
and other pay television services, wireless telecommunications, gas or water.
The Fund's objective of total return is a fundamental policy and may not be
changed without shareholder approval. There is no assurance that the Fund's
objective may be achieved.
Utility Industries - Description and Risk Factors
Utility companies in the United States ("U.S.") and in foreign countries are
generally subject to regulation. In the U.S., most utility companies are
regulated by state and/or federal authorities. Such regulation is intended to
ensure appropriate standards of service and adequate capacity to meet public
demand. Prices are also regulated, with the intention of protecting the public
while ensuring that the rate of return earned by utility companies is sufficient
to allow them to attract capital in order to grow and continue to provide
appropriate services. There can be no assurance that such pricing policies or
rates of return will continue in the future.
The nature of regulation of utility industries is evolving both in the U.S. and
in foreign countries. Changes in regulation in the U.S. increasingly allow
utility companies to provide services and products outside their traditional
geographic areas and lines of business, creating new areas of competition within
the industries. Furthermore, the investment manager, Franklin Advisers, Inc.
("Advisers" or "Manager"), believes that the emergence of competition will
result in utility companies potentially earning more than their traditional
regulated rates of return. Although certain companies may develop more
profitable opportunities, others may be forced to defend their core businesses
and may be less profitable. The Manager seeks to take advantage of favorable
investment opportunities that are expected to arise from these structural
changes. Of course, there can be no assurance that favorable developments will
occur in the future.
Foreign utility companies are also subject to regulation, although such
regulation may or may not be comparable to that in the U.S. Foreign regulatory
systems vary from country to country and may evolve in ways different from
regulation in the U.S.
The Fund's investment policies are designed to enable it to capitalize on
evolving investment opportunities throughout the world. For example, the rapid
growth of certain foreign economies will necessitate expansion of capacity in
the utility industries in those countries. Although many foreign utility
companies currently are government-owned Advisers believes that, in order to
attract significant capital for growth, foreign governments are likely to seek
global investors through the privatization of their utility industries.
Privatization, which refers to the trend toward investor ownership of assets
rather than government ownership, is expected to occur in newer, faster-growing
economies and also in more mature economies. In addition, the economic
unification of European markets is expected to improve economic growth, reduce
costs and increase competition in Europe, which will result in opportunities for
investment by the Fund in European utility industries. Of course, there is no
assurance that such favorable developments will occur or that investment
opportunities in foreign markets for the Fund will increase.
The revenues of domestic and foreign utility companies generally reflect the
economic growth and developments in the geographic areas in which they do
business. The Manager takes into account anticipated economic growth rates and
other economic developments when selecting securities of utility companies.
Further descriptions of some of the anticipated opportunities and risks of
specific segments within the global utility industries are set forth below.
Electric. The electric utility industry consists of companies that are engaged
principally in the generation, transmission and sale of electric energy,
although many also provide other energy-related services. Domestic electric
utility companies in general have recently been favorably affected by lower fuel
and financing costs and the full or near completion of major construction
programs. In addition, many of these companies recently have generated cash
flows in excess of current operating expenses and construction expenditures,
permitting some degree of diversification into unregulated businesses. Some
electric utilities have also taken advantage of the right to sell power outside
of their traditional geographic areas. Electric utility companies have
historically been subject to the risks associated with increases in fuel and
other operating costs, high interest costs on borrowing needed for capital
construction programs, costs associated with compliance with environmental,
nuclear and other safety regulations and changes in the regulatory climate. For
example, in the U.S., the construction and operation of nuclear power facilities
are subject to increased scrutiny by, and evolving regulations of, the Nuclear
Regulatory Commission. Increased scrutiny might result in higher operating costs
and higher capital expenditures, with the risk that regulators may disallow
inclusion of these costs in rate authorizations.
Telephone Communications. The telephone communications industry is a distinct
utility industry segment that is subject to different risks and opportunities.
Companies that provide telephone services and access to telephone networks
compose the largest portion of this segment. The telephone industry is large and
highly concentrated. Telephone companies in the U.S. are still experiencing the
effects of the break-up of American Telephone & Telegraph Company, which
occurred in 1984. Since that time the number of local and long-distance
companies and the competition among such companies has increased. In addition,
since 1984, companies engaged in telephone communication services have expanded
their nonregulated activities into other businesses, including cellular
telephone services, cable television, data processing, equipment retailing and
software services. This expansion has provided significant opportunities for
certain telephone companies to increase their earnings and dividends at faster
rates than have been allowed in traditional regulated businesses. Increasing
competition and other structural changes, however, could adversely affect the
profitability of such utilities.
Cable and Other Pay Television Services. Cable and pay television companies
produce and distribute programming over private networks. Cable television
continues to be a growth industry throughout most of the world. The industry is
regulated in most countries, but such regulation is typically less restrictive
than regulation of the electric and telephone utility industries. Cable
companies usually enjoy local monopolies; however, emerging technologies and
pro-competition legislation are presenting substantial challenges to these
monopolies and could slow growth rates.
Wireless Telecommunications. The wireless telecommunications segment includes
those companies which provide alternative telephone and communications services.
These technologies may include: cellular, paging, satellite, microwave and
private communication networks, and other emerging technologies. The wireless
telecommunications industry is in the early development stage and is
characterized by emerging, rapidly growing companies.
Gas. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the U.S., interstate transmission companies
are regulated by the Federal Energy Regulatory Commission, which is reducing its
regulation of the industry. Many companies have diversified into oil and gas
exploration and development, making returns more sensitive to energy prices. In
the recent decade, gas utility companies have been adversely affected by
disruption in the oil industry and have also been affected by increased
concentration and competition.
Water. Water supply utilities are companies that collect, purify, distribute and
sell water. In the U.S. and around the world, the industry is highly fragmented
because most of the supplies are owned by local authorities. Companies in this
industry are generally mature and are experiencing little or no per capita
volume growth.
There can be no assurance that the positive developments noted above, including
those relating to business growth and changing regulation, will occur or that
risk factors, other than those noted above, will not develop in the future.
Some of the Fund's Other Investment Policies
As noted in the Prospectus, the Fund may lend its portfolio securities to
qualified securities dealers in amounts not to exceed one-third of the value of
the Fund's total assets. Any voting rights the loaned securities have may pass
to the borrower during the term of the loan. Loans are typically subject to
termination by the Fund in the normal settlement time, currently five business
days after notice, or by the borrower on one day's notice. Borrowed securities
must be returned when the loan is terminated. Where matters are submitted to the
vote of the security holders of a portfolio company and such matters would
materially affect the Fund, the Fund will either terminate the loan or it will
have provided other means to permit it to vote such securities.
Short-Term Investments. As stated in the Prospectus, the Fund may temporarily
invest cash in short-term debt instruments. The Fund may also invest its
short-term cash in shares of the Franklin Money Fund, the assets of which are
managed under a "master/feeder" structure by the Fund's investment adviser. Such
temporary investments will only be made with cash held to maintain liquidity or
pending investment, and for defensive purposes in the event or in anticipation
of a general decline in the market prices of stocks in which the Fund invests.
Illiquid Securities. The Fund will not invest more than 15% of its net assets in
illiquid securities. Generally an "illiquid security" is any security that
cannot be disposed of within seven days and in the ordinary course of business
at approximately the amount at which the Fund has valued the instrument. Subject
to this limitation, the Trust's Board of Trustees has authorized the Fund to
invest in restricted securities where such investment is consistent with the
Fund's investment objective and has authorized such securities to be considered
to be liquid to the extent the Manager determines that there is a liquid
institutional or other market for such securities - for example, restricted
securities which may be freely transferred among qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933, as amended, and for
which a liquid institutional market has developed. The Board of Trustees will
review any determination by the Manager to treat a restricted security as a
liquid security on an ongoing basis, including the Manager's assessment of
current trading activity and the availability of reliable price information. In
determining whether a restricted security is properly considered a liquid
security, the Manager and the Board of Trustees will take into account the
following factors: (i) the frequency of trades and quotes for the security; (ii)
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (iii) dealer undertakings to make a market in the
security; and (iv) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). To the extent the Fund
invests in restricted securities that are deemed liquid, the general level of
illiquidity in the Fund may be increased if qualified institutional buyers
become uninterested in purchasing these securities or the market for these
securities contracts.
To comply with applicable state restrictions, the Fund will limit its
investments in illiquid securities, including illiquid securities with legal or
contractual restrictions on resale and securities which are not readily
marketable, to 10% of the Fund's net assets.
When-Issued and Delayed Delivery Transactions. The Fund may purchase securities
on a "when-issued" or "delayed delivery" basis. These transactions are
arrangements under which the Fund may purchase securities with payment and
delivery scheduled for a future time. These transactions are subject to market
fluctuation and are subject to the risk that the value or yields at delivery may
be more or less than the purchase price or the yields available when the
transaction was entered into. Although the Fund will generally purchase these
securities on a when-issued basis with the intention of acquiring such
securities, it may sell such securities before the settlement date if it is
deemed advisable. In when-issued and delayed delivery transactions, the Fund
relies on the seller to complete the transaction. The other party's failure to
do so may cause the Fund to miss a price or yield considered advantageous.
Securities purchased on a when-issued or delayed delivery basis do not generally
earn interest until their scheduled delivery date. The Fund is not subject to
any percentage limit on the amount of its assets which may be invested in
"when-issued" purchase obligations.
Transactions in Options, Futures
and Options on Financial Futures
The Fund may engage in various portfolio strategies to seek to hedge its
portfolio against adverse movements in the equity, debt and currency markets.
The Fund has authority to deal in forward foreign exchange transactions and
foreign currency options and futures and options on such futures. The Fund also
has authority to write (i.e., sell) covered put and call options on its
portfolio securities, purchase put and call options on securities and engage in
transactions in stock index options and financial futures, including stock and
bond index futures and related options on such futures. Although certain risks
are involved in options and futures transactions (as discussed below and in
"Risk Factors and Considerations Regarding Options, Futures and Options on
Futures"), the Manager believes that, because the Fund will (i) write only
covered options on portfolio securities, and (ii) engage in other options and
futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to the risks
frequently associated with the speculative use of options and futures
transactions. While the Fund's use of hedging strategies is intended to reduce
the volatility of the net asset value of Fund shares, the Fund's net asset value
will fluctuate. There can be no assurance that the Fund's hedging transactions
will be effective. Furthermore, the Fund will only engage in hedging activities
from time to time and may not necessarily be engaging in hedging activities when
movement in the equity, debt and currency markets occurs.
Forward Currency Exchange Contracts. The Fund may enter into forward currency
exchange contracts ("Forward Contracts") to attempt to minimize the risk to the
Fund from adverse changes in the relationship between currencies or to enhance
income. A Forward Contract is an obligation to purchase or sell a specific
currency for an agreed price at a future date which is individually negotiated
and privately traded by currency traders and their customers.
The Fund may enter into a Forward Contract, for example, when it enters into a
contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock-in" the U.S. dollar price of that security.
Additionally, for example, when the Fund believes that a foreign currency may
suffer a substantial decline against the U.S. dollar, it may enter into a
Forward Contract to sell an amount of that foreign currency approximating the
value of some or all of the Fund's portfolio securities denominated in such
foreign currency; or when the Fund believes that the U.S. dollar may suffer a
substantial decline against a foreign currency, it may enter into a Forward
Contract to buy that foreign currency for a fixed dollar amount.
To limit potential risks in connection with the purchase of currency under
Forward Contracts, cash, cash equivalents or readily marketable high grade debt
securities equal to the amount of the purchase will be held aside or segregated
in the Fund's custodian bank to be used to pay for the commitment, or the Fund
will cover any commitments under these contracts to sell currency by owning the
underlying currency (or an absolute right to acquire such currency). The
segregated account will be marked-to-market on a daily basis.
Forward Contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies or between foreign
currencies. Unanticipated changes in currency exchange rates also may result in
poorer overall performance for the Fund than if it had not entered into such
Forward Contracts.
Foreign Currency Futures. The Fund may acquire and sell foreign currency futures
contracts in order to hedge against changes in the level of future currency
rates. Such contracts involve an agreement to purchase or sell a specific
currency at a future date at a price set in the contract. The Fund will not
purchase such contracts if more than 5% of the Fund's assets are then invested
as initial or variation margin deposits on such contracts or options. Assets
will be held aside or segregated in the Fund's custodian bank, as required to
cover the Fund's obligations under foreign currency futures contracts.
Options on Foreign Currencies. The Fund may purchase and write put and call
options on foreign currencies (traded on U.S. and foreign exchanges or
over-the-counter) for hedging purposes to protect against declines in the U.S.
dollar value of foreign portfolio securities or other assets to be acquired. As
in the case of other kinds of options, however, the writing of an option on
foreign currency will constitute only a partial hedge, up to the amount of the
premium received, and the Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate movements
adverse to the Fund's position, the Fund may forfeit the entire amount of the
premium plus related transaction costs.
Options and Financial Futures. The Fund may write covered put and call options
and purchase put and call options on stocks, stock indices and bonds which trade
on securities exchanges and in the over-the-counter market. The Fund may
purchase and sell futures and options on futures with respect to stock and bond
indices. Additionally, the Fund may engage in "close-out" transactions with
respect to futures and options. The Fund will not enter into any futures
contract or related options (except for closing transactions) if, immediately
thereafter, the sum of the amount of its initial deposits and premiums on open
contracts and options would exceed 5% of the Fund's total assets (taken at
current value). The Fund will not engage in any securities options or securities
index options, if the option premiums paid regarding its open option positions,
exceed 5% of the value of the Fund's total assets.
The Fund's option and futures investments involve certain risks. For example,
the effectiveness of an options and futures strategy depends on the degree to
which price movements in the underlying index or securities correlate with price
movements in the relevant portion of the Fund's portfolio. The Fund bears the
risk that the prices of its portfolio securities will not move in the same
amount as the option or future it has purchased, or that there may be a negative
correlation which would result in a loss on both such securities and the option
or future.
Positions in exchange traded options and futures may be closed out only on an
exchange which provides a secondary market. There may not always be a liquid
secondary market for a futures or option contract at a time when the Fund seeks
to close out its position. If the Fund were unable to close out a futures or
option position, and if prices moved adversely, the Fund would have to continue
to make daily cash payments to maintain its required margin, and, if the Fund
had insufficient cash, it might have to sell portfolio securities at a
disadvantageous time. In addition, the Fund might be required to deliver the
stocks underlying futures or options contracts it holds. Over-the-counter
options ("OTC options") may not be closed out on an exchange and 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.
There can be no assurance that a liquid secondary market will exist for any
particular option or futures contract at any specific time. Thus, it may not be
possible to close such an option or futures position. The Fund will enter into
an option or futures position only if there appears to be a liquid secondary
market for such option or futures.
The Fund understands the current position of the staff of the Securities and
Exchange Commission ("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 Advisers 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. (See "Investment Objective and Policies of the Fund - Illiquid
Investments" in the Prospectus.)
In addition, adverse market movements could cause the Fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss by
the Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a futures contract or option.
The Fund's transactions in options, futures contracts, and forward contracts may
be limited by the requirements of the Internal Revenue Code of 1986, as amended
("the Code") for qualification as a regulated investment company. These
transactions are also subject to special tax rules that may affect the amount,
timing, and character of certain distributions to shareholders, more information
about which is included in the section entitled "Additional Information
Regarding Taxation."
Writing Call Options. Call options written by the Fund give the holder the right
to buy the underlying securities from the Fund at a stated exercise price; put
options written by the Fund give the holder the right to sell the underlying
security to the Fund at a stated exercise price. A call option written by the
Fund is "covered" if the Fund owns the underlying security which 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 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, since, with regard to certain
options, 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, of course, 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.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is that
the writer's position will be canceled by the clearing corporation. A writer may
not effect a closing purchase transaction, however, after being notified of the
exercise of an option. Likewise, an investor who is the holder of an option may
liquidate its position by effecting a "closing sale transaction." This is
accomplished 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 can be effected.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both. Also, effecting a closing
transaction will permit the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other Fund investments. If the
Fund desires to sell a particular security from its portfolio on which it has
written a call option, it will effect a closing transaction prior to or
concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the price 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 price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
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 repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
Purchasing Call Options. The Fund may purchase call options on securities which
it intends to purchase in order to limit the risk of a substantial increase in
the market price of such security. The Fund may also purchase 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 plus the related transaction costs.
Writing Put Options. Although the Fund has no current intention of writing
covered put options in the foreseeable future, the Fund reserves the right to do
so.
A put option gives the purchaser of the option the right to sell, and the writer
(seller) the obligation to buy, the underlying security or currency at the
exercise price during the option period. The option may be exercised at any time
prior to 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 would write put options only on a covered basis, which means that the
Fund would maintain 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 would generally write covered
put options in circumstances where the Adviser wishes to purchase the underlying
security or currency for the Fund's portfolio at a price lower than the current
market price of the security or currency. In such event, the Fund would write a
put option at an exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the Fund would 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 such a transaction
would be that the market price of the underlying security or currency would
decline below the exercise price less the premiums received.
Purchasing Put Options. The Fund may purchase put options. As the holder of a
put option, the Fund has the right to sell the underlying security or currency
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 purchase a put option on an underlying security or currency (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 or currency. 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
or currency 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 or currency when Advisers deems it desirable to continue to hold the
security or currency because of tax considerations. The premium paid for the put
option and any transaction costs would reduce any capital gain otherwise
available for distribution when the security or currency is eventually sold.
The Fund may also purchase put options at a time when the Fund does not own the
underlying security or currency. By purchasing put options on a security or
currency it does not own, the Fund seeks to benefit from a decline in the market
price of the underlying security or currency. If the put option is not sold when
it has remaining value, and if the market price of the underlying security or
currency 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 or currency 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.
For state law purposes, the Fund will commit no more than 5% of its assets to
premiums when purchasing put options. The premium paid by the Fund when
purchasing a put option will be recorded as an asset in the Fund's statement of
assets and liabilities. This asset will be adjusted daily to the options'
current market value, which will be the latest sale price at the time at which
the net asset value per share of the Fund is computed (generally at the
scheduled close of the New York Stock Exchange), or, in the absence of such
sale, the latest bid price. The asset will be extinguished upon expiration of
the option, the writing of an identical option in a closing transaction, or the
delivery of the underlying security or currency upon the exercise of the option.
Over-the-Counter options. The Fund intends to write covered put and call options
and purchase put and call options which trade in the over-the-counter market to
the same extent that it will engage in exchange traded options. Just as with
exchange traded options, OTC call options give the option holder the right to
buy an underlying security from an option writer at a stated exercise price; OTC
put options give the option holder the right to sell an underlying security to
an option writer at a stated exercise price. OTC options, however, differ from
exchange traded options in certain material respects.
OTC options are arranged directly with dealers and not, as is the case with
exchange traded options, with a clearing corporation. Thus, there is a risk of
non-performance by the dealer. Because there is no exchange, pricing is
typically done by reference to information from market makers. OTC options are
available, however, for a greater variety of securities, and in a wider range of
expiration dates and exercise prices, than exchange traded options; and the
writer of an OTC option is paid the premium in advance by the dealer.
There can be no assurance that a continuous liquid secondary market will exist
for any particular 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 which the Fund originally wrote it.
Options on Stock Indices. The Fund may also purchase 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 purchase 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 than (or less than, in the case of
puts) 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 price
movements in the stock market generally (or in a particular industry or segment
of the market) rather than price movements in individual stocks.
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 and will maintain the account while the option is open or
it will otherwise cover the transaction.
Futures Contracts. The Fund may enter into contracts for the purchase or sale
for future delivery of securities and in such 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 which have been designated "contracts markets" by the
Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant, or brokerage firm, which 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 futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearinghouse associated with the exchange
on which the contracts are traded, the Fund will incur brokerage fees when it
purchases or sells futures contracts.
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 which it intends to
purchase. 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 net assets would be represented by futures contracts or related
options. In addition, the Fund may not purchase or sell futures contracts or
purchase or sell related options if, immediately thereafter, the sum of the
amount of margin deposits on its existing futures and related options positions
and premiums paid for related options would exceed 5% of the market value of the
Fund's total assets. In instances involving the purchase of 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 which 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 Index Futures and Options on Stock Index Futures. The Fund may purchase
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 purchaser 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 purchase 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 purchase.
Options on Stock Index Futures. The Fund may purchase and sell call and put
options on stock index futures to hedge against risks of market-side price
movements. The need to hedge against such risks will depend on the extent of
diversification of the Fund's 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 purchase or sell stock at a specified
price, options on a stock index futures give the holder the right to receive
cash. Upon exercise of the option, the delivery of the futures position by the
writer of the option to the holder of the option will be accompanied by delivery
of the accumulated balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. If an option is
exercised on the last trading day prior to the expiration date of the option,
the settlement will be made entirely in cash equal to the difference between the
exercise price of the option and the closing price of the futures contract on
the expiration date.
Bond Index Futures and Options on such Contracts. The Fund may purchase 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 which 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 also may purchase and write put and call options on such index futures
and enter into closing transactions with respect to such options.
Future Developments. The Fund may take advantage of opportunities in the area of
options and futures contracts and options on futures contracts and any other
derivative investments which are not presently contemplated for use by the Fund
or which are not currently available but which may be developed, to the extent
such opportunities are both consistent with the Fund's investment objective and
legally permissible for the Fund. Prior to investing in any such investment
vehicle, the Fund will supplement its Prospectus, if appropriate.
Investment Restrictions
The Fund has adopted the following restrictions as fundamental policies, which
means that they may not be changed without the approval of a majority of the
Fund's shareholders. In order to change any of these restrictions (i) 67% or
more of the voting securities present at a meeting of shareholders if the
holders of more than 50% of the voting securities of the Fund are represented at
that meeting or (ii) more than 50% of the outstanding voting securities of the
Fund, whichever is less, must vote to make the change.
The Fund may not:
1. 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;
2. Borrow money or mortgage or pledge any of its assets, except in the form of
reverse repurchase agreements or from banks for temporary or emergency purposes
in an amount up to 33% of the value of the Fund's total assets (including the
amount borrowed) based on the lesser of cost or market, less liabilities (not
including the amount borrowed) at the time the borrowing is made. While
borrowings exceed 5% of the Fund's total assets, the Fund will not make any
additional investments;
3. Underwrite securities of other issuers (does not preclude the Fund from
obtaining such short-term credit as may be necessary for the clearance of
purchases and sales of its portfolio securities) or invest more than 5% of its
assets in securities with legal or contractual restrictions on resale (although
the Fund may invest in such securities to the extent permitted under the federal
securities laws) or which are not readily marketable, if more than 15% of the
Fund's total assets would be invested in such companies;
4. Invest in securities for the purpose of exercising management or control of
the issuer;
5. Maintain a margin account with a securities dealer or invest in commodities
and commodity contracts (except that the Fund may engage in financial futures,
including stock index futures, and options on stock index futures) or lease or
acquire any interests, including interests issued by limited partnerships (other
than publicly traded equity securities), in oil, gas, or other mineral
exploration or development programs, or invest in excess of 5% of its total
assets in options unrelated to the Fund's transactions in futures, including
puts, calls, straddles, spreads, or any combination thereof;
6. Effect short sales, unless at the time the Fund owns securities equivalent
in kind and amount to those sold (which will normally be for deferring
recognition of gains or losses for tax purposes). The Fund does not currently
intend to employ this investment technique;
7. Invest directly in real estate, real estate limited partnerships or illiquid
securities issued by real estate investment trusts (the Fund may, however,
invest in marketable securities issued by real estate investment trusts);
8. Invest in the securities of other investment companies, except where there
is no commission other than the customary brokerage commission or sales charge,
or except that securities of another investment company may be acquired pursuant
to a plan of reorganization, merger, consolidation or acquisition, and except
where the Fund would not own, immediately after the acquisition, securities of
the investment companies which exceed in the aggregate i) more than 3% of the
issuer's outstanding voting stock, ii) more than 5% of the Fund's total assets
and iii) together with the securities of all other investment companies held by
the Fund, exceed, in the aggregate, more than 10% of the Fund's total assets.
Pursuant to available exemptions from the 1940 Act, the Fund may invest in
shares of one or more money market funds managed by Franklin Advisers, Inc. or
its affiliates;
9. Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but may deal with
such persons or firms as brokers and pay a customary brokerage commission; or
purchase or retain securities of any issuer if, to the knowledge of the Trust,
one or more of the officers or trustees of the Trust, or its investment adviser,
own beneficially more than one-half of 1% of the securities of such issuer and
all such officers and trustees together own beneficially more than 5% of such
securities;
10. Concentrate in any industry, except that the Fund will invest at least 25%
of total assets in the equity and debt securities issued by domestic and foreign
companies in the utilities industries; and
11. Invest more than 10% of its assets in securities of companies which have a
record of less than three years continuous operation, including the operations
of any predecessor companies.
In addition to these fundamental policies, it is the present policy of the Fund
(which may be changed without the approval of the shareholders) not to engage in
joint or joint and several trading accounts in securities, except that it may
participate in joint repurchase arrangements, invest its short-term cash in
shares of the Franklin Money Fund (pursuant to the terms of any order, and any
conditions therein, issued by the SEC permitting such investments), or combine
orders to purchase or sell with orders from other persons to obtain lower
brokerage commissions. The Fund may not invest in excess of 5% of its net
assets, valued at the lower of cost or market, in warrants, nor more than 2% of
its net assets in warrants not listed on either the New York or American Stock
Exchange. It is also the policy of the Fund that it may, consistent with its
objective, invest a portion of its assets, as permitted by the 1940 Act and the
rules adopted thereunder, in securities or other obligations issued by companies
engaged in securities related businesses, including such companies that are
securities brokers, dealers, underwriters or investment advisers.
Special Considerations and Risk Factors
Political and Economic Risks. Investing in securities of non-U.S. companies may
entail additional risks due to the potential political and economic instability
of certain countries and the risks of expropriation, nationalization,
confiscation or the imposition of restrictions on foreign investment and on
repatriation of capital invested. In the event of such expropriation,
nationalization or other confiscation by any country, the Fund could lose its
entire investment in any such country.
Illiquid Securities. The sale of restricted or illiquid securities often
requires more time and results in higher brokerage charges or dealer discounts
and other selling expenses than does the sale of securities eligible for trading
on national securities exchanges or in the over-the-counter markets. Restricted
securities often sell at a price lower than similar securities that are not
subject to restrictions on resale.
Religious and Ethnic Instability. Certain countries in which the Fund may invest
may have vocal minorities that advocate radical religious or revolutionary
philosophies or support ethnic independence. Any disturbance on the part of such
individuals could carry the potential for widespread destruction or confiscation
of property owned by individuals and entities foreign to such country and could
cause the loss of the Fund's investment in those countries.
Foreign Investment Restrictions. Certain countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Fund. As illustrations,
certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investment by foreign persons to only a specific class of
securities of a company that may have less advantageous terms than securities of
the company available for purchase by nationals. Moreover, the national policies
of certain countries may restrict investment opportunities in issuers or
industries deemed sensitive to national interests. In addition, some countries
require governmental approval for the repatriation of investment income, capital
or the proceeds of securities sold by foreign investors. The Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation, as well as by the application to it of
other restrictions on investments.
Non-Uniform Corporate Disclosure Standards and Governmental Regulation. Foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards or to other regulatory requirements comparable to
those applicable to U.S. companies. Most of the securities held by the Fund will
not be registered with the SEC or regulators of any foreign country, nor will
the issuers thereof be subject to the SEC's reporting requirements. Thus, there
will be less available information concerning foreign issuers of securities held
by the Fund than is available concerning U.S. issuers. In instances where the
financial statements of an issuer are not deemed to reflect accurately the
financial situation of the issuer, Advisers may take appropriate steps to
evaluate the proposed investment, which may include on-site inspection of the
issuer, interviews with its management and consultations with accountants,
bankers and other specialists.
Currency Fluctuations. Because the Fund under normal circumstances will invest a
substantial portion of its total assets in the securities of foreign issuers
which are denominated in foreign currencies, the strength or weakness of the
U.S. dollar against such foreign currencies will account for part of the Fund's
investment performance. A decline in the value of any particular currency
against the U.S. dollar will cause a decline in the U.S. dollar value of the
Fund's holdings of securities denominated in such currency and, therefore, will
cause an overall decline in the Fund's net asset value and any net investment
income and capital gains to be distributed in U.S. dollars to shareholders of
the Fund.
The rate of exchange between the U.S. dollar and other currencies is determined
by several factors, including the supply and demand for particular currencies,
central bank efforts to support particular currencies, the movement of interest
rates, the pace of business activity in certain other countries and the U.S.,
and other economic and financial conditions affecting the world economy.
Although the Fund values its assets daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund will do so from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the
difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Fund at one rate, while offering a lesser rate of exchange should the
Fund desire to sell that currency to the dealer.
Adverse Market Characteristics. Securities of many foreign issuers may be less
liquid and their prices more volatile than securities of comparable U.S.
issuers. In addition, foreign securities exchanges and brokers are generally
subject to less governmental supervision and regulation than in the U.S., and
foreign securities exchange transactions are usually subject to fixed
commissions, which are generally higher than negotiated commissions on U.S.
transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could either result in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible gain
to the purchaser. The Manager will consider such difficulties when determining
the allocation of the Fund's assets, although the Manager does not believe that
such difficulties will have a material adverse effect on the Fund's portfolio
trading activities.
Non-U.S. Taxes. The Fund's net investment income from foreign issuers may be
subject to non-U.S. withholding or other taxes, thereby reducing the Fund's net
investment income.
Risk Factors and Considerations Regarding
Options, Futures and Options on Futures
The Fund's ability to hedge effectively all or a portion of its securities
through transactions in options on stock indexes, stock index futures, financial
futures and related options depends on the degree to which price movements in
the underlying index or underlying debt securities correlate with price
movements in the relevant portion of the Fund's portfolio. Inasmuch as such
securities will not duplicate the components of any index or such underlying
debt 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 which would result in a loss on
both such 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 financial futures and
related options may be closed out only on an exchange which 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 such an option or futures
position. The inability to close options or futures positions also 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 which 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 purchaser 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
which any person may hold or control in a particular futures contract. Trading
limits are imposed on the maximum number of contracts which any person may trade
on a particular trading day. An exchange may order the 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 natures of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Manager may still not
result in a successful transaction.
In addition, futures contracts entail risks. Although the Fund believes that use
of such contracts will benefit the Fund, if the Manager's investment 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 such contract.
For example, if the Fund has hedged against the possibility of an increase in
interest rates which 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 which 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 purchase of put options on futures
contracts will be solely to protect its investments against declines in value.
The Fund expects that in the normal course it will purchase 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 a corresponding purchase of securities.
Forward Foreign Currency Exchange Contracts. While these contracts are not
presently regulated by the CFTC, the CFTC may in the future assert authority to
regulate forward contracts. In such event, the Fund's ability to utilize forward
contracts may be restricted. Forward contracts will reduce the potential gain
from a positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance for the Fund than if it had not entered into such contracts.
The use of foreign currency forward contracts will not eliminate fluctuations in
the underlying U.S. dollar equivalent value of, or rates of return on, the
Fund's foreign currency denominated portfolio securities and the use of such
techniques will subject the Fund to certain risks.
The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedge generally will not be precise. In addition, the Fund
may not always be able to enter into foreign currency forward contracts at
attractive prices and this will limit the Fund's ability to use such contracts
to hedge or cross-hedge its assets. Also, with regard to the Fund's use of
cross-hedges, there can be no assurance that historical correlations between the
movement of certain foreign currencies relative to the U.S. dollar will
continue. Thus, at any time, poor correlation may exist between movements in the
exchange rates of the foreign currencies in which the Fund's assets that are the
subject of such cross-hedges are denominated.
Foreign Currency Futures. By entering into such contracts, the Fund is able to
protect against a loss resulting from an adverse change in the relationship
between the U.S. dollar and a foreign currency occurring between the trade and
settlement dates of the Fund's securities transaction. Such contracts also tend
to limit the potential gains that might result from a positive change in such
currency relationships.
Options on Foreign Currencies. As stated above, the Fund may purchase and write
options on foreign currencies for hedging purposes in a manner similar to that
in which futures contracts on foreign currencies, or forward contracts, will be
utilized. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value of the
currency does decline, the Fund will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole or part, the adverse
effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund deriving from purchases of foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options which would require it to forego a portion or all of the benefits of
advantageous changes in such rates.
The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar value
of foreign currency denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, write a call option
on the relevant currency. If the expected decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. As in the case of other types of options,
however, the writing of a foreign currency option will constitute only a partial
hedge up to the amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the Fund
would be required to purchase or sell the underlying currency at a loss which
may not be offset by the amount of the premium. Through the writing of options
on foreign currencies, the Fund also may be required to forego all or a portion
of the benefits which might otherwise have been obtained from favorable
movements in exchange rates.
The Fund intends to write covered call options on foreign currencies. A call
option written on a foreign currency by the Fund is "covered" if the Fund owns
the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other foreign currency held in
its portfolio. A call option is also covered if the Fund has a call on the same
foreign currency 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 is maintained by the Fund in cash, U.S. government
securities or other high grade liquid debt securities in a segregated account
with its custodian bank.
The Fund also intends to write call options on foreign currencies that are not
covered for cross-hedging purposes. A call option on a foreign currency is for
cross-hedging purposes if it is not covered, but is designed to provide a hedge
against a decline in the U.S. dollar value of a security which the Fund owns or
has the right to acquire and which is denominated in the currency underlying the
option due to an adverse change in the exchange rate. In such circumstances, the
Fund collateralizes the option by maintaining in a segregated account with the
Fund's custodian bank, cash or U.S. government securities or other high grade
liquid debt securities in an amount not less than the value of the underlying
foreign currency in U.S. dollars marked to market daily.
Options on foreign currencies and forward contracts are not traded on contract
markets regulated by the CFTC or (with the exception of certain foreign currency
options) by the SEC. To the contrary, such instruments are traded through
financial institutions acting as market makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. Similarly, options on currencies may be traded over-the-counter.
In an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and a
trader of forward contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation ("OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting the Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
In addition, forward contracts and options on foreign currencies may be traded
on foreign exchanges. Such transactions are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign currencies. The value of
such positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the U.S. of
data on which to make trading decisions, (iii) delays in the Fund's ability to
act upon economic events occurring in foreign markets during nonbusiness hours
in the U.S., (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S., and (v) less trading
volume.
Risk Factors Relating to High
Yielding, Fixed-income Securities
The Fund may invest up to 5% of its assets in lower-rated, fixed-income
securities and unrated securities of comparable quality (known as "junk bonds").
The market values of such securities tend to reflect individual corporate
developments to a greater extent than do higher-rated securities, which react
primarily to fluctuations in the general level of interest rates. Such
lower-rated securities also tend to be more sensitive to economic conditions
than higher-rated securities. These lower-rated, fixed-income securities are
considered by Standard & Poor's Corporation ("S&P") and Moody's Investors
Service ("Moody's"), two nationally recognized statistical rating organizations
("NRSROs"), on balance, to be predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation and will generally involve more credit risk than
securities in the higher-rating categories. Even securities rated BBB by S&P or
Baa by Moody's, ratings which are considered investment grade, possess some
speculative characteristics.
Companies that issue high yielding, fixed-income securities are often highly
leveraged and may not have more traditional methods of financing available to
them. Therefore, the risk associated with acquiring the securities of such
issuers is generally greater than is the case with higher-rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of high yielding securities may experience
financial stress. During these periods, such issuers may not have sufficient
cash flow to meet their interest payment obligations. The issuer's ability to
service its debt obligations may also be adversely affected by specific
corporate developments, or the issuer's inability to meet specific projected
business forecasts, or the unavailability of additional financing. The risk of
loss due to default by the issuer may be significantly greater for the holders
of high yielding securities because such securities are generally unsecured and
are often subordinated to other creditors of the issuer.
High yielding, fixed-income securities frequently have call or buy-back features
which would permit an issuer to call or repurchase the security from the Fund.
Although such securities are typically not callable for a period from three to
five years after their issuance, when calls are exercised by the issuer during
periods of declining interest rates, the Fund would likely have to replace such
called security with a lower yielding security, thus decreasing the net
investment income to the Fund and dividends to shareholders. The premature
disposition of a high yielding security due to a call or buy-back feature, the
deterioration of the issuer's creditworthiness, or a default may also make it
more difficult for the Fund to manage the timing of its receipt of income, which
may have tax implications. Further information is included under "Taxation of
the Fund and Its Shareholders" in the Fund's Prospectus.
The Fund may have difficulty disposing of certain high yielding securities
because there may be a thin trading market for a particular security at any
given time. The market for lower-rated, fixed-income securities generally tends
to be concentrated among a smaller number of dealers than is the case for
securities which trade in a broader secondary retail market. Generally,
purchasers of these securities are predominantly dealers and other institutional
buyers, rather than individuals. To the extent a secondary trading market for a
particular high yielding, fixed-income security does exist, it is generally not
as liquid as the secondary market for higher-rated securities. Reduced liquidity
in the secondary market may have an adverse impact on market price and the
Fund's ability to dispose of particular issues, 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 the 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. Current values for these issues are obtained from pricing
services and/or a limited number of dealers and may be based upon factors other
than actual sales. (See "Valuation of Fund Shares.")
The Fund is authorized to acquire high yielding, fixed-income securities that
are sold without registration under the federal securities laws and therefore
carry restrictions on resale. While many recent high yielding securities have
been sold with registration rights, covenants and penalty provisions for delayed
registration, if the Fund were required to sell such restricted securities
before the securities have been registered, it may be deemed an underwriter of
such securities as defined in the Securities Act of 1933, which entails special
responsibilities and liabilities. The Fund may incur special costs in disposing
of such securities; however, the Fund will generally incur no costs when the
issuer is responsible for registering the securities.
The Fund may acquire such securities during an initial underwriting. Such
securities involve special risks because they are new issues. The Fund has no
arrangement with any person concerning the acquisition of such securities, and
the Manager will carefully review the credit and other characteristics pertinent
to such new issues.
Factors adversely impacting the market value of high yielding securities will
adversely impact the Fund's net asset values. For example, adverse publicity
regarding lower-rated bonds which appeared during 1989 and 1990, along with
highly publicized defaults of some high yield issuers, and concerns regarding a
sluggish economy which continued in 1993, depressed the prices for many such
securities. The Fund may also incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of principal or interest
on its portfolio holdings. The Fund will rely on the Manager's judgment,
analysis and experience in evaluating the creditworthiness of an issuer. In this
evaluation, the Manager will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and trends,
its operating history, the quality of the issuer's management and regulatory
matters.
Rather than relying principally on the ratings assigned by the NRSRO, however,
the Manager will perform its own internal investment analysis of debt securities
being considered for the Fund's portfolio. Such analysis may include, among
other things, consideration of relative values, based on such factors as:
anticipated cash flow; interest coverage; asset coverage; earning prospects; the
experience and managerial strength of the issuer; responsiveness to changes in
interest rates and business conditions; debt maturity schedules and borrowing
requirements; and the issuer's changing financial condition and public
recognition thereof. Investments will be evaluated in the context of economic
and political conditions in the issuer's domicile, such as the inflation rate,
growth prospects, global trade patterns and government policies. In the event
the rating on an issue held in the Fund's portfolio is changed by the ratings
service, such change will be considered by the Fund in its evaluation of the
overall investment merits of that security but will not necessarily result in an
automatic sale of the security. At fiscal year end, April 30, 1995, none of the
securities in the Fund's portfolio were in default on their contractual
provisions.
The Fund may engage in a substantial number of portfolio transactions. Portfolio
turnover is calculated by dividing the lesser of the Fund's annual sales or
purchases of portfolio securities (exclusive of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year.
Officers and Trustees
The Board of Trustees has the responsibility for the overall management of the
Fund, including general supervision and review of its investment activities. The
trustees, in turn, elect the officers of the Trust who are responsible for
administering day-to-day operations of the Fund. The affiliations of the
officers and trustees and their principal occupations for the past five years
are listed below. Trustees who are deemed to be "interested persons" of the
Trust as defined in the 1940 Act, are indicated by an asterisk (*).
Frank H. Abbott, III (74) Trustee
1045 Sansome St.
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 31 of the
investment companies in the Franklin Group of Funds.
Harris J. Ashton (63) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 56 of the investment companies in the Franklin
Templeton Group of Funds.
*Harmon E. Burns (50) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 43 of the investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (63) Trustee
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (80) Trustee
111 New Montgomery St., #402
San Francisco, CA 94105
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, trustee or managing
general partner, as the case may be, of 30 of the investment companies in the
Franklin Group of Funds.
*Charles B. Johnson (62) Chairman of
777 Mariners Island Blvd. the Board
San Mateo, CA 94404 and Trustee
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general partner,
as the case may be, of most other subsidiaries of Franklin Resources, Inc. and
of 57 of the investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (55) President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies
in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (66) Trustee
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or trustee, as the case may
be, of 26 of the investment companies in the Franklin Group of Funds.
Gordon S. Macklin (67) Trustee
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI
Communications Corporation, MedImmune, Inc. (biotechnology), InfoVest
Corporation (information services), and Fusion Systems Corporation (industrial
technology); and director, trustee or managing general partner, as the case may
be, of 53 of the investment companies in the Franklin Templeton Group of Funds;
and formerly held the following positions: Chairman, Hambrecht and Quist Group;
Director, H & Q Healthcare Investors; and President, National Association of
Securities Dealers, Inc.
Kenneth V. Domingues (62) Vice President -
777 Mariners Island Blvd. Financial
San Mateo, CA 94404 Reporting and
Accounting
Standards
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and
Franklin Templeton Distributors, Inc.; officer and/or director, as the case may
be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 37 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan (35) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer of 61 of the investment companies in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek (46) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President - Legal, Franklin Resources, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and officer of 37 of
the investment companies in the Franklin Group of Funds.
Charles E. Johnson (39) Vice President
777 Mariners Island Blvd.
San Mateo CA 94404
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc. and Franklin Institutional Services Corporation;
officer and/or director, as the case may be, of some of the subsidiaries of
Franklin Resources, Inc. and officer and/or director or trustee, as the case may
be, of 24 of the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (56) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting
Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (58) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.
Trustees not affiliated with the investment manager ("nonaffiliated trustees")
may be but are not currently paid fees or expenses incurred in connection with
attending meetings. As indicated above, certain of the Trust's nonaffiliated
trustees also serve as directors, trustees or managing general partners of other
investment companies in the Franklin Group of Funds(R) and the Templeton Group
of Funds (the "Franklin Templeton Group of Funds") from which they may receive
fees for their services. The following table indicates the total fees paid to
nonaffiliated trustees by the funds in the Franklin Group of Funds.
<TABLE>
<CAPTION>
Number of Boards
Total Fees Received in the Franklin
from the Franklin Templeton Group
Templeton Group of Funds on Which
Name of Funds* Each Serves**
<S> <C> <C>
Frank H. Abbott, III ....................... $176,870 31
Harris J. Ashton ........................... 319,925 56
S. Joseph Fortunato ........................ 336,065 58
David Garbellano ........................... 153,300 30
Frank W.T. LaHaye .......................... 150,817 26
Gordon S. Macklin .......................... 303,685 53
</TABLE>
*For the calendar year ended December 31, 1994.
**The number of boards is based on the number of registered investment companies
in the Franklin Templeton Group of Funds and does not include the total number
of series or funds within each investment company for which the trustees are
responsible. The Franklin Templeton Group of Funds currently includes 61
registered investment companies, consisting of more than 162 U.S. based mutual
funds or series.
No officer or trustee received any compensation directly from the Fund. Certain
officers or trustees who are shareholders of Franklin Resources, Inc. may be
deemed to receive indirect remuneration by virtue of their participation, if
any, in the fees paid to its subsidiaries.
As of June 5, 1995, the trustees and officers, as a group, owned no shares of
either class of the Fund. Many of the Trust's trustees also own shares in
various of the other funds in the Franklin Templeton Group of Funds. Charles E.
Johnson is the son and nephew, respectively, of Charles B. Johnson and Rupert H.
Johnson, Jr., who are brothers.
Investment Advisory and Other Services
Advisers is a wholly-owned subsidiary of Franklin Resources, Inc. ("Resources"),
a publicly owned holding company whose shares are listed on the New York Stock
Exchange (the "Exchange"). Resources owns several other subsidiaries which are
involved in investment management and shareholder services. The Manager and
other subsidiary companies of Resources currently manage over $125 billion in
assets for over 3.8 million shareholders.
Pursuant to the management agreement, the Manager provides investment research
and portfolio management services, including the selection of securities for the
Fund to purchase, 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 Trust's Board of Trustees to whom the
Manager renders periodic reports of the Fund's investment activities. Under the
terms of the Management Agreement, the Manager provides office space and office
furnishings, facilities and equipment required for managing the business affairs
of the Fund; maintains all internal bookkeeping, clerical, secretarial and
administrative personnel and services; and provides certain telephone and other
mechanical services. The Manager is covered by fidelity insurance on its
officers, directors and employees for the protection of the Fund. See the
Statements of Operations in the financial statements included in the Trust's
Annual Report to Shareholders dated April 30, 1995.
Pursuant to the management agreement, the Fund is obligated to pay the Manager a
fee computed and accrued daily and paid monthly at the annual rate of 0.625 of
1% of the value of average daily net assets up to and including $100 million;
0.50 of 1% of the value of average daily net assets over $100 million up to and
including $250 million; 0.45 of 1% of the value of average daily net assets over
$250 million up to and including $10 billion; 0.44 of 1% of the value of average
daily net assets over $10 billion up to and including $12.5 billion; 0.42 of 1%
of the value of average daily net assets over $12.5 billion up to and including
$15 billion; and 0.40 of 1% of the value of average daily net assets over $15
billion.
The Manager agreed in advance to waive all or a portion of its management fees
and make certain payments to reduce expenses. This arrangement was terminated
during fiscal year ended April 30, 1994. The management agreement specifies that
the management fee will be reduced to the extent necessary to comply with the
most stringent limits on the expenses which may be borne by the Fund as
prescribed by any state in which the Fund's shares are offered for sale. The
most stringent current limit requires the Manager to reduce or eliminate its fee
to the extent that aggregate operating expenses of the Fund (excluding interest,
taxes, brokerage commissions and extraordinary expenses such as litigation
costs) would otherwise exceed in any fiscal year 2.5% of the first $30 million
of average net assets of the Fund, 2% of the next $70 million of average net
assets of the Fund and 1.5% of average net assets of the Fund in excess of $100
million. Expense reductions have not been necessary based on state requirements.
For the fiscal years ended April 30, 1993 and 1994, the management fees, before
any advance waiver, were $33,316 and $394,550, respectively. The Fund paid no
management fees for the fiscal year ended April 30, 1993 and paid $191,367,
respectively, for the fiscal year ended April 30, 1994. For fiscal year ended
April 30, 1995, the Fund paid fees totaling $737,090.
The management agreement is in effect until April 30, 1996. Thereafter, it may
continue in effect for successive annual periods providing such continuance is
specifically approved at least annually by a vote of the Trust's Board of
Trustees 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 Fund's trustees
who are not parties to the management agreement or interested persons of any
such party (other than as trustees of the Trust), cast in person at a meeting
called for that purpose. The management agreement may be terminated without
penalty at any time by the Fund or by the Manager on 30 days' written notice and
will automatically terminate in the event of its assignment, as defined in the
1940 Act.
Franklin/Templeton Investor Services, Inc. ("Investor Services" or "Shareholder
Services Agent"), a wholly-owned subsidiary of Resources, is the shareholder
servicing agent for the Fund 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.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian of the securities and other assets of the
Fund. Citibank Delaware, One Penn's Way, New Castle, Delaware 19720, acts as
custodian in connection with transfer services through bank automated clearing
houses. The custodians do not participate in decisions relating to the purchase
and sale of portfolio securities.
Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California 94105,
are the Fund's independent auditors. During the fiscal year ended April 30,
1995, their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report to Shareholders
dated April 30, 1995.
The Fund's Policies Regarding
Brokers Used on Portfolio Transactions
Under the current management agreement with Advisers, the selection of brokers
and dealers to execute transactions in the Fund's portfolio is made by the
Manager in accordance with criteria set forth in the management agreement and
any directions which the Trust's Board of Trustees may give.
When placing a portfolio transaction, the Manager attempts to obtain the best
net price and execution of the transaction. On portfolio transactions which are
done on a securities exchange, the amount of commission paid by the Fund is
negotiated between the Manager and the broker executing the transaction. The
Manager seeks to obtain the lowest commission rate available from brokers which
are felt to be capable of efficient execution of the transactions. The
determination and evaluation of the reasonableness of the brokerage commissions
paid in connection with portfolio transactions are based to a large degree on
the professional opinions of the persons responsible for the placement and
review of such transactions. These opinions are formed on the basis of, among
other things, the experience of these individuals in the securities industry and
information available to them concerning the level of commissions being paid by
other institutional investors of comparable size. The Manager will ordinarily
place orders for the purchase and sale of 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 Fund seeks to obtain
prompt execution of orders at the most favorable net price.
The amount of commission is not the only relevant factor to be considered in the
selection of a broker to execute a trade. If it is felt to be in the Fund's best
interests, the Manager may place portfolio transactions with brokers who provide
the types of services described below, even if it means the Fund will have to
pay a higher commission than would be the case if no weight were given to the
broker's furnishing of these services. This will be done only if, in the opinion
of the Manager, the amount of any additional commission is reasonable in
relation to the value of the services. Higher commissions will be paid only when
the brokerage and research services received are bona fide and produce a direct
benefit to the Fund or assist the Manager in carrying out its responsibilities
to the Fund, or when it is otherwise in the best interest of the Fund to do so,
whether or not such data may also be useful to the Manager in advising other
clients.
When it is felt that several brokers are equally able to provide the best net
price and execution, the Manager may decide to execute transactions through
brokers who provide quotations and other services to the Fund, specifically
including the quotations necessary to determine the value of the Fund's net
assets, in such amount of total brokerage as may reasonably be required in light
of such services, and through brokers who supply research, statistical and other
data to the Fund and Manager in such amount of total brokerage as may reasonably
be required.
It is not possible to place a dollar value on the special executions or on the
research services received by Advisers from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staff 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. Provided that
the Fund's officers are satisfied that the best execution is obtained, the sale
of Fund shares may also be considered as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the National Association of Securities
Dealers, it is sometimes entitled to obtain 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 Advisers under
the management agreement will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection
therewith.
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 such 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. It is recognized that in some cases this
procedure could possibly 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 and to negotiate lower brokerage
commissions will be beneficial to the Fund.
During the fiscal years ended April 30, 1993, 1994 and 1995, the Fund paid total
brokerage commissions of $0, $156,666, and $74,757, respectively. As of April
30, 1995, the Fund did not own securities of its regular broker-dealers.
Additional Information
Regarding Fund Shares
All checks, drafts, wires and other payment mediums used for purchasing or
redeeming shares of the Fund must be denominated in U.S. dollars. The Fund
reserves the right, in its sole discretion, to either (a) reject any order for
the purchase or sale of shares denominated in any other currency, or (b) honor
the transaction or make adjustments to a shareholder's account for the
transaction as of a date and with a foreign currency exchange factor determined
by the drawee bank.
In connection with exchanges (see the Prospectus "Exchange Privilege"), it
should be noted that since the proceeds from the sale of shares of an investment
company generally are not available until the fifth business day following the
redemption, the fund into which the Fund's shareholders are seeking to exchange
reserves the right to delay issuing shares pursuant to an exchange until said
fifth business day. The redemption of shares of the Fund to complete an exchange
will be effected at the close of business on the day the request for exchange is
received in proper form at the net asset value then effective.
Dividend checks which are returned to the Fund marked "unable to forward" by the
postal service will be deemed to be a request by the shareholder to change the
dividend option and the proceeds will be reinvested in additional shares at net
asset value until new instructions are received.
The Fund may impose a $10 charge for each returned item, against any shareholder
account which, in connection with the purchase of Fund shares, submits a check
or a draft which is returned unpaid to the Fund.
The Fund may deduct from a shareholder's account the costs of its efforts to
locate a shareholder if mail is returned as undeliverable or the Fund is
otherwise unable to locate the shareholder or verify the current mailing
address. These costs may include a percentage of the account when a search
company charges a percentage fee in exchange for its location services.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to such banks' discretionary trust funds at net asset
value. The banks may charge service fees to their customers who participate in
the discretionary trusts. Pursuant to agreements, a portion of such service fees
may be paid to Distributors, or an affiliate of Distributors, 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 firms known locally as Securities Investment Consulting Enterprises.
In conformity with local business practices in Taiwan, Class I shares of the
Fund will be offered with the following schedule of sales charges:
Sales
Size of Purchase - in U.S. dollars Charge
Up to $100,000 ...................................... 3%
$100,000 to $1,000,000 .............................. 2%
Over $1,000,000 ..................................... 1%
Purchases and Redemptions
Through Securities Dealers
Orders for the purchase of shares of the Fund received in proper form prior to
the scheduled close of the Exchange (generally 1:00 p.m. Pacific time) any
business day that the Exchange is open for trading and promptly transmitted to
the Fund will be based upon the public offering price determined that day.
Purchase orders received by securities dealers or other financial institutions
after the scheduled close of the Exchange will be effected at the Fund's public
offering price on the day it is next calculated. The use of the term "securities
dealer" herein shall include other financial institutions which, pursuant to an
agreement with Distributors (directly or through affiliates), handle customer
orders and accounts with the Fund. Such reference, however, is for convenience
only and does not indicate a legal conclusion of capacity.
Orders for the redemption of shares are effected at net asset value subject to
the same conditions concerning time of receipt in proper form. It is the
securities dealer's responsibility to transmit the order in a timely fashion and
any loss to the customer resulting from failure to do so must be settled between
the customer and the securities dealer.
Special Net Asset Value Purchases -
Class I Shares
As discussed in the Prospectus under "How to Buy Shares of the Fund -
Description of Special Net Asset Value Purchases," certain categories of
investors may purchase Class I shares of the Fund without a front-end sales
charge ("net asset value") or a contingent deferred sales charge. Distributors
or one of its affiliates may make payments, out of its own resources, to
securities dealers who initiate and are responsible for such purchases, as
indicated below. 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 securities dealer, in the event of investor
redemptions made within 12 months of the calendar month following purchase.
Other conditions may apply. All terms and conditions may be imposed by an
agreement between Distributors, or its affiliates, and the securities dealer.
The following amounts may be paid by Distributors or one of its affiliates, out
of its own resources, to securities dealers who initiate and are responsible for
(i) purchases of most equity and taxable-income Franklin Templeton Funds made at
net asset value by certain designated retirement plans (excluding IRA and IRA
rollovers): 1.00% on sales of $1 million but less than $2 million, plus 0.80% on
sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million
but less than $50 million, plus 0.25% on sales of $50 million but less than $100
million, plus 0.15% on sales of $100 million or more; and (ii) purchases of most
taxable income Franklin Templeton Funds made at net asset value by
non-designated retirement plans: 0.75% on sales of $1 million but less than $2
million, plus 0.60% on sales of $2 million but less than $3 million, plus 0.50%
on sales of $3 million but less than $50 million, plus 0.25% on sales of $50
million but less than $100 million, plus 0.15% on sales of $100 million or more.
These payment breakpoints are reset every 12 months for purposes of additional
purchases. With respect to purchases made at net asset value by certain trust
companies and trust departments of banks and certain retirement plans of
organizations with collective retirement plan assets of $10 million or more,
Distributors, or one of its affiliates, out of its own resources, may pay up to
1% of the amount invested.
Letter of Intent
An investor may qualify for a reduced sales charge on the purchase of Class I
shares of the Fund, as described in the Prospectus. At any time within 90 days
after the first investment which the investor wants to qualify for the reduced
sales charge, a signed Shareholder Application, with the Letter of Intent
section completed, may be filed with the Fund. After the Letter of Intent 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 upon purchases in more than one of the Franklin Templeton
Funds, including Class II shares, will be effective only after notification to
Distributors that the investment qualifies for a discount. The shareholder's
holdings in the Franklin Templeton Funds acquired more than 90 days before the
Letter of Intent is filed will be counted towards completion of the Letter of
Intent but will not be entitled to a retroactive downward adjustment in the
sales charge. Any redemptions made by the shareholder, other than by a
designated benefit plan, during the 13-month period will be subtracted from the
amount of the purchases for purposes of determining whether the terms of the
Letter of Intent have been completed. If the Letter of Intent is not completed
within the 13-month period, there will be an upward adjustment of the sales
charge, depending upon the amount actually purchased (less redemptions) during
the period. The upward adjustment does not apply to designated benefit plans. An
investor who executes a Letter of Intent prior to a change in the sales charge
structure for the Fund will be entitled to complete the Letter of Intent at the
lower of (i) the new sales charge structure; or (ii) the sales charge structure
in effect at the time the Letter of Intent was filed with the Fund.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in the
investor's name, unless the investor is a designated benefit plan. If the total
purchases, less redemptions, equal the amount specified under the Letter, the
reserved shares will be deposited to an account in the name of the investor or
delivered to the investor or the investor's order. If the total purchases, less
redemptions, exceed the amount specified under the Letter of Intent and is an
amount which 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 of Intent (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 total
purchases, less redemptions, are less than the amount specified under the
Letter, the investor 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 which would have applied to the aggregate purchases if the total of
such purchases had been made at a single time. The shareholder will receive a
written notification from Distributors requesting the remittance. Upon such
remittance the reserved shares held for the investor's account will be deposited
to an account in the name of the investor or delivered to the investor or to the
investor's order. If within 20 days after written request such difference in
sales charge is not paid, the redemption of an appropriate number of reserved
shares to realize such difference will be made. In the event of a total
redemption of the account prior to fulfillment of the Letter of Intent, the
additional sales charge due will be deducted from the proceeds of the
redemption, and the balance will be forwarded to the investor.
If a Letter of Intent is executed on behalf of a benefit plan (such plans are
described under "Purchases at Net Asset Value" in the Prospectus), the level and
any reduction in sales charge for these designated benefit plans will be based
on actual plan participation and the projected investments in the Franklin
Templeton Funds under the Letter of Intent. Benefit 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 benefit plans entitled to
receive retroactive adjustments in price for investments made before executing
the Letter of Intent.
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 such period. Such commitment is irrevocable without
the prior approval of the SEC. In the case of requests for redemption in excess
of such amounts, the trustees reserve the right to make payments in whole or in
part in securities or other assets of the Fund from which the shareholder is
redeeming, 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 such
circumstances, the securities distributed would be valued at the price used to
compute the Fund's net assets. Should the Fund do so, a shareholder may incur
brokerage fees in converting the securities to cash. The Fund does not intend to
redeem illiquid securities in kind; however, should it happen, shareholders may
not be able to timely recover their investment and may also incur brokerage
costs in selling such securities.
Redemptions by the Fund
Due to the relatively high cost of handling small investments, the Fund reserves
the right to redeem, involuntarily, at net asset value, the shares of any
shareholder whose account has a value of less than one-half of the initial
minimum investment required for that shareholder, but only where the value of
such account has been reduced by the shareholder's prior voluntary redemption of
shares. Until further notice, it is the present policy of the Fund not to
exercise this right with respect to any shareholder whose account has a value of
$50 or more. In any event, before the Fund redeems such shares and sends the
proceeds to the shareholder, it will notify the shareholder that the value of
the shares in the account is less than the minimum amount and allow the
shareholder 30 days to make an additional investment in an amount which will
increase the value of the account to at least $100.
Calculation of Net Asset Value
As noted in the Prospectus, the Fund generally calculates net asset value as of
the scheduled close of the Exchange (generally 1:00 p.m. Pacific time) each day
that the Exchange is open for trading. As of the date of this SAI, the Fund is
informed that the Exchange observes the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The Fund's portfolio securities are valued as stated in the Prospectus.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times prior to
the close of the Exchange. The values of such securities used in computing the
net asset value of the Fund's shares are determined as of such times.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the scheduled close of the Exchange
which will not be reflected in the computation of the Fund's net asset value. If
events materially affecting the value of such securities occur during such
period, then these securities will be valued at their fair value as determined
following procedures approved by the Board of Trustees.
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. The processing date for the reinvestment of dividends may vary from month
to month, and does not affect the amount or value of the shares acquired.
Reports to Shareholders
The Fund sends annual and semi-annual reports to its shareholders regarding the
Fund's performance and its portfolio holdings. Shareholders who would like to
receive an interim quarterly report may phone Fund Information at 1-800/DIAL
BEN.
Special Services
The Franklin Templeton Institutional Services Department of Distributors
provides specialized services, including recordkeeping, for institutional
investors of the Fund. The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions which maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such beneficial owners. For each beneficial
owner in the omnibus account, the Fund may reimburse Investor Services an amount
not to exceed the per account fee which the Fund normally pays Investor
Services. Such financial institutions may also charge a fee for their services
directly to their clients.
Additional Information Regarding Taxation
As stated in the Prospectus, the Fund intends to continue to qualify as a
regulated investment company under Subchapter M of the Code. The trustees
reserve the right not to maintain the qualification of the Fund as a regulated
investment company if they determine such course of action to be beneficial to
the shareholders. In such case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, and distributions to
shareholders will be ordinary dividend income to the extent of the Fund's
available earnings and profits.
Subject to the limitations discussed below, all or a portion of the income
distributions paid by the Fund may be treated by corporate shareholders as
qualifying dividends for purposes of the dividends-received deduction under
federal income tax law. If the aggregate qualifying dividends received by the
Fund (generally, dividends from U.S. domestic corporations, the stock in which
is not debt-financed by the Fund and is held for at least a minimum holding
period) is less than 100% of its distributable income, then the amount of the
Fund's dividends paid to corporate shareholders which may be designated as
eligible for such deduction will not exceed the aggregate qualifying dividends
received by the Fund for the taxable year. The amount or percentage of income
qualifying for the corporate dividends-received deduction will be declared by
the Fund annually in a notice to shareholders mailed shortly after the end of
the Fund's fiscal year.
Corporate shareholders should note that dividends paid by a Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and net
short-term capital gain (in excess of any net long-term capital loss or capital
loss carryover) included in investment company taxable income and distributed by
a Fund as a dividend will not qualify for the dividends-received deduction.
Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless the Fund shares have been held (or deemed
held) for at least 46 days in a substantially unhedged manner. The
dividends-received deduction may also be reduced to the extent interest paid or
accrued by a corporate shareholder is directly attributable to its investment in
Fund shares. The entire dividend, including the portion which is treated as a
deduction, is includable in the tax base on which the alternative minimum tax is
computed and may also result in a reduction in the shareholder's tax basis in
its Fund shares, under certain circumstances, if the shares have been held for
less than two years. Corporate shareholders whose investment in the Fund is
"debt financed" for these tax purposes should consult with their tax advisors
concerning the availability of the dividends-received deduction.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed, nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to the shareholder until the following January, will be
treated for tax purposes as if paid by the Fund and received by the shareholder
on December 31 of the calendar year in which they are declared. The Fund intends
as a matter of policy to declare and pay such dividends, if any, in December to
avoid the imposition of this tax, but does not guarantee that its distributions
will be sufficient to avoid any or all federal excise taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between the shareholder's basis
in the shares and the amount realized from the transaction, subject to the rules
described below. If such shares are a capital asset in the hands of the
shareholder, gain or loss will be capital gain or loss and will be long-term for
federal income tax purposes if the shares have been held for more than one year.
All or a portion of the sales charge incurred in purchasing shares of the Fund
will not be included in the federal tax basis of such shares sold or exchanged
within 90 days of their purchase (for purposes of determining gain or loss with
respect to such shares) if the sales proceeds are reinvested in the Fund or in
another fund in the FranklinTempleton Funds (defined under "How to Buy Shares of
the Fund" in the Prospectus) and a sales charge which would otherwise apply to
the reinvestment is reduced or eliminated. Any portion of such sales charge
excluded from the tax basis of the shares sold will be added to the tax basis of
the shares acquired in the reinvestment.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.
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. For
example, OTC 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. By contrast, the Fund's treatment of certain other
options, futures and forward contracts entered into by the Fund is 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 all gain
or loss associated with fiscal year transactions and mark-to-market positions at
fiscal year end (except certain foreign 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. 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 time of income distributed to shareholders 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, resulting in possible deferral of losses,
adjustments in the holding periods of Fund securities and conversion of
short-term capital losses into long-term capital losses. Certain tax elections
exist 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.
As a regulated investment company, the Fund is also subject to the requirement
that less than 30% of its annual gross income be derived from the sale or other
disposition of securities and certain other investments held for less than three
months, ("short-short income"). This requirement may limit the Fund's ability to
engage in options, straddles, hedging transactions and forward or futures
contracts because these transactions are often consummated in less than three
months, may require the sale of portfolio securities held less than three months
and may, as in the case of short sales of portfolio securities, reduce the
holding periods of certain securities within the Fund, resulting in additional
short-short income for the Fund.
The Fund will monitor its transactions in such options and futures contracts and
may make certain other tax elections in order to mitigate the effect of the
above rules and to prevent disqualification of the Fund as a regulated
investment company under Subchapter M of the Code.
In order for the Fund to qualify as a regulated investment company, at least 90%
of the Fund's annual gross income must consist of dividends, interest and
certain other types of qualifying income, and no more than 30% of its annual
gross income may be derived from the sale or other disposition of securities or
certain other instruments held for less than three months. Foreign exchange
gains are presently treated as qualifying income for purposes of this 90%
limitation. Foreign exchange gains derived by the Fund with respect to the
Fund's business of investing in stock or securities or options or futures with
respect to such stock or securities is qualifying income for purposes of this
90% limitation.
Currency speculation or the use of currency forward contracts or other currency
instruments for non-hedging purposes may generate gains deemed to be not derived
with respect to the Fund's principal business of investing in stock or
securities and related options or futures. Under current law,
non-directly-related gains arising from foreign currency positions or
instruments held for less than three months are treated as derived from the
disposition of securities held less than three months in determining the Fund's
compliance with the 30% limitation. The Fund will limit its activities involving
foreign exchange gains to the extent necessary to comply with these
requirements.
If the Fund owns shares in a foreign corporation that constitutes a "passive
foreign investment company" (a "PFIC") for federal income tax purposes and the
Fund does not elect to treat the foreign corporation as a "qualified electing
fund" within the meaning of the Code, the Fund may be subject to U.S. federal
income taxation on a portion of any "excess distribution" it receives from the
PFIC or any gain it derives from the disposition of such shares, even if such
income is distributed as a taxable dividend by the Fund to its U.S.
shareholders. The Fund may also be subject to additional interest charges in
respect of deferred taxes arising from such distributions or gains. Any federal
income tax paid by the Fund as a result of its ownership of shares of a PFIC
will not give rise to a deduction or credit to the Fund or to any shareholder. A
PFIC means any foreign corporation if, for the taxable year involved, either (i)
it derives at least 75 percent of its income from "passive income" (including,
but not limited to, interest, dividends, royalties, rents and annuities), or
(ii) on average, at least 50 percent of the value (or adjusted basis, if
elected) of the assets held by the corporation produce "passive income."
On April 1, 1992, proposed U.S. Treasury regulations were issued regarding a
special mark to market election for regulated investment companies. Under these
regulations, the annual mark-to-market gain, if any, on shares held by a Fund in
a PFIC would be treated as an excess distribution received by the Fund in the
current year, eliminating the deferral and the related interest charge. Such
excess distribution amounts are treated as ordinary income, which the Fund will
be required to distribute to shareholders even though the Fund has nor received
any cash to satisfy this distribution requirement. These regulations would be
effective for taxable years ending after the promulgation of the proposed
regulations as final regulations.
The Fund's Underwriter
Pursuant to an underwriting agreement in effect until April 30, 1996,
Distributors acts as principal underwriter in a continuous public offering for
both classes of the Fund's shares. The underwriting agreement will continue in
effect for successive annual periods provided that its continuance is
specifically approved at least annually by a vote of the Trust's Board of
Trustees, 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 Trust's
trustees who are not parties to the underwriting agreement or interested persons
of any such party (other than as trustees of the Trust), 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 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 Class I shares, aggregate underwriting
commissions for the fiscal years ended April 30, 1993, 1994 and 1995 were
$419,248, $2,538,088, and $664,553, respectively. After allowances to dealers,
Distributors retained $18,194, $304,423, and $76,600, respectively. Distributors
may be entitled to reimbursement under the distribution plan relating to Class I
shares as discussed in "Plans of Distribution" below. Distributors received no
other compensation from the Fund for acting as underwriter.
Plans of Distribution
Each class of the Fund has adopted a Distribution Plan ("Class I Plan" and
"Class II Plan," respectively or "Plans"), pursuant to Rule 12b-1 under the 1940
Act.
The Class I Plan
Pursuant to the Class I Plan, Distributors or others will be entitled to be
reimbursed each quarter up to a maximum of .25% for actual expenses incurred in
the distribution and promotion of Class I shares, including, but not limited to,
the printing of prospectuses and reports used for sales purposes, expenses of
preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to the distribution of
Class I shares, as well as any distribution or service fees paid to securities
dealers or their firms or others who have executed a servicing agreement with
the Fund, Distributors or its affiliates.
The Class II Plan
Under the Class II Plan, the Fund pays to Distributors for distribution expenses
up to .75% per annum of Class II's average daily net assets, payable quarterly.
Such fees may be used in order to compensate Distributors or others for
providing distribution and related services and bearing certain expenses of the
Class. All expenses of distribution and marketing over that amount will be borne
by Distributors, or others who have incurred them, without reimbursement by the
Fund. In addition to this amount, under the Class II Plan, the Fund shall pay
0.25% per annum, payable quarterly, of the Class' average daily net assets as a
servicing fee. This fee will be used to pay dealers or others for, among other
things, assisting in establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; receiving and answering
correspondence; monitoring dividend payments from the Fund on behalf of
customers, and similar activities related to furnishing personal services and
maintaining shareholder accounts. Distributors may pay the securities dealer,
from its own resources, a commission of up to 1% of the amount invested at the
time of investment.
In General
In addition to the payments to which Distributors or others are entitled under
the Plans, the Plans also provide 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 payments for the financing of
any activity primarily intended to result in the sale of each class of shares of
the Fund within the context of Rule 12b-1 under the 1940 Act, then such payments
shall be deemed to have been made pursuant to the Plans.
In no event shall the aggregate asset-based sales charges which include payments
made under a Plan, plus any other payments deemed to be made pursuant to a Plan,
exceed the amount permitted to be paid pursuant to the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., Article III, Section
26(d)4. The terms and provisions of the Plan relating to required reports, term,
and approval are consistent with Rule 12b-1. The Plans do not permit
unreimbursed expenses incurred in a particular year to be carried over or
reimbursed in subsequent years.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks may not be
entitled to participate in the Plan to the extent that applicable federal law
prohibits certain banks from engaging in the distribution of mutual fund shares.
Such banking institutions, however, are permitted to receive fees under the
Plans for administrative servicing or for agency transactions. If a bank were
prohibited from providing such services, its customers who are shareholders
would be permitted to remain shareholders of the Fund, and alternate means for
continuing the servicing of such shareholders would be sought. In such an event,
changes in the services provided might occur and such shareholders might no
longer be able to avail themselves of any automatic investment or other services
then being provided by the bank. It is not expected that shareholders would
suffer any adverse financial consequences as a result of any of these changes.
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law expressed herein, and banks and
financial institutions selling shares of the Fund may be required to register as
dealers pursuant to state law.
The Plans have been approved in accordance with the provisions of Rule 12b-1.
Both Plans are effective through April 30, 1996, and renewable annually by a
vote of the Trust's Board of Trustees, including a majority vote of the trustees
who are non-interested persons of the Trust 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 trustees be done by the non-interested trustees. The Class I Plan and
any related agreement may be terminated at any time, without any penalty, by
vote of a majority of the non-interested trustees 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 the underwriting agreement with Distributors, or by vote of a majority of
Class I's outstanding shares. The Class II Plan and any related agreement may be
terminated at any time, without any penalty, by vote of a majority of the
non-interested trustees 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 Class II's outstanding shares. Distributors or any dealer
or other firm may also terminate their respective distribution or service
agreement at any time upon written notice.
With respect to a Plan, the Plan and any related agreements may not be amended
to increase materially the amount to be spent for distribution expenses without
approval by a majority of the Fund's outstanding shares, and all material
amendments to the Plan or any related agreements shall be approved by a vote of
the non-interested trustees, 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 of Trustees 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 of Trustees with such other
information as may reasonably be requested in order to enable the Board of
Trustees to make an informed determination of whether the Plans should be
continued.
For the fiscal year ended April 30, 1995, the total amount paid by the Fund
pursuant to the Class I Plan was $283,696, all of which was paid to dealers.
General Information
Performance
As noted in the Prospectus, the Fund may from time to time quote various
performance figures to illustrate the Fund's past performance. It may
occasionally cite statistics to reflect its volatility or risk.
Performance quotations by investment companies are subject to rules recently
adopted by the SEC. 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. Current yield and average annual
compounded total return quotations used by the Fund are based on the new
standardized methods of computing performance mandated by the SEC. An
explanation of those and other methods used by the Fund to compute or express
performance follows.
Total Return
The average annual total return is determined by finding the average annual
compounded rates of return over one-, five-, and ten-year periods (or fractional
portion thereof) 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 order and income dividends
and capital gains are reinvested at net asset value. The quotation assumes the
account was completely redeemed at the end of each one-, five- and ten-year
period and the deduction of all applicable charges and fees. If a change is made
on the sales charge structure, historical performance information will be
restated to reflect the maximum front-end sales charge in effect currently.
In considering the quotations of total return by the Fund, investors should
remember that the maximum front-end sales charge reflected in each quotation is
a one-time fee (charged on all direct purchases) which will have its greatest
impact during the early stages of an investor's investment in the Fund. The
actual performance of an investment will be affected less by this charge the
longer an investor retains the investment in the Fund. The average annual
compounded rates of return for the Fund for the one-year period ended April 30,
1995, was -1.45% and for the period from inception (July 2, 1992) to April 30,
1995, was 9.49%.
These figures were calculated according to the Securities and Exchange
Commission 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 the one-, five-, or ten-year periods at the end of the one-, five-,
or ten-year periods (or fractional portion thereof)
As discussed in the Prospectus, the Fund may quote total rates of return in
addition to its average annual total return. Such quotations are computed in the
same manner as the Fund's average annual compounded rate, except that such
quotations will be based on the Fund's actual return for a specified period
rather than on its average return over one-, five- and ten-year periods, or
fractional portion thereof. The total rates of return for the Fund for a
one-year period ended April 30, 1995, was -1.45%, and for the period from
inception (July 2, 1992) to April 30, 1995, was 29.24%.
Yield
Current yield reflects the income per share earned by the Fund's portfolio
investments.
Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share on
the last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders during the base period. The
yield for the Fund for the 30-day period ended on the date of the financial
statements incorporated herein by reference to the Trust's Annual Report to
Shareholders dated April 30, 1995 was 3.12%.
This figure was obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1 )6 - 1]
---
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reductions)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
Current Distribution Rate
Yield which is calculated according to a formula prescribed by the SEC is not
indicative of the amounts which were or will be paid to the Fund's shareholders.
Amounts paid to shareholders are reflected in the quoted "current distribution
rate." The current distribution rate is computed by dividing the total amount of
dividends per share paid by the Fund during the past 12 months by a current
maximum offering price. Under certain circumstances, such as when there has been
a change in the amount of dividend payout, or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid over the
period such policies were in effect, rather than using the dividends during the
past 12 months. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing
and short-term capital gains, and is calculated over a different period of time.
Volatility
Occasionally statistics may be used to specify Fund volatility or risk. Measures
of volatility or risk are generally used to compare Fund net asset value or
performance relative 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 the S
& P's 500 Stock Index. 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 premise is that greater
volatility connotes greater risk undertaken in achieving performance.
Other Performance Quotations
With respect to those categories of investors who are permitted to purchase
shares of the Fund at net asset value, sales literature pertaining to the Fund
may quote a current distribution rate, yield, 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.
Regardless of the method used, past performance is not necessarily indicative of
future results, but is an indication of the return to shareholders only for the
limited historical period used.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Templeton Group of Funds. Resources is the parent company of the advisers and
underwriters of both the Franklin Group of Funds(R) and Templeton Group of
Funds.
Comparisons
To help investors better evaluate how an investment in the Fund might satisfy
their investment objective, advertisements and other materials regarding the
Fund may discuss various 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.
Such comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) S&P's 500 Stock Index or its component indices - an unmanaged index composed
of 400 industrial stocks, 40 financial stocks, 40 utilities stocks, and 20
transportation stocks. Comparisons of performance assume reinvestment of
dividends.
c) The Exchange composite or component indices - unmanaged indices of all
industrial, utilities, transportation, and finance stocks listed on the
Exchange.
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 - Fixed Income Fund
Performance Analysis - measure of total return and average current yield for the
mutual fund industry. 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 equity funds.
h) Valueline Index - an unmanaged index which follows the stocks of
approximately 1,700 companies.
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) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Pierce, Fenner & Smith, Lehman Brothers and Bloomberg L.P.
k) 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.
l) Morgan Stanley Capital International World Indices, including, among others,
the Morgan Stanley Capital International Europe, Australia, Far East Index
("EAFE Index"). The EAFE index is an unmanaged index of more than 1,000
companies of Europe, Australia and the Far East.
m) Financial Times Actuaries Indices - including the FTA-World Index (and
components thereof), which are based on stocks in major world equity markets.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived by an investment in
the Fund. Such advertisements or information may include symbols, headlines, or
other material which highlight or summarize the information discussed in more
detail in the communication.
Advertisements or information may also compare the Fund's performance to the
return on certificates of deposit or other investments. Investors 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
certificate of deposit issued by a bank. For example, as the general level of
interest rates rise, the value of the Fund's fixed-income investments, as well
as the value of its shares which 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.
Certificates of deposit 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 such comparisons of performance, an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the Fund's portfolio, that the indices and averages are
generally unmanaged, and that the items included in the calculations of such
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 this
performance as compared to such other averages.
Other Features and Benefits
The Fund may help investors achieve various investment goals such as
accumulating money for retirement, saving for a down payment on a home, college
cost and/or other long-term goals. The Franklin College Costs Planner may assist
an investor 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 Templeton Retirement
Planning Guide leads an investor through the steps to start a retirement savings
program. Of course, an investment in the Fund cannot guarantee that such goals
will be met.
Miscellaneous Information
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the United States 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 47 years and
now services more than 2.5 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 Worldwide, Inc., a pioneer
in international investing. Together, the Franklin/Templeton Group has over $128
billion in assets under management for more than 3.8 million shareholder
accounts in addition to foundations and endowments, employee benefit plans, and
individuals and offers 162 U.S.-based mutual funds.
The Fund may identify itself by its NASDAQ or CUSIP number.
The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin number one in
service quality for five of the past seven years.
Franklin has been managing utility securities since 1948. As a pioneer in
running the oldest mutual fund exclusively devoted to utilities, this expertise
is applied to the management of the Fund.
Access persons of the Franklin Templeton Group, as defined in SEC Rule 17(j)
under the 1940 Act, who are employees of Resources or its subsidiaries, are
permitted to engage in personal securities transactions subject to the following
general restrictions and procedures: (1) The trade must receive advance
clearance from a Compliance Officer and must be completed within 24 hours after
this clearance; (2) Copies of all brokerage confirmations must be sent to the
Compliance Officer and within 10 days after the end of each calendar quarter, a
report of all securities transactions must be provided to the Compliance
Officer; (3) In addition to items (1) and (2), access persons involved in
preparing and making investment decisions must file annual reports of their
securities holdings each January and also 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.
Ownership and Authority Disputes
In the event of disputes involving multiple claims of ownership or authority to
control a shareholder's 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, prior
to 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 Internal Revenue Service in response
to a Notice of Levy.
Appendix
Description of Bond Ratings*
Moody's
Aaa - Bonds which are 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-edge." Interest payments are protected by a large or by an 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 which are rated Aa are judged to be of 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 as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., 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. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
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 - Bonds rated AAA are highest grade debt obligation. This rating 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 they
differ from AAA issues only in 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.
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 obligations 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 numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1 - This designation indicates that 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 payments on issues with this designation is strong.
The relative degree of safety, however, is not as high for issues designated
"A-1."
*Ratings are generally given to securities at the time of issuance. While the
rating agencies may from time to time revise such ratings, they undertake no
obligation to do so.
Financial Statements
The audited financial statements contained in the Annual Report to Shareholders
of the Trust dated April 30, 1995, including the auditors' report, are
incorporated herein by reference.
Templeton Global
Utilities
- --------------------------------------------------------------------------------
Your Fund's Objective:
Templeton Global Utilities seeks to provide a high level of total return (income
plus capital appreciation), without incurring undue risk, through investment in
equity and debt securities of domestic and foreign companies in the utility
industries.
- --------------------------------------------------------------------------------
October 16, 1995
Dear Shareholder:
We are pleased to bring you the sixth annual report for the Templeton Global
Utilities Fund, which covers the fiscal year ended August 31, 1995. Volatile
interest rates, currency turmoil and regulatory changes are among the factors
that made the period challenging for global utilities investors.
During the first half of the period, rising U.S. interest rates contributed to
the steep declines in the stock prices of utility companies worldwide. In
December 1994, Mexico's sudden peso devaluation damaged investors' confidence in
many emerging markets where we have holdings. Investor concerns eased during the
remainder of the fiscal year, as stability returned to these markets and global
interest rates began to fall. Within this environment, the Fund provided a
return of 3.66% in terms of net asset value, as shown in the Performance Summary
on page 7. Unfortunately, in terms of market price, total return was -9.88%. One
reason for this differential might have been the dividend reduction, in
September 1994,
1
<PAGE>
from five cents to four cents per share per month. However, the new dividend
policy has allowed the Fund to purchase lower-yielding shares which can provide
higher total return over the long term.
One issue which has had, and will continue to have, a profound impact on the
future performance of the sector is the ongoing evolution of the different
regulatory frameworks used by different countries around the world. We have
tried to focus on some of these changes in this letter.
As of August 31, 1995, the U.S. and U.K. electric utility markets represented
the two largest geographic sectors in the Fund. Interestingly, these two
countries have very different regulatory frameworks. In the U.S., electric
utilities are typically allowed to earn a specified rate of return which
reflects the company's cost of capital and their approved rate base. Prices are
set at a level that yields this return based on forecasts of demand and
expenses. This is called "rate of return" regulation. By contrast, a price-
capping system is used in the U.K. for electricity distributing companies. Under
this system prices are set for a specified period, during which the utility is
allowed to keep whatever level of profit it can manage. The purpose of this type
of regulation is to provide more incentive for management to reduce costs, since
the benefits of those
- --------------------------------------------------------------------------------
Templeton Global Utilities
Geographic Distribution on 8/31/95
Based on Total Net Assets
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Canada 1.8%
Australia & New Zealand 6.1%
Latin America 11.4%
Asia 12.1%
Europe 29.6%
United States 39.0%
</TABLE>
cost reductions are kept by the company and its shareholders. The consumer also
benefits because a real reduction in rates can be specified under the price-
capping formula.
Since their privatization in 1991, the U.K. regional electricity companies have
cut prices and improved service levels. However, the public has grown
increasingly dissatisfied with the new regulatory system. Consumer groups feel
that large dividends for shareholders and excessive compensation for chief
executives mean that the regulator has allowed too much of the massive cost
savings achieved so far to flow to the companies and too little to
2
<PAGE>
the public. It is likely that such protests were a contributing factor to the
decision by the regulator to reset prices, a move which dealt a blow to investor
confidence and sent share prices tumbling. For the Fund, this turmoil was an
opportunity to add shares of companies that we believed were oversold to our
U.K. holdings. There has since been a price recovery in the sector, as the new
electricity price controls proved less onerous than was at first expected.
A second distinction between the U.K. and U.S. systems is the structure of their
respective power markets. The electric industry can be split into three distinct
parts including generation of power, transmission over high voltage lines, and
distribution to customers. In the U.S., profits from all three activities are
typically heavily regulated and combined in a single entity. The U.K. has
separated these activities with the distribution and transmission functions
regulated as discussed above. In contrast, generators in the U.K. sell their
power at competitively determined prices into a pool. The Fund currently owns
convertible bonds of National Power PLC, the largest thermal producer in
England. One of the reasons we like the shares is that management should be able
to apply the lessons learned from this competitive environment to potentially
lucrative projects being pursued in emerging market countries such as Pakistan.
- --------------------------------------------------------------------------------
Templeton Global Utilities
Portfolio Breakdown on 8/31/95
Based on Total Net Assets
<TABLE>
<CAPTION>
% of Total
Company, Industry, Country Net Assets
- --------------------------------------------------------------------------------
<S> <C>
Electric Company of New Zealand, Ltd., 10.00%,
6/15/96; Utilities - Electrical & Gas,
New Zealand 3.0%
- --------------------------------------------------------------------------------
Iberdrola SA; Utilities - Electrical & Gas,
Spain 2.5%
- --------------------------------------------------------------------------------
New York State Electric & Gas Corp.;
Utilities - Electrical & Gas, United States 2.4%
- --------------------------------------------------------------------------------
Endesa-Empresa Nacional de Electricidad SA,
ADR; Utilities - Electrical & Gas, Spain 2.4%
- --------------------------------------------------------------------------------
Illinova Corp.; Utilities - Electrical & Gas,
United States 2.3%
- --------------------------------------------------------------------------------
Southern Electric PLC; Utilities - Electrical &
Gas, United Kingdom 2.2%
- --------------------------------------------------------------------------------
VEBA, AG; Utilities - Electrical & Gas, Germany 2.2%
- --------------------------------------------------------------------------------
National Power Corp., 7.625%, 11/15/00, 144a;
Utilities - Electric & Gas, Philippines 2.2%
- --------------------------------------------------------------------------------
Pinnacle West Capital Corp.;
Utilities - Electrical & Gas, United States 2.2%
- --------------------------------------------------------------------------------
Powergen PLC; Utilities - Electrical & Gas,
United Kingdom 2.1%
- --------------------------------------------------------------------------------
</TABLE>
For a complete list of portfolio holdings, please see page 9 of this report.
Competition for utility companies is coming to the U.S., although the key issues
of how fast and in what form remain unsettled by regulators and unsettling for
investors. Some utilities have taken a proactive role in this process by looking
for new ways to address their high fixed costs. One of the Fund's newer
acquisitions, PECO Energy Company, is in this camp. This Pennsylvania-based
utility recently announced a proposed merger with Pennsylvania Power and Light
which can potentially
3
<PAGE>
eliminate redundant overhead and labor expenses and reduce costs associated with
their nuclear assets.
As we have uncovered more undervalued securities over the last year, the
weighting of the U.S. equity sector of the portfolio has grown. Share price
performance has been impacted by shifts in investors' perceptions. Towards the
end of last year and into the start of 1995, investors, fearful of the looming
specter of competition and new regulatory and financial risks, flocked to lower-
yielding companies, which outperformed the average electric utility company
stock. As investor fear gradually gave way to careful analysis of each company's
unique risks and opportunities, this situation reversed itself, and after the
beginning of 1995, lower-quality, higher-yielding stocks rallied.
We tried to use these swings in sentiment to add to the names we felt offered
the best value relative to their long-term earnings potential. This included our
position in Texas Utilities, even though the company still faces significant
regulatory issues. Our analysis suggested that the risk associated with these
issues may, to a large degree, already be reflected in its share price and that
the price has the potential to increase as these concerns are resolved.
Other nations like Germany and Spain can also see the future and are preparing
their industries for market forces. In April, we were able to add to our
positions in Spain as currency weakness and interest rate concerns weighed on
share prices. We felt that a company like Iberdrola offered good long-term value
as earnings may benefit from changes taking place in the regulatory framework.
While this selling pressure hurt the Fund's performance in the first half, a
strong recovery in the latter part of the year has benefited shareholders. We
continue to feel these shares offer good value.
Turning away from the developed world and looking at the emerging market
countries we see a different form of competition developing -- a competition for
funding. As discussed in the Fund's semi-annual report of February 28, 1995,
these governments are aggressively seeking foreign capital through the
privatization of state-owned utilities. In order to attract outside investment,
competitive rates of return need to be offered. In many developing countries,
therefore, this form of competition is having the exact opposite impact of the
competition being introduced in the developed world -- electricity rates are
being pushed upwards.
4
<PAGE>
In China and India, electricity rates are below what consumers in the U.S. or
other developed countries pay despite the fact that, unlike in more mature
economies, demand is well above supply in these emerging market countries. One
major reason for this anomaly is that these governments have tended to keep
rates low at state-owned utilities in order to subsidize industry. Another cause
is the use of electricity rates to achieve other macroeconomic goals, as in
Brazil where rates have in the past been frozen to help keep inflation down.
However, with private capital being asked to help fund at least an estimated
$300 to $350 billion in electricity related investments in the Pacific region
over the next five years, according to the World Energy Council, governments are
having to allow tariffs to rise so as to offer returns competitive enough to
attract investors./1/ So whereas electricity prices in developed countries are
falling toward their economically justified level, prices in the developing
world are rising toward theirs.
As we have found new opportunities in Indonesia, Pakistan, South Korea and
China, we have reduced our holdings in Hong Kong, where the prices of local
utilities have appreciated above what we feel is fair value. So far, some of our
new holdings have failed to meet expectations, but as long as the fundamentals
remain intact, we are willing to be patient and wait for the underlying value to
be realized.
The continuing evolution of utility businesses like electricity, gas, water and
telecommunications away from monopoly and toward competition has provided the
Fund with both challenge and opportunity. In our opinion, the traditional view
of utilities as low-risk, low-return investments should lose relevance, and
company-specific analysis should become increasingly important. We believe our
disciplined, value-oriented approach combined with the long-term, bottom-up
emphasis Templeton has always followed is particularly well suited to this
environment.
Of course, investments in foreign securities involve special risks, such as
market and currency volatility and adverse economic, social and political
developments in the countries where the Fund is invested. While short-term price
volatility can be disconcerting, declines of as much as 40% to 50% are not
unusual in emerging markets. For example, the Hong Kong market has increased
763% in the last 15 years, but has suffered six declines of
1. Warburg. Based on report titled "Filling the Energy Gap in Asia" dated
June 1994.
5
<PAGE>
more than 20% during that time./2/ Developing markets are represented in the
Fund's portfolio, and involve heightened risks related to the same factors, in
addition to risks associated with the relatively small size and lesser liquidity
of these markets.
In closing, we would like to mention that, although Sir John Templeton has not
been involved in investment management of the Templeton funds since October
1992, we were saddened by his recent decision to step down as Chairman and
Director of the U.S.-registered Templeton funds. The Fund's Board of Directors
has elected John Wm. Galbraith, former vice chairman of Templeton, Galbraith &
Hansberger, Ltd. to succeed him. The investment manager will continue to use the
investment philosophies and principles established by Sir John.
We appreciate your ongoing participation in the Fund and look forward to
investing on your behalf in the future.
Sincerely,
/s/ Gary P. Motyl
Gary P. Motyl, CFA
President
Templeton Global Utilities, Inc.
/s/ Sean Farrington
Sean Farrington, CFA
Portfolio Manager
Templeton Global Utilities, Inc.
2. Source: Bloomberg. Based on quarterly percentage change over 15 years.
- --------------------------------------------------------------------------------
Templeton Global Utilities, Inc. confirmed on September 1, 1995 that the Fund's
Articles of Incorporation require the Fund's Board of Directors to submit to
shareholders a proposal to convert the Fund to an open-end investment company if
the Fund's shares trade on the American Stock Exchange, Inc. at an average
discount from net asset value of greater than 2%. Accordingly, the Board is
required to submit to the Fund's shareholders at the Fund's next scheduled
meeting of shareholders a proposal to convert the Fund to an open-end investment
company. The Board will consider the proposal and other alternatives at its next
scheduled meeting on October 21, 1995. There can be no assurances that the Board
and shareholders would vote in favor of a conversion of the Fund to an open-end
investment company.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Performance Summary
During the reporting period, Templeton Global Utilities shareholders received
combined distributions totaling $1.705 per share, including long-term capital
gains of $1.225 and income distributions totaling 48 cents ($0.48) per share.
The Fund's closing price on the American Stock Exchange decreased from $15.38 on
August 31, 1994 to $12.25 on August 31, 1995, and the Fund produced a total
return of -9.88% in market-price terms for this one-year period. Between August
31, 1994 and August 31, 1995, the Fund's net asset value declined from $15.03 to
$13.77. Based on the change in actual net asset value (in contrast to market
price), the Fund produced a total return of 3.66% for the same period. Both
total return figures assume reinvestment of dividends and capital gains in
accordance with the dividend reinvestment plan.
We have always maintained 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 chart below, based on the change in market price, the
Fund delivered a total return of 50.40% for the period between its inception on
May 23, 1990 and August 31, 1995.
Past distributions and total returns are not predictive of future performance,
and distributions will vary depending on income earned by the Fund, as well as
any profits realized from the sale of securities in the portfolio.
- --------------------------------------------------------------------------------
Templeton Global Utilities
Cumulative Total Returns*
Periods Ended August 31, 1995
<TABLE>
<CAPTION>
Since
Inception
One-Year Five-Year (5/23/90)
<S> <C> <C> <C>
Based on change
in net asset value 3.66% 90.38% 80.38%
Based on change
in market price -9.88% 70.93% 50.40%
</TABLE>
*Cumulative total return calculations show the change in value of an investment
over the periods indicated. These calculations assume reinvestment of all
distributions and capital gains, either at net asset value or at market price on
the reinvestment date in accordance with the dividend reinvestment plan. Past
performance is not predictive of future results.
- --------------------------------------------------------------------------------
7
<PAGE>
Templeton Global Utilities, Inc.
Financial Highlights
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
-------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 15.03 $ 15.01 $ 13.38 $ 11.85 $ 10.60
------- ------- ------- ------- -------
Income from investment operations:
Net investment income .54 .60 .60 .67 .61
Net realized and unrealized gain
(loss) (.10) .73 1.90 1.47 1.32
------- ------- ------- ------- -------
Total from investment operations .44 1.33 2.50 2.14 1.93
------- ------- ------- ------- -------
Distributions:
Dividends from net investment in-
come (.48) (.64) (.64) (.61) (.68)
Distributions from net realized
gains (1.22) (.67) (.23) -- --
------- ------- ------- ------- -------
Total distributions (1.70) (1.31) (.87) (.61) (.68)
------- ------- ------- ------- -------
Change in net asset value (1.26) .02 1.63 1.53 1.25
------- ------- ------- ------- -------
Net asset value, end of year $ 13.77 $ 15.03 $ 15.01 $ 13.38 $ 11.85
======= ======= ======= ======= =======
TOTAL RETURN
Based on market value per share (9.88)% 3.78% 27.31% 25.97% 13.96%
Based on net asset value per share 3.66% 8.98% 19.57% 18.53% 18.91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000) $43,438 $47,317 $46,429 $40,702 $35,855
Ratio of expenses to average net
assets 1.25% 1.21% 1.31% 1.44% 1.55%
Ratio of net investment income to
average net assets 4.08% 4.00% 4.41% 5.28% 5.46%
Portfolio turnover rate 24.76% 40.34% 42.90% 15.21% 19.85%
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Templeton Global Utilities, Inc.
Investment Portfolio, August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
<C> <S> <C> <C> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS: 69.2%
- -------------------------------------------------------------------------------
Electrical & Electronics: 1.2%
BBC Brown Boveri Ltd., br. Swtz. 500 $ 527,408
- -------------------------------------------------------------------------------
Energy Sources: 3.0%
Coastal Corp. U.S. 18,000 589,500
Enron Global Power & Pipeline U.S. 28,000 651,000
Transportadora de Gas del Sur
SA, ADR B Arg. 4,000 41,500
-----------
1,282,000
- -------------------------------------------------------------------------------
Multi-Industry: 1.1%
Hutchison Whampoa Ltd. H.K. 100,000 481,850
- -------------------------------------------------------------------------------
Telecommunications: 16.3%
BCE Inc. Can. 24,000 773,040
Cable & Wireless PLC U.K. 49,000 318,567
Compania de Telecomunicaciones
de Chile SA, ADR Chil. 6,000 438,000
MCI Communications Corp. U.S. 38,500 926,406
*Pakistan Telecom Corp. PTC Pan. 3,127 339,280
Philippine Long Distance
Telephone Co., GDR, 144a Phil. 9,400 340,750
PT Indosat, ADR Indo. 21,200 744,650
STET (Sta Finanziaria
Telefonica Torino) SPA, di
Risp Itl. 160,000 391,907
Telecom Corp. of New Zealand
Ltd. N.Z. 105,000 416,772
Telecom Italia Mobile, di risp Itl. 265,000 265,999
Telecom Italia Spa, di Risp Itl. 265,000 340,042
Teledanmark AS, ADS Den. 13,540 360,503
Teledanmark AS, B Den. 7,830 411,002
Telefonica de Espana SA, ADR Sp. 15,000 609,375
Telmex-Telefonos de Mexico SA,
L, ADR Mex. 12,400 406,100
-----------
7,082,393
- -------------------------------------------------------------------------------
Utilities Electrical & Gas: 47.6%
American Electric Power Co.
Inc. U.S. 18,000 614,250
Australian Gas & Light Company Aus. 270,000 909,193
British Gas PLC U.K. 150,000 644,706
Central Costanera SA, ADR, 144a Arg. 17,000 446,250
Chilectra SA, ADS, 144a Chil. 11,700 546,975
Cia Energetica de Minas Gerais,
ADR Braz. 20,000 450,645
Compania Boliviana de Energia
Electricas SA Bol. 14,900 456,313
Electrabel SA Bel. 3,200 679,385
Electricidad de Caracas Venz. 398,076 306,788
Endesa-Empresa Nacional de
Electricidad SA, ADR Sp. 20,000 1,035,000
Entergy Corp. U.S. 24,000 576,000
Evn Energie-Versorgung
Niederoesterreich AG Aust. 2,800 365,848
Hongkong Electric Holdings Ltd. H.K. 195,000 676,366
</TABLE>
9
<PAGE>
Templeton Global Utilities, Inc.
Investment Portfolio, August 31, 1995 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
- --------------------------------------------------------------------------------
Utilities Electrical & Gas: (cont.)
Iberdrola SA Sp. 143,000 $ 1,097,983
Illinova CP Holdings Co. U.S. 40,500 1,017,563
Kansas City Power and
Light Co. U.S. 14,600 326,675
Korea Electric Power
Corp. Kor. 8,000 303,942
Long Island Lighting Co. U.S. 54,000 918,000
New York State Electric
& Gas Corp. U.S. 43,000 1,037,375
Nipsco Industries Inc. U.S. 16,800 550,200
Peco Energy Co. U.S. 21,600 575,100
Pinnacle West Capital
Corp. U.S. 38,000 945,250
Powergen PLC U.K. 102,000 927,445
Shandong Huaneng Power Chn. 45,600 381,900
*Sithe Energies Inc. U.S. 50,000 450,000
South Wales Electricity U.K. 50,000 708,323
Southern Co. U.S. 27,900 589,388
Southern Electric PLC U.K. 79,300 973,285
Texas Utilties Electric
Co. U.S. 25,000 868,750
Unicom Corp. U.S. 11,000 309,375
VEBA AG Ger. 25,000 955,381
Wing Shan International
Ltd. H.K. 340,000 43,483
-----------
20,687,137
-----------
TOTAL COMMON STOCKS (cost $24,241,682 ) 30,060,788
- --------------------------------------------------------------------------------
PREFERRED STOCKS: 4.4%
- --------------------------------------------------------------------------------
Cia Inversiones
Telecomunicaciones SA,
pfd., conv.,144a Arg. 6,900 353,625
Concessioni e
Costruzioni Autostrade
SPA, B, pfd. Itl. 457,000 534,380
Nacional Financiera SA,
11.25%, conv., pfd.,
05/15/98 Mex. 12,400 420,050
Telebras-
Telecomunicacoes
Brasileiras SA, pfd. Braz. 13,216,481 571,241
-----------
TOTAL PREFERRED STOCKS (cost $1,607,511) 1,879,296
- --------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL IN
LOCAL CURRENCY **
- --------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
BONDS: 23.6%
- --------------------------------------------------------------------------------
Bellsouth, 6.75%,
10/15/33 U.S. 570,000 520,125
Electricity Corp. of New
Zealand Ltd., 10.00%,
6/15/96 N.Z. 2,000,000 1,312,069
GTE Corp., 10.25%,
11/01/20 U.S. 500,000 580,390
Korea Electric Power
Co., 7.75%, 4/01/13 U.S. 500,000 502,900
Korea Telecom, 7.40%,
12/01/99 U.S. 500,000 507,550
National Power Corp.,
7.625%, 11/15/00, 144a U.S. 1,000,000 952,500
National Power PLC,
6.25%, 9/23/08 U.K. 333,000 630,369
</TABLE>
10
<PAGE>
Templeton Global Utilities, Inc.
Investment Portfolio, August 31, 1995 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
IN
LOCAL
INDUSTRY ISSUE COUNTRY CURRENCY** VALUE
<C> <S> <C> <C> <C>
- -------------------------------------------------------------------------------
BONDS: (CONT.)
- -------------------------------------------------------------------------------
New York State Electric &
Gas, 9.875%, 5/01/20 U.S. 400,000 $ 460,404
Pennsylvania Power & Light
Co., 9.25%, 10/01/19 U.S. 500,000 536,920
RGS I&M Funding Corp., 9.81%,
12/07/22 U.S. 500,000 610,555
San Diego Gas & Electric Co.,
9.625%, 4/15/20 U.S. 500,000 576,190
Softe SA, 4.25%, conv.,
7/30/98, 144a Itl. 725,000,000 503,077
Telebras-Telecomunicacoes
Brasileiras,
10.00%, 6/16/97 U.S. 500,000 500,000
U.S. West Communications,
6.875%, 9/15/33 U.S. 1,000,000 915,960
Veba International, 6.00%,
4/06/00 Ger. 330,000 567,600
Virginia Electric Power,
7.00%, 1/1/2024 U.S. 600,000 572,871
-----------
TOTAL BONDS (cost $9,682,260) 10,249,480
- -------------------------------------------------------------------------------
SHORT TERM OBLIGATIONS: 2.5%
- -------------------------------------------------------------------------------
Federal Farm Credit Banks,
10/4/95 U.S. 715,000 711,282
Federal National Mortgage
Assn., 9/14/95 U.S. 285,000 284,419
U.S. Treasury Bills, 5.35% to
5.74% with
maturities to 10/5/95 U.S. 105,000 104,592
-----------
TOTAL SHORT TERM OBLIGATIONS (cost $1,100,132) 1,100,293
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS: 99.7% (cost $36,631,585 ) 43,289,857
OTHER ASSETS, LESS LIABILITIES: 0.3% 147,687
-----------
TOTAL NET ASSETS: 100.0% $43,437,544
===========
</TABLE>
*NON-INCOME PRODUCING.
**CURRENCY OF COUNTRIES INDICATED.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Templeton Global Utilities, Inc.
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1995
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (identified cost $36,631,585) $43,289,857
Cash 24,536
Receivables:
Investment securities sold 170,000
Dividends and interest 389,815
-----------
Total assets 43,874,208
-----------
Liabilities:
Payable for investment
securities purchased 314,798
Accrued expenses 121,866
-----------
Total liabilities 436,664
-----------
Net assets, at value $43,437,544
===========
Net assets consist of:
Undistributed net investment income $ 204,123
Net unrealized appreciation 6,658,272
Accumulated net realized gain 1,378,201
Net capital paid in on shares of capital stock 35,196,948
-----------
Net assets, at value $43,437,544
===========
Shares outstanding 3,153,664
===========
Net asset value per share
($43,437,544 / 3,153,664 ) $ 13.77
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
for the year ended August 31, 1995
<TABLE>
<S> <C> <C>
Investment income:
(net of $131,677 foreign taxes withheld)
Interest $1,016,984
Dividends 1,224,480
----------
Total income $2,241,464
Expenses:
Management fees (Note 3) 251,410
Administrative fees (Note 3) 62,850
Transfer agent fees 45,500
Custodian fees 13,500
Reports to shareholders 94,335
Audit fees 18,000
Legal fees (Note 3) 6,000
Amortization of organization costs 7,951
Registration and filing fees 16,500
Directors' fees and expenses 6,500
Other 3,871
----------
Total expenses 526,417
----------
Net investment income 1,715,047
Realized and unrealized
gain (loss):
Net realized gain (loss) on:
Investments 1,393,433
Foreign currency transactions (3,198)
----------
1,390,235
Net unrealized depreciation on investments (1,671,247)
----------
Net realized and unrealized loss (281,012)
----------
Net increase in net assets resulting from operations $1,434,035
==========
</TABLE>
12
<PAGE>
Templeton Global Utilities, Inc.
Financial Statements (cont.)
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended August 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 1,715,047 $ 1,866,930
Net realized gain on investment and foreign cur-
rency transactions 1,390,235 4,573,413
Net unrealized depreciation (1,671,247) (2,347,310)
----------- -----------
Net increase in net assets resulting from opera-
tions 1,434,035 4,093,033
Distributions to shareholders:
From net investment income (1,513,131) (1,997,282)
From net realized gain (3,857,775) (2,072,126)
Fund share transactions (Note 2): 57,495 864,762
----------- -----------
Net increase (decrease) in net assets (3,879,376) 888,387
Net assets:
Beginning of year 47,316,920 46,428,533
----------- -----------
End of year $43,437,544 $47,316,920
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Templeton Global Utilities, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
Templeton Global Utilities, Inc. (the Fund), is a closed-end, non-diversified
management investment company registered under the Investment Company Act of
1940. The following summarizes the Fund's significant accounting policies.
a. Securities Valuations:
Securities listed or traded on a recognized national or foreign stock exchange
or NASDAQ are valued at the last reported sales prices on the principal ex-
change on which the securities are traded. Over-the-counter securities and
listed securities for which no sale is reported are valued at the mean between
the last current bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
and approved in good faith by the Board of Directors.
b. Foreign Currency Transactions:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the rate of exchange of
such currencies against U.S. dollars on the date of valuation. Purchases and
sales of portfolio securities and income items denominated in foreign curren-
cies are translated into U.S. dollar amounts on the respective dates of such
transactions. When the Fund purchases or sells foreign securities, it will cus-
tomarily enter into a foreign exchange contract to minimize foreign exchange
risk between the trade date and the settlement date of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of for-
eign currencies, currency gains or losses realized between the trade and set-
tlement dates on security transactions, the differences between the amounts of
dividends, interest, and foreign withholding taxes recorded on the Fund's
books, and the U.S. dollar equivalent of the amounts actually received or paid.
Net unrealized foreign exchange gains and losses arise from changes in the
value of assets and liabilities other than investments in securities at the end
of the fiscal period, resulting from changes in the exchange rates.
c. Income Taxes:
It is the Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable income to its shareholders. Therefore, no provision has been made for
income taxes.
d. Unamortized Organization Costs:
Organization costs are being amortized on a straight line basis over five
years.
e. Security Transactions, Investment Income, Distributions and Other Expenses:
Security transactions are accounted for on a trade date basis. Dividend income
is recorded on the ex-dividend date. Certain dividend income on foreign securi-
ties is recorded as soon as information is available to the Fund. Interest in-
come and estimated expenses are accrued daily. Distribution to shareholders,
which are determined in accordance with income tax regulations, are recorded on
the ex-dividend date.
2. TRANSACTIONS IN SHARES OF CAPITAL STOCK
At August 31, 1995, there were 100,000,000 shares of capital stock authorized
($0.01 par value). Commencing August 31, 1991, and at August 31 each year
thereafter until 1995, the Fund will determine if the Fund's shares have traded
on the American Stock Exchange at an average discount from net asset value of
2% or more for the previous fiscal quarter. For the quarter ended August 31,
1995, the average discount exceeded this level. Therefore, the Fund will submit
to shareholders, at its next annual meeting, a proposal to convert the Fund to
an open-end investment company. There can be no assurance that the Board and
Shareholders would vote in favor of a conversion of the Fund to an open-end in-
vestment company.
For the year ended August 31, 1995, 4,460 shares were issued for $57,495 from
reinvested distributions. During the year ended August 31, 1994, 55,714 shares
were issued for $864,762 from reinvested distributions.
14
<PAGE>
Templeton Global Utilities, Inc.
Notes to Financial Statements (cont.)
- --------------------------------------------------------------------------------
3. INVESTMENT MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Certain officers of the Fund are also directors or officers of Templeton,
Galbraith, & Hansberger Ltd. (TGH), and Templeton Global Investors, Inc.
(TGII), the Fund's investment manager and business manager, respectively. The
Fund pays monthly an investment management fee to TICI equal, on an annual ba-
sis, to 0.60% of the average daily net assets of the Fund. The Fund pays TGII
monthly a fee of 0.15% per annum of the Fund's average net assets.
An officer of the Fund is a partner of Dechert Price & Rhoads, legal counsel
for the Fund, which firm received fees of $6,000 for the year ended August 31,
1995.
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding short-term securities) for the
year ended August 31, 1995 aggregated $9,977,860 and $12,747,613, respectively.
The cost of securities for federal income tax purposes is the same as that
shown in the investment portfolio. Realized gains and losses are reported on an
identified cost basis.
At August 31, 1995, the aggregate gross unrealized appreciation and deprecia-
tion of portfolio securities, based on cost for federal income tax purposes,
was as follows:
<TABLE>
<S> <C>
Unrealized appreciation $ 7,940,188
Unrealized depreciation (1,281,916)
-----------
Net unrealized appreciation $ 6,658,272
===========
</TABLE>
5. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NET INCREASE
NET GAIN (LOSS) (DECREASE)
ON INVESTMENT AND IN NET ASSETS
INVESTMENT NET INVESTMENT FOREIGN CURRENCY RESULTING FROM
INCOME INCOME TRANSACTIONS OPERATIONS
---------------- ---------------- ----------------------------------------
PER PER PER PER
TOTAL SHARE TOTAL SHARE TOTAL SHARE TOTAL SHARE
---------- ----- ---------- ----- ------------ ------------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995
For the quarter ended:
November 30, 1994 $ 556,938 $.18 $ 403,071 $.13 $ (2,583,287) $ (.82) $(2,180,216) $(.69)
February 28, 1995 450,893 .14 306,876 .10 (1,003,503) (.33) (696,627) (.23)
May 31, 1995 660,854 .21 549,514 .17 2,453,474 .78 3,002,988 .95
August 31, 1995 572,779 .18 455,586 .14 852,304 .27 1,307,890 .41
---------- ---- ---------- ---- ------------ ------ ----------- -----
$2,241,464 $.71 $1,715,047 $.54 $ (281,012) $ (.10) $ 1,434,035 $ .44
========== ==== ========== ==== ============ ====== =========== =====
1994
For the quarter ended:
November 30, 1993 $ 575,091 $.19 $ 440,791 $.14 $ 574,562 $ .19 $ 1,015,353 $ .33
February 28, 1994 524,716 .16 429,180 .14 2,887,787 .93 3,316,967 1.07
May 31, 1994 634,744 .20 446,065 .14 (3,012,942) (.96) (2,566,877) (.82)
August 31, 1994 696,572 .22 550,894 .18 1,776,696 .57 2,327,590 .75
---------- ---- ---------- ---- ------------ ------ ----------- -----
$2,431,123 $.77 $1,866,930 $.60 $ 2,226,103 $ .73 $ 4,093,033 $1.33
========== ==== ========== ==== ============ ====== =========== =====
</TABLE>
15
<PAGE>
Templeton Global Utilities, Inc.
Independent Auditor's Report
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
Templeton Global Utilities, Inc.
We have audited the accompanying statement of assets and liabilities, including
the investment portfolio of Templeton Global Utilities, Inc. as of August 31,
1995, 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 each of the five years in the period
then ended. These financial statements and financial highlights are the respon-
sibility 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 stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial high-
lights 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 Au-
gust 31, 1995, 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 pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Tem-
pleton Global Utilities, Inc. as of August 31, 1995, the results of its opera-
tions, the changes in its net assets and the financial highlights for the peri-
ods indicated, in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
New York, New York
September 29, 1995
16
<PAGE>
Templeton Global Utilities, Inc.
- --------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN
The Fund offers a Dividend Reinvestment Plan (the "Plan") with the following
features: . If shares of the Fund are held in the shareholder's name, the share-
holder will automatically be a participant in the Plan unless he elects to
withdraw. If the shares are registered in the name of a broker-dealer or other
nominee (i.e., in "street name"), the broker-dealer or nominee will elect to
participate in the Plan on the shareholder's behalf unless the shareholder in-
structs them otherwise, or unless the reinvestment service is not provided by
the broker-dealer or nominee. . Participants should contact Chemical Mellon
Shareholder Services, Shareholder Investment Services, P.O. Box 750, Pitts-
burgh, PA 15230, to receive the Plan brochure. . To receive dividends or distri-
butions in cash, the shareholder must notify Mellon Securities Trust Company
("Mellon") or the institution in whose name the shares are held. Mellon must
receive written notice within 10 business days before the record date for the
distribution. . Whenever the Fund declares dividends in either cash or common
stock of the Fund, if the market price is equal to or exceeds net asset value
at the valuation date, participants will receive the dividends entirely in
stock at a price equal to the net asset value but not less than 95% of the then
current market price of the Fund's shares. If the market price is lower than
net asset value and if dividends and/or capital gains distributions are payable
only in cash, the participant will receive shares purchased on the American
Stock Exchange. . The automatic reinvestment of dividends and/or capital gains
does not relieve the participant of any income tax which may be payable on div-
idends or distributions. . The participant may withdraw from the Plan without
penalty at any time by written notice to Mellon. Upon withdrawal, the partici-
pant will receive, without charge, stock certificates issued and in the partic-
ipant's name for all full shares; or, if the participant's wishes, Mellon will
sell the participant's shares and send the proceeds, net of any brokerage com-
missions. A $2.50 fee is charged by Mellon upon any cash withdrawal or termina-
tion. . Whenever shares are purchased on the American Stock Exchange, each par-
ticipant will pay a pro rata portion of brokerage commissions. Brokerage com-
missions will be deducted from amounts to be invested.
SHAREHOLDER INFORMATION
Shares of Templeton Global Utilities, Inc. are traded daily on the American
Stock Exchange under the symbol "TGU." Information about the net asset value
and the market price is published weekly in Barron's and in the Monday edition
of the Wall Street Journal in a table called "Publicly Traded Funds."
For current information about the net asset value, call 1-800-354-9191.
If any shareholder is not receiving copies of the Reports to Shareholders be-
cause shares are registered in a broker's name or in a custodian's name, he or
she can write and request that his or her name be added to the Fund's mailing
list, by writing Templeton Global Utilities, Inc., 700 Central Avenue, St. Pe-
tersburg, FL 33701.
For information about dividends and shareholder accounts, call 1-800-526-0801.
17
<PAGE>
Notes
-----
<PAGE>
Notes
-----
<PAGE>
- --------------------------
TEMPLETON GLOBAL
UTILITIES, INC.
700 Central Avenue
St. Petersburg,
Florida 33701-3628
Auditors
McGladrey & Pullen, LLP
555 Fifth Avenue
New York, New York 10017-2416
Investors should be aware that the value of investments made for the Fund may
go up as well as down and that the Investment Manager may make errors in
selecting securities for the Fund's portfolio. Like any investment in
securities, the Fund's portfolio will be subject to the risk of loss from
market, currency, economic, political, and other factors. The Fund and Fund
investors are not protected from such losses by the Investment Manager.
Therefore, investors who cannot accept the risk of such losses should not
invest in shares of the Fund.
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.
- --------------------------
[RECYCLING LOGO APPEARS HERE] TLTGU A95 10/95
TEMPLETON
GLOBAL
UTILITIES, INC.
Annual Report
August 31, 1995
[LOGO OF FRANKLIN TEMPLETON APPEARS HERE]
TABLE OF CONTENTS
<TABLE>
<S> <C>
Franklin California Growth Fund... 3
Franklin Global Utilities Fund.... 9
Franklin Small Cap Growth Fund.... 14
Franklin Global Health Care Fund.. 19
Franklin Strategic Income Fund..... 24
Franklin Institutional
Midcap Growth Fund................ 30
</TABLE>
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FDIC INSURED
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
June 15, 1995
Dear Shareholder:
It's a pleasure to bring you the fourth annual report for the Franklin
Strategic Series, which covers the period ended April 30, 1995.
The fiscal year covered by this report was a reminder that volatility is a
fundamental market condition. In 1994, stocks delivered below-average returns,
and bonds had one of their worst years in history. 1995, to date, has been a
different story. Stock prices, as measured by the Dow Jones Industrial
Average(R), rose 12.58%, from 3838.48 on January 3, 1995 to 4321.27 on April
28, 1995, and long-term bond prices, as measured by 30-year Treasuries, rose
5.84% during the same period.(*)
Of course there can be no guarantee that these markets will continue to rise in
the months to come. As you know, markets experience both ups and downs, and
volatility is a normal part of investing. That's why we have always encouraged
you to focus on your long-term investment goals. As the charts on the following
page demonstrate, if you concentrate on the long term, you need not be unduly
concerned about how the market rises and falls in the short term.
* Source: Dow Jones Industrial Average; Merrill Lynch Long-Term Bond Index.
Indices are unmanaged.
<PAGE>
One way to help minimize the impact of market fluctuations is to diversify your
investments. The Franklin Strategic Series is composed of six different mutual
funds, offering individual investors a level of diversification that would be
almost impossible for them to achieve on their own. While the funds have
different strategies and objectives, their management teams all pursue
long-term investment goals, following the fundamental principles of careful
selection and constant professional supervision.
For specific information about each fund in the Series, including the effects
of market conditions and management strategies upon its performance, please
refer to the pages listed in the table of contents.
As always, we appreciate your support, welcome your questions and look forward
to serving you in the years to come.
Sincerely,
Rupert H. Johnson, Jr.
President
Franklin Strategic Series
GRAPHIC MATERIAL (1) & (2) OMITTED - SEE APPENDIX
2
<PAGE>
FRANKLIN CALIFORNIA GROWTH FUND
YOUR FUND'S OBJECTIVE
The Franklin California Growth Fund seeks capital appreciation through a
policy of investing at least 65% of its assets in the securities of
companies either headquartered or conducting a majority of their operations
in the state of California.
This report of the Franklin California Growth Fund covers the fiscal year ended
April 30, 1995. We are pleased to report that your fund provided a total return
of +29.09% over the twelve-month period, as shown in the Performance Summary on
page 8. These results compare quite favorably with the performance of the
Standard & Poor's 500 Stock Index(R), and Franklin California Growth Index(R),
which posted total returns of +17.42% and +24.54%, respectively, during the
same period. We are also pleased that Lipper Analytical Services, Inc., ranked
the Franklin California Growth Fund #1 out of 504 funds in the Lipper growth
stock category.(*)
The past year presented a challenging environment for financial markets. In
1994, returns on U.S. stocks, as measured by various indices, were essentially
flat because of the market's reaction to rising interest rates, the devaluation
of the Mexican peso, weakness of the dollar versus the Japanese yen and German
mark, and the bankruptcy of Orange County, CA. However, during the first four
months of 1995, U.S. equities made substantial upward progress due to a better
interest rate environment and strong corporate earnings. In fact, earnings have
impressed analysts for the past several calendar quarters and, in aggregate,
have exceeded the consensus estimates of brokerage analysts this year, a rather
rare circumstance.
Despite all this turmoil in these inter-connected financial markets, your fund
has been successful due to its adherence to a sound investment strategy. This
strategy is not based on any pre-
* The fund was ranked #1 for the one-year period ended April 30, 1995. Lipper
Analytical Services, Inc. is a nationally recognized mutual fund research
organization. Lipper rankings do not include sales charges; past and present
expense limitations increased the fund's total returns. Rankings may have been
different if such charges had been considered. Past performance is not
predictive of future results.
3
<PAGE>
determined proportion of "growth" to "value" stocks, nor do we seek to maintain
any particular ratio of "medium capitalization" to "small capitalization"
stocks. Rather, our investments are driven by fundamental business analysis
supported by solid research. We are most eager to identify, and invest in, the
few existing truly outstanding businesses. Such businesses share certain
characteristics: high, or even dominant, market share within a large and
clearly identifiable market niche; very high returns on the capital deployed in
the business; a captive customer base; reasonably predictable earnings; above
average growth potential; evidence of managerial excellence; and, critically,
the ability to reinvest in the business at high rates of return. Any investor
should be willing to pay a fair price for part ownership of such companies. We
believe that they are the surest path to long-term investment success. Our
holdings of such companies as Adobe Systems, Cisco Systems and Intel fit these
criteria well.
Our second highest priority in evaluating possible investments is in companies
that are leaders, but lack either the strong franchises or unusually favorable
fundamental economic characteristics that are enjoyed by the very few truly
great companies. We prefer companies that have a clearly identifiable niche in
their market giving them some control over their own destiny. Generally, we
attempt to make investments in these companies at favorable points in their
life-cycles, or when their stocks are trading below what we consider to be fair
value. Investments in 3Com, Fritz Companies, Mentor Corporation, Oracle,
Rockwell, Superior Industries, Vallicorp Holdings, Verifone, Western Atlas and
Xilinx are representative of this approach.
Making up the balance of our equity investments are stocks in companies that we
believe are either severely undervalued or are in their emerging growth stages.
We have found that price changes in stocks of such companies are usually more
exaggerated than those of our other stocks, and, in these cases, volatility of
individual securities can be very useful to us. Read-Rite Corp. and Western
Digital are two examples of such holdings in the electronic technology sector.
Selective participation in the new issue market this past year has also
benefited your fund. We purchased shares in newly public, emerging
4
<PAGE>
growth companies such as Ascend Communications, C-Cube Microsystems and NetCom
On-Line, and then sold them after they reached our analysts' targets. However,
we will keep an eye on their progress in case their share prices fall to
bargain levels.
As you can see in the chart to the right, many companies meeting our investment
priorities are participants in the technology sector. In fact, the three
largest sectors, Electronic Technology, Semiconductors, and Technology
Services, combined, make up 37.1% of the fund's total net assets. This reflects
our belief that technology will become increasingly important as the world's
economy moves from industrial-based to service- and information-based.
GRAPHIC MATERIAL (3)OMITTED - SEE APPENDIX
We also believe that in the years ahead, California companies will help produce
powerful innovations in the health care, general commerce, education, media,
and consumer markets. Our investments in premier biotechnology companies such
as Amgen, Chiron and Genentech, plus holdings in several HMOs, should give the
fund excellent exposure to opportunities in the health sector, in the area of
consumer media services, we have accumulated shares of Disney Co., which we
feel is a truly outstanding company with a solid customer base.
5
<PAGE>
Finally, we have purchased shares in California companies with international
economic exposure and prominence, such as Atlantic Richfield and Chevron. The
risks of investing in a non-diversified fund concentrating its investments in a
single state, such as increased susceptibility to adverse economic or
regulatory developments, are described in the prospectus.
Looking forward, we believe that California, which is ranked among the ten
largest economies in the world, is fertile soil for investment opportunity. Its
more than 800,000 companies produce more than $800 billion in goods and
services, which is equal to about 13% of the U.S. Gross Domestic Product
(GDP).(*) We do not foresee any shortage of potential investments in such an
environment, and we feel confident of our ability to take advantage of this
economic activity.
Thank you for your participation in the Franklin California Growth Fund. We
welcome any comments or suggestions you may have and look forward to serving
you in the years to come.
* Sources: California Trade and Commerce Agency, November, 1994; Economic Report
of the Governor, June, 1992.
- -------------------------------------------------
FRANKLIN CALIFORNIA GROWTH FUND
Top 10 Holdings on April 30, 1995
Based on Total Net Assets
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY NET ASSETS
- -------------------------------------------------
<S> <C>
Intel Corp. 2.59%
Semiconductors
- -------------------------------------------------
Western Digital Corp. 2.31%
Electronic Technology
- -------------------------------------------------
Atlantic Richfield 2.07%
Energy Minerals
- -------------------------------------------------
Read-Rite Corp. 2.04%
Electronic Technology
- -------------------------------------------------
Catellus Development, pfd. 2.03%
Real Estate
- -------------------------------------------------
Vons Companies 1.92%
Retail
- -------------------------------------------------
Adobe Systems 1.81%
Technology Services
- -------------------------------------------------
Applied Materials 1.78%
Electronic Technology
- -------------------------------------------------
Altera Corp. 1.75%
Semiconductors
- -------------------------------------------------
Cisco Systems 1.73%
Electronic Technology
- -------------------------------------------------
</TABLE>
FOR A DETAILED LISTING OF PORTFOLIO HOLDINGS, PLEASE SEE PAGE 36 OF THIS
REPORT.
6
<PAGE>
PERFORMANCE SUMMARY
The Franklin California Growth Fund reported a total return of +29.09% for the
fiscal year ended April 30, 1995. Total return measures the change in value of
an investment, assuming reinvestment of dividends and capital gains at net
asset value, and does not include the maximum initial sales charge.
The fund's share price, as measured by net asset value, increased $1.98 per
share, from $12.05 on April 30, 1994 to $14.03 on April 30, 1995. During the
period, shareholders received distributions of 12.4 cents ($0.124) per share in
income dividends, 68.59 cents ($0.6859) per share in short-term capital gains
and 41.31 cents ($0.4131) per share in long-term capital gains. Of course, past
performance is not predictive of future results, and distributions will vary,
depending on the fund's income, as well as any capital gains realized from the
sale of securities in the portfolio.
The graph on page 8 shows how an investment made in the fund at its inception
on October 30, 1991, has outperformed the unmanaged Standard & Poor's 500 Stock
Index(R) (S&P 500(R)) and the unmanaged Franklin California Growth Index(R) as
of April 30, 1995. The S&P 500 is a broad market index, whereas the Franklin
California Growth Index is an equally-weighted index representing 250 of the
largest corporations headquartered in California. It is important to note that
an index does not contain cash (the fund generally carries a certain percentage
of cash at any given time), nor does an index include sales charges or
management fees. Of course, one cannot invest directly in an index, and past
performance is not predictive of future results.
7
<PAGE>
GRAPHIC MATERIAL (4)OMITTED - SEE APPENDIX
1. Includes all sales charges and represents the change in value of an
investment during the period shown. Total return assumes reinvestment of
dividends and capital gains at net asset value. Past performance is not
predictive of future results.
2. Includes reinvested dividends.
FRANKLIN CALIFORNIA GROWTH FUND
Periods ended April 30, 1995
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 3-YEAR (10/30/91)
- ------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative
Total Return 3,4 29.09% 69.72% 69.13%
Average Annual
Total Return 5 23.26% 17.45% 14.66%
- ------------------------------------------------------------------
</TABLE>
3. The Franklin California Growth Fund changed its investment objective, policy
and name in July 1993. Cumulative total return from the date of the change
through April 30, 1995 was 51.03%.
4. Cumulative total return represents the change in value of an investment over
the specified periods and does not include the maximum 4.5% initial sales
charge.
5. Average annual total return represents the average annual increase in value
of an investment over the specified periods and includes the maximum 4.5%
initial sales charge.
All total return calculations assume reinvestment of dividends and capital
gains at net asset value. Investment return and principal value will fluctuate
with market conditions, and you may have a gain or loss when you sell your
shares. Past performance can not guarantee future results.
The fund's manager has agreed in advance to waive a portion of the management
fees, which reduces operating expenses and increases total return to
shareholders. Without these reductions, the fund's total return would have been
lower. The waiver may be discontinued at any time.
8
<PAGE>
FRANKLIN GLOBAL UTILITIES FUND
FUND OBJECTIVE:
Seeks to provide total return by investing in securities of utility
companies located in the United States and around the world.
The investment environment for utility stocks varied greatly during the fund's
fiscal year. Market volatility during the first six months of the period
resulted from rising long-term interest rates. In the U.S., the 30-year
Treasury bond's yield increased almost 70 basis points to 7.97% on October 31,
from 7.31% on April 30, 1994. This market environment caused investors to turn
away from interest-rate sensitive utilities, and the stock prices fell.
Reflecting the market, the Franklin Global Utilities Fund's share price as
measured by net asset value (NAV) also declined during this time, from $12.60
on April 30, 1994, to $12.33 on October 31, 1994. By the end of December, the
fund had declined further to $11.43 per share.
Rising rates affected many foreign markets as well, particularly those closely
linked to the U.S. dollar, such as Argentina, Mexico and Hong Kong. For this
reason, the fund maintained a fairly defensive position, holding almost 15% of
its total net assets in cash during the first six months of the reporting
period.
GRAPHIC MATERIAL (5)OMITTED - SEE APPENDIX
During the second half, the U.S. economy slowed and further interest-rate hikes
seemed less likely. As a result, U.S. utility stocks became more attractive. As
the U.S. utilities market improved in early 1995, the fund's NAV also increased
steadily and ended the fiscal year at $12.23 per share.
9
<PAGE>
The price weaknesses in many utility sectors created excellent buying
opportunities. We purchased stocks of several companies with strong underlying
fundamentals that we believed were not fully reflected in their prices. By
April 30, we had reduced the fund's cash to 3.4% of total net assets, becoming
fully invested.
UNITED STATES
In the U.S., we increased our electric utility holdings dramatically after
interest rates peaked in mid-September and utility stock prices hit their
trough. During this time, we targeted electric utilities in particular because
they appeared to be very oversold.
This repositioning helped us considerably in the last six months of the
reporting period, as prospects for a slower growth economy and more stable
interest rates favored the traditionally defensive U.S. utility sector.
As always, we sought to purchase companies with strong growth prospects, good
competitive positioning and entrepreneurial management, such as Southern
Company, DPL Inc., Public Service of Colorado, Enron, and AT&T.
EUROPE
Investment opportunities in the European utility markets were mixed. The
diverse nature of German utility companies, coupled with the country's strong
currency, placed some of these companies, including VEBA, one of our largest
holdings, among Europe's best performing utility stocks.
Spain endured considerable weakness over the period, as political
uncertainties, fears of higher interest rates, and a weak currency had a
negative impact on our holdings there. However, weakness overshadowed the
strong fundamentals of Spanish utility companies and created many bargain
priced stocks. Thus, we increased our Spanish holdings over the last two months
of the period. Spain has since seen a strong recovery as political fears have
lessened.
The fund had very little exposure in the U.K. after we sold securities in the
first six months of the fiscal year. Utility companies there underperformed as
attention was focused on a changing political and regulatory environment. We
also made purchases there on weakness. During the period, some of the European
securities we accumulated for the fund in the European region
10
<PAGE>
include Empresa Nacional de Electricidad, Cable and Wireless, Telewest,
Scottish Power, ESPOON, and BritishTelecom.
LATIN AMERICA
Latin American utility stocks, in general, experienced increased volatility as
the Mexican currency crisis affected many surrounding countries. At the time,
the fund was underweighted in Latin America, and we sold half of our Telmex
holding (our only position in Mexico) before the crisis. The weakness in these
markets negatively affected the fund, particularly in January and February.
However, we were able to purchase two securities we considered both undervalued
and of high quality: Telefonica de Argentina and Grupo Iusacell.
ASIA
Asia is another region where we have been relatively underweighted. During the
fiscal year we sold several Asian company securities after strong price
performance made valuations appear expensive. While prospects for many of these
countries continue to improve, recent weakness in some of these markets has
made this region appear more attractively priced.
We expect to continue searching for high quality, growth utility companies in
Latin America and Asia, where, compared with the U.S., companies tend to have
much higher growth rates in earnings per share and dividends. These developing
nations have higher economic growth rates and strong, pent-up public demand for
basic necessities including telephones, electricity, and water.
Looking forward, we remain optimistic about the prospects for global utility
stocks. In the U.S., we will continue to evaluate the many attractive buying
opportunities resulting from last year's market declines. With the developing
competitive market, we will continue to pursue our strategy of selecting
utilities based on their competitive positions. Of course, no one knows how
soon true competition will arrive, but high-quality companies with aggressive,
more entrepreneurial management are already seeing price gains.
Elsewhere, the ongoing privatization of utilities in many emerging nations will
likely continue to present additional investment opportunities with potential
for high growth. There are, of course, special risks involved with investing
globally in a non-diversified fund concentrating its investments in a single
industry. These risks, which include currency fluctuations and increased
susceptibility to adverse economic, political, social, and regulatory
developments, are further discussed in the fund's prospectus.
11
<PAGE>
PERFORMANCE SUMMARY
The Franklin Global Utilities Fund reported a total return of +3.17% for the
one-year period ended April 30, 1995. Total return measures the change in value
of an investment, assuming reinvestment of dividends and capital gains
distributions, and does not include the initial sales charge.
The fund's share price, as measured by net asset value, decreased from $12.60
on April 30, 1994, to $12.23 on April 30, 1995. During the reporting period,
shareholders received distributions of 36.5 cents ($0.365) per share in
dividend income and 35.8 cents ($0.358) per share in capital gains, of which
25.14 cents ($0.2514) represented short-term gains and 10.66 cents ($0.1066)
represented long-term gains. Of course, past performance is not indicative of
future results, and distributions will vary depending on income earned by the
fund, as well as any profits realized from the sale of securities in the
portfolio.
The chart on page 13 compares the total return performance of the fund with
that of the Standard & Poor's 500 Stock Index(R) (S&P 500(R)) since the fund's
inception on July 2, 1993. The S&P 500 is a broad market index consisting of
companies of various sizes. It is important to note that the index, unlike the
fund, is unmanaged, does not contain cash (the fund generally carries a certain
percentage of cash at any given time), and does not include sales charges or
management fees. Of course one cannot invest directly in an index.
12
<PAGE>
GRAPHIC MATERIAL (6)OMITTED - SEE APPENDIX
* Includes all sales charges and represents the change in value of an investment
over the period shown. Total return assumes the reinvestment of dividends and
capital gains at net asset value. Past performance is not predictive of future
results.
FRANKLIN GLOBAL UTILITIES FUND
Periods ended April 30, 1995
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (07/02/92)
- -----------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return 1 3.17% 35.32%
Average Annual Total Return 2 -1.45% 9.49%
- -----------------------------------------------------------------
</TABLE>
1. Cumulative total return shows the change in value of an investment over the
specified periods and does not include the maximum 4.5% initial sales charge.
See note below.
2. Average annual total return represents the average annual change in value of
an investment over the specified periods and includes the maximum 4.5% initial
sales charge. See note below.
Note: The historical total return figures shown above pertain only to the
fund's Class I shares. Class II shares, which the fund began offering on May 1,
1995 are subject to different fees and expenses, which will affect their
performance. Total return figures for Class II shares are not yet available.
Please see the prospectus for more details regarding Class I and Class II
shares. All total return calculations assume reinvestment of dividends and
capital gains at net asset value. Investment return and principal value will
fluctuate with market conditions, and you may have a gain or loss when you sell
your shares. Past performance cannot guarantee future results.
The fund's manager has agreed in advance to waive a portion of the management
fees, which reduces operating expenses and increases total return to
shareholders. Without this waiver, the fund's total return would have been
lower. The waiver may be discontinued at any time.
13
<PAGE>
FRANKLIN SMALL CAP GROWTH FUND
YOUR FUND'S OBJECTIVE
The Franklin Small Cap Growth Fund seeks long-term capital growth by
investing in equity securities of small-capitalization companies -- those
with a market capitalization of less than $1 billion at the time of
investment.
The Federal Reserve Board reacted to strong economic growth in 1994 by raising
short-term interest rates on several occasions. These actions compressed stock
valuations and exerted downward pressure on market prices. They appear to have
been successful because, in the first quarter of 1995, the economy slowed
significantly, interest rates stabilized, and the stock market responded by
reaching record-high levels.
Within this volatile environment, the fund performed extremely well. As you can
see in the Performance Summary on page 18, the fund delivered an impressive
one-year total return of +27.05%. This was significantly higher than the
+17.42% one-year total return reported by the Standard & Poor's 500 Stock
Index(R) (S&P 500(R)), and earned the fund a number 7 ranking out of 255 small
company growth funds, as measured by Lipper Analytical Services, Inc., a
nationally recognized mutual fund research organization.(1) It also helped
increase assets under management, from $24 million on April 30, 1994, to more
than $63 million on April 30, 1995.
In seeking to achieve the fund's objective of long-term capital growth, we
focus on stocks of small capitalization companies that we believe are well
positioned for rapid growth in revenues, earnings, or cash flow. By following
this strategy, we attempt to identify industries with significant growth
potential and invest in companies that are
1. Lipper rankings do not include sales charges; past expense limitations
increased the fund's total returns. Rankings may have been different if these
factors had been considered. Past performance cannot guarantee future results.
14
<PAGE>
leading this growth. We also try to find companies in the midst of their growth
phases because of special products or marketing niches, regardless of the
outlook for their overall industries. There are, of course, risks involved in
seeking capital appreciation from newly emerging companies, such as relatively
small revenues, limited product lines and small market share.(2)
By the end of the reporting period, the fund's investments were diversified
over a broad range of industries, including electronic technology,
semiconductors, technology services, financial services, communications, and
health services. The majority of our investments remained in the technology
sector due to the ongoing acceptance of, and demand for, new technological
products, which we believe will lead to significant growth well into the next
century.
GRAPHIC MATERIAL (7)OMITTED - SEE APPENDIX
We recognized gains during the fiscal year on some technology stocks that we
believed were fundamentally overvalued, such as Cascade Communications and
Applied Digital Access. We added positions in stocks with lower price to
earnings ratios, including Western Digital Corp., a major manufacturer of disk
drives for personal
2. These risks are further discussed in the fund's prospectus.
15
<PAGE>
computers, and Read-Rite Corp., a leading producer of thin-film heads for
magnetic disk drives. Our approach also uncovered investments in other sectors
that we feel have excellent growth opportunities. For example, we initiated a
position in the PMI Group, one of the nation's largest private mortgage
insurers, and purchased additional shares of Tommy Hilfiger Corp., a leading
manufacturer of casual apparel.
Looking forward, small capitalization companies should continue to provide an
opportunity to invest in tomorrow's industry leaders while they are still in
their emerging growth phases. Although it is impossible to predict the
long-term outlook for the economy, we feel that the current environment is
ideal for promoting the growth and development of smaller companies, and remain
confident that our value-oriented approach to growth stock investing should
position the fund to perform well under a variety of market conditions.
We thank you for your participation in the Franklin Small Cap Growth Fund and
look forward to serving your investment needs in the years to come.
- -------------------------------------------------------
FRANKLIN SMALL CAP GROWTH FUND
Top 10 Holdings on April 30, 1995
Based on Total Net Assets
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY NET ASSETS
- -------------------------------------------------------
<S> <C>
Western Digital Corp. 2.29%
Computer Hardware
- -------------------------------------------------------
The PMI Group, Inc. 2.07%
Financial Services
- -------------------------------------------------------
Read-Rite Corp. 2.02%
Computer Hardware
- -------------------------------------------------------
Colonial Data Technologies Corp. 1.85%
Telecommunications
- -------------------------------------------------------
Magma Copper Co. 1.73%
Metals
- -------------------------------------------------------
Advocat, Inc. 1.71%
Health Services
- -------------------------------------------------------
Nokia Corp., pfd., ADR 1.69%
Electronics/Electrical Equipment
- -------------------------------------------------------
Tommy Hilfiger Corp. 1.67%
Textiles/Apparel
- -------------------------------------------------------
Verifone, Inc. 1.65%
Electronics/Electrical Equipment
- -------------------------------------------------------
Transaction Systems Architecture, Inc. 1.64%
Computer Software
- -------------------------------------------------------
</TABLE>
FOR A COMPLETE LIST OF PORTFOLIO HOLDINGS, PLEASE SEE PAGE 48 OF THIS REPORT.
16
<PAGE>
PERFORMANCE SUMMARY
The Franklin Small Cap Growth Fund reported a total return of +27.05% for the
fiscal year ended April 30, 1995. Total return measures the change in value of
an investment, assuming reinvestment of dividends and capital gains
distributions, and does not include the initial sales charge.
The fund's share price, as measured by net asset value, increased from $12.75
on April 30, 1994, to $14.90 on April 30, 1995. During the reporting period,
shareholders received distributions of 2.1 cents ($0.021) per share in dividend
income and 99.7 cents ($0.997) per share in capital gains, of which 79.75 cents
($0.7975) represented short-term gains and 19.95 cents ($0.1995) represented
long-term gains. Of course, past performance is not indicative of future
results, and distributions will vary depending on income earned by the fund, as
well as any profits realized from the sale of securities in the portfolio.
As you can see from the chart on the following page, the fund outperformed both
the Standard & Poor's 500 Stock Index(R) (S&P 500(R)) and the Russell 2500
Index(R) for the one-year period ended April 30, 1995. The S&P 500 is a broad
market index consisting of companies of various sizes, whereas the Russell 2500
is an index of 2,500 companies with small market capitalizations. It is
important to note that both indices are unmanaged, do not contain cash (the
fund generally carries a certain percentage of cash at any given time), and do
not include sales charges or management fees. Of course, one cannot invest
directly in an index.
17
<PAGE>
GRAPHIC MATERIAL (8)OMITTED - SEE APPENDIX
* 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. Past performance is not predictive of future
results.
** Indices are unmanaged and include reinvested dividends.
FRANKLIN SMALL CAP GROWTH FUND
Periods ended April 30, 1995
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (2/14/92)
- ---------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return 1 27.05% 69.37%
Average Annual Total Return 2 21.34% 16.16%
- ---------------------------------------------------------------
</TABLE>
1. Cumulative total return shows the change in value of an investment over the
specified periods and does not include the maximum 4.5% initial sales charge.
2. Average annual total return represents the average annual increase in value
of an investment over the specified periods and includes the maximum 4.5%
initial sales charge.
All total return calculations assume reinvestment of dividends and capital
gains at net asset value. Investment return and principal value will fluctuate
with market conditions and you may have a gain or loss when you sell your
shares. Past performance cannot guarantee future results.
The fund's manager has agreed in advance to waive a portion of the management
fees, which reduces operating expenses and increases total return to
shareholders. Without this waiver, the fund's total return would have been
lower. The waiver may be discontinued at any time.
18
<PAGE>
FRANKLIN GLOBAL HEALTH CARE FUND
YOUR FUND'S OBJECTIVE
The Franklin Global Health Care Fund seeks capital appreciation by
investing primarily in the equity securities of health care companies
located throughout the world
The health care sector performed remarkably well over the past fiscal year
after it became apparent that the proposed National Health Care Reform Act of
1994 would not pass Congress. Health care stocks had underperformed the overall
stock market since the November 1992 presidential election because of
uncertainty surrounding the impact of health care reform on the fundamentals of
publicly traded health care companies. The shelving of the proposal, however,
abated much of this concern, and health care stocks began an upward climb. We
are pleased to report that the fund benefited from this improved investment
environment and provided an impressive one-year total return of +16.33%, as
shown in the Performance Summary on page 23.
At the end of the fiscal year, 88.5% of the fund's total net assets were
invested in equities, with the remaining 11.5% in cash. Our investment
portfolio continued to be allocated globally across several health care
sectors. The fund's largest sector was pharmaceuticals, which accounted for
18.9% of total net assets at the end of the reporting period. We increased the
fund's exposure
GRAPHIC MATERIAL (9)OMITTED - SEE APPENDIX
19
<PAGE>
to this sector by initiating a position in Roche Holding, a major Swiss
manufacturer of pharmaceutical and chemical products. On April 30, this company
was the fund's largest holding at 4.66% of total net assets. We remained
relatively underweighted in stocks of large U.S. pharmaceutical companies
because we believe they will continue to feel pricing and margin pressures due
to current reforms in the managed care sector.
Our second largest sector was specialty pharmaceuticals, which represented
17.6% of total net assets on April 30, 1995. We believe these stocks have
characteristics that should allow them to perform well for the remainder of
1995. While many companies in this sector are introducing new products and have
improved earnings prospects, their stocks have been out of favor with investors
and are, we believe, relatively undervalued.
We maintained a large weighting in the medical technology and supplies sector
because growth prospects for many of these companies have improved and rapid
consolidation is occurring within the industry. Increasing our exposure to this
sector slightly, we added a position in Mentor Corp., a leading manufacturer of
urological and cosmetic surgery devices.
Biotechnology stocks represented a relatively small weighting in the fund
because they have been underperforming other health care stocks due to
financial and product-related difficulties. We decreased our exposure to this
sector over the course of the fiscal year, from 7.3% on April 30, 1994 to 4.8%
on April 30, 1995.
Although we continue to like the managed care sector, many stocks in this group
performed poorly at the end of the period as a result of rising expenses within
certain prepaid plans. In reaction, we sold the fund's shares of U.S.
HealthCare, Inc., which has recently been subjected to increased costs and
initiated a position in Foundation Health Corporation, a leading provider of
HMO plans in California and the Southwest, whose costs are declining. We intend
to monitor this industry's competitive climate carefully and take appropriate
action when necessary.
Looking forward, we are optimistic about the prospects for the health care
industry and believe
20
<PAGE>
the upcoming fiscal year should offer investment opportunities similar to those
of the past year. We do not anticipate another broad-scope health care reform
bill arising in the U.S., nor do we envision major legislation impacting
foreign markets in the near future. While individual U.S. states may enact
their own reform bills to cope with rising medical costs, such legislation
would most likely favor companies in the areas of managed care and home health
care. Our goal, as always, is to provide our shareholders with exposure to
today's fastest growing health care companies by discovering global health care
investment opportunities in a timely and disciplined fashion. There are, of
course, special risks involved with investing globally in a non-diversified
fund concentrating its investments in a single industry. These risks, which
include currency fluctuations and increased susceptibility to adverse economic,
political, social and regulatory developments, are further discussed in the
fund's prospectus.
We appreciate your participation in the Franklin Global Health Care Fund and
look forward to serving your investment needs in the years to come.
- --------------------------------------------------
FRANKLIN GLOBAL HEALTH CARE FUND
Top 10 Holdings on April 30, 1995
Based on Total Net Assets
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY NET ASSETS
- --------------------------------------------------
<S> <C>
Roche Holding 4.66%
Pharmaceuticals
- --------------------------------------------------
Pfizer, Inc. 3.36%
Pharmaceuticals
- --------------------------------------------------
Pyxis Corp. 3.08%
Software/Information Systems
- --------------------------------------------------
Matrix Pharmaceuticals, Inc. 2.86%
Specialty Pharmaceuticals
- --------------------------------------------------
Noven Pharmaceuticals, Inc. 2.77%
Specialty Pharmaceuticals
- --------------------------------------------------
Sierra Health Services, Inc. 2.73%
Health Maintenance Organizations
- --------------------------------------------------
Penederm, Inc. 2.58%
Specialty Pharmaceuticals
- --------------------------------------------------
Humana, Inc. 2.57%
Health Maintenance Organizations
- --------------------------------------------------
Medeva PLC, ADR 2.52%
Pharmaceuticals
- --------------------------------------------------
MediSense, Inc. 2.50%
Medical Technology & Supplies
- --------------------------------------------------
</TABLE>
FOR A COMPLETE LIST OF PORTFOLIO HOLDINGS, PLEASE SEE PAGE 53 OF THIS REPORT.
21
<PAGE>
PERFORMANCE SUMMARY
The Franklin Global Health Care Fund provided a total return of +16.33% for the
fiscal year ended April 30, 1995. Total return measures the change in value of
an investment, assuming reinvestment of dividends and capital gains
distributions, and does not include the initial sales charge.
The fund's share price, as measured by net asset value, increased from $10.43
on April 30, 1994 to $11.45 on April 30, 1995. During the reporting period,
shareholders received distributions of 6.1 cents ($0.061) per share in dividend
income and 55.9 cents ($0.559) per share in short-term capital gains. Past
performance is not indicative of future results, and distributions will vary
depending on income earned by the fund and any profits realized from the sale
of securities in the fund's portfolio.
The graph on the following page compares the fund's performance since inception
with the performance of the broad-based Standard & Poor's 500 Stock Index(R)
(S&P 500(R)). The fund and the index, however, are inherently different. The
index includes a variety of securities issued by companies not associated with
the health care industry. Furthermore, it does not contain cash (the fund
generally carries a certain percentage of cash at any given time) and does not
include sales charges or management expenses. Of course, one cannot invest
directly in an index.
22
<PAGE>
GRAPHIC MATERIAL (10)OMITTED - SEE APPENDIX
* 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. Past performance is not predictive of future
results.
** Index is unmanaged and includes reinvested dividends.
FRANKLIN GLOBAL HEALTH CARE FUND
Periods ended April 30, 1995
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (2/14/92)
- ------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return 1 16.33% 27.16%
Average Annual Total Return 2 11.11% 6.24%
- ------------------------------------------------------------------
</TABLE>
1. Cumulative total return shows the change in value of an investment over the
specified periods and does not include the maximum 4.5% initial sales charge.
2. Average annual total return represents the average annual increase in value
of an investment over the specified periods and includes the maximum 4.5%
initial sales charge.
All total return calculations assume reinvestment of dividends and capital
gains. Investment return and principal value will fluctuate with market
conditions and you may have a gain or loss when you sell your shares. Past
performance cannot guarantee future results.
The fund's manager has agreed in advance to waive a portion of the management
fees, which reduces operating expenses and increases total return to
shareholders. Without this waiver, the fund's total return would have been
lower. The waiver may be discontinued at any time.
23
<PAGE>
FRANKLIN STRATEGIC INCOME FUND
YOUR FUND'S OBJECTIVE:
The Franklin Strategic Series Income Fund seeks a high level of current
income, with capital appreciation over the long term as a secondary
objective. The fund uses an active asset allocation process and invests in
securities of foreign governments, U.S. and foreign high yield fixed-income
securities, asset-backed securities, and preferred stock, common stocks
that pay dividends, and income producing securities convertible into common
stocks of such companies.
The Franklin Strategic Income Fund commenced operations on June 1, 1994. Using
active asset allocation, the fund's managers seek to capitalize on worldwide
investment opportunities. They are free to allocate assets among a wide variety
of worldwide market sectors including foreign government and corporate
securities, high yield corporate bonds, convertible securities, mortgage-backed
securities, emerging market debt securities, and U.S. government bonds.(1)
The Franklin Templeton Group offers other funds focusing on each of these
sectors, and we are able to take advantage of the research undertaken for those
funds. Furthermore, the fund's current size makes it fairly nimble, making it
easier for us to react to changing market conditions as they occur.
The fund's first fiscal year proved to be a successful one. Because it did not
begin operations until June 1, 1994, the fiscal period was actually 11 months,
rather than the usual 12. Despite this abbreviated period, the fund reported an
impressive cumulative total return of +8.94% for the eleven-month fiscal
period. In comparison, the average return of the 19 funds in Lipper's flexible
income category was +5.84% for the 12 months ended April 30, 1995.(2)
1. The fund may invest up to 100% of its assets in foreign securities, which
may involve political uncertainty and currency risks. Investing in developing
markets involves special considerations, which may include risks related to
market and currency volatility, adverse social and political developments, and
the relatively small size and lesser liquidity of these markets. High yields
reflect the higher credit risk associated with certain lower rated securities
in the fund's portfolio and, in some cases, the lower market prices for these
instruments.
2. Source: Lipper Analytical Services, Inc., 4/30/95. Lipper rankings do not
include sales charges; past and present expense reductions by the fund's
manager increased the fund's total returns. Rankings may have been different if
these factors had been considered. Because the fund is less than one-year-old,
it is not ranked by Lipper. Total return measures the change in value of an
investment over the specified period and assumes reinvestment of dividends and
capital gains at net asset value. Past performance cannot guarantee future
results.
24
<PAGE>
During the fiscal year, our primary objective was to capitalize on domestic and
international economic growth. With U.S. interest rates rising so dramatically
throughout most of 1994, we were relatively underweighted in sectors that are
traditionally sensitive to interest rates, such as utilities, U.S. government
bonds, and mortgage-backed securities.
Since the fund's semi-annual report in October, however, long-term interest
rates have actually begun to decline. Thirty-year Treasuries, which yielded
7.97% on October 31, 1994, have fallen over 50 basis points to 7.34% on April
30, 1995.(3) Declining interest rates and more stable economic growth have
fueled the recent rally of the bond markets, causing their prices to rise.
In anticipation of continued strength in the corporate bond market, we
increased the fund's holdings in this area to 31.8% of total net assets on
April 30, 1995, from 24.0% on October 31, 1994.
Since a significant portion of the value of a convertible security comes from
its value as a fixed-income investment, recent declines in interest rates also
benefited this sector. We added to the fund's convertible stock and bond
holdings, bringing convertible securities to 14.2% of total net assets on April
30, 1995 -- nearly double the 7.6% this sector represented on October 31, 1994.
GRAPHIC MATERIAL (11)OMITTED - SEE APPENDIX
* Total market value is the value of the fund's investments and does not
include certain liabilities and other assets. Please see page 40 of this report
for a complete listing of the fund's assets.
3. Source: Micropal
25
<PAGE>
The fund reduced its international exposure during the last six months of the
reporting period. Foreign corporate and government agency bonds were reduced to
20.4% of total net assets on April 30, 1995, from 25.2% on October 31, 1994.
This underweighting, particularly in emerging markets (the worst-performing
fixed-income sector in 1994), helped buoy the fund's relative performance
during the fiscal period.
There were several specific industry allocations that aided the fund's
performance. The paper industry, which includes forest and paper products as
well as containers and packaging, experienced near-record price increases
during the fiscal period. Improving worldwide economies increased demand for
all sorts of paper and packaging materials, while more stringent environmental
regulations and an overall production shortage limited the available supply. As
a result, paper prices soared during the past year. The fund's holdings of
Stone Container, a maker of corrugated boxes, and S.D. Warren Co., a producer
of high-quality coated paper, both performed well over the fiscal period.
Looking forward, we do not expect paper supply to increase significantly, which
should continue to support prices.
During the past year, the healthcare industry has benefited from a trend toward
consolidation. Many companies merged for greater economies of scale, in hopes
of competing with the large HMOs that have emerged in recent years. In the
first half of the fiscal year we established a position in Ornda Healthcare,
Inc., an operator of acute care hospitals, which has recently acquired a number
of other hospital facilities. During the second half of the year, we initiated
a position in National Medical Enterprises, another acute care hospital
operator. National Medical Enterprises recently acquired American Medical
Holdings, one of its largest competitors, and changed its
26
<PAGE>
name to Tenet Healthcare. At the end of the fiscal period, healthcare
represented 4.2% of total net assets, up from 2.7% at the end of October.
The gaming and hotels sector also helped the fund's performance. After being
out of favor with investors, this sector rebounded in late 1994. Aztar Corp.
and Showboat, Inc., two casino operators, were both strong performers for the
fund within this sector.
The fund's allocation included other solidly performing industries as well. The
fund's cable television holdings, particularly Bell Cablemedia, a cable and
telephone provider in the United Kingdom, benefited from improving global
economies.
Within the convertible universe, we established a significant position in the
financial services industry (3.7% of total net assets at fiscal year-end),
initiating holdings in Roosevelt Financial Group, a savings and loan, and
Allstate Corp., a private mortgage insurer. Lower interest rates should benefit
these companies, and we were able to purchase both at inexpensive prices
relative to their peers.
Looking forward, with inflation seemingly under control and economies
(particularly the U.S.) showing signs of slowing, the outlook for fixed-income
markets appears favorable. Given this environment, we may seek to exchange
credit risk (inherent in high yield bonds and convertible securities) for
interest rate risk (government bonds, mortgage-backed securities).
Internationally, emerging markets have exhibited some signs of stability, so we
may look for long-term opportunities in this sector. Fortunately, we have the
benefit of Franklin Templeton's vast research network throughout the world, and
will seek to maneuver the fund to take advantage of changing market conditions
as they occur.
27
<PAGE>
PERFORMANCE SUMMARY
The Franklin Strategic Income Fund's share price, as measured by net asset
value, increased to $10.18 on April 30, 1995, from $10.00 at the fund's
inception on June 1, 1994.
For the fiscal year ended April 30, 1995, your fund paid monthly income
distributions totaling 67.4 cents ($0.674) per share. This figure includes the
special year-end distribution of 20.5 cents ($0.205). Dividends will vary based
on the earnings of the fund's portfolio, and past distributions are not
necessarily predictive of future trends.
Based on an annualization of the monthly dividend of 6.7 cents ($0.067) per
share and the maximum offering price of $10.63 on April 30, 1995, your fund's
distribution rate was 7.56%.
From its inception on June 1, 1994, through April 30, 1995, the fund posted a
total return of +8.94%. Cumulative total return measures the change in value of
an investment during the period indicated, assuming reinvestment of dividends
and capital gains, if any. This calculation does not include the maximum sales
charge, and past performance is not predictive of future results.
The graph on page 29 compares the Strategic Income Fund to the Lehman Brothers
Aggregate Index from June 1, 1994, through April 30, 1995. Unlike the Franklin
Strategic Income Fund, the index includes only fixed-rate debt issues rated
investment grade or higher by Moody's, Standard & Poor's, and Fitch, and does
not include sales charges or management fees. Thus, its performance will not
always reflect that of the fund. Despite these differences, the fund followed
the index closely during the fiscal period. Please remember that an index is
simply a measure of performance, and cannot be invested in directly.
We manage this fund from a long-term perspective and encourage shareholders to
view their investment in a similar manner. While the fund is bound to encounter
volatility from time to time, short-term fluctuations should not unduly concern
long-term investors.
28
<PAGE>
GRAPHIC MATERIAL (12)OMITTED - SEE APPENDIX
* This performance graph assumes an initial $10,000 investment and includes the
maximum 4.25% initial sales charge, all fund expenses and account fees. It also
assumes that your dividends and capital gains were reinvested at net asset
value. The Lehman Brothers Aggregate Index includes price appreciation or
depreciation and income as a percentage of the original investment. Past
performance is not predictive of future results.
FRANKLIN STRATEGIC INCOME FUND
Periods ended April 30, 1995
<TABLE>
<CAPTION>
SINCE
INCEPTION
(06/01/94)
- -------------------------------------------------------------------
<S> <C>
Standardized Cumulative Total Return 1 4.35%
Non-Standardized
Cumulative Total Return 2 8.94%
30-Day Standardized Yield 3 8.30%
Distribution Rate 4 7.56%
- -------------------------------------------------------------------
</TABLE>
1. Standardized cumulative total return measures the change in value of an
investment over the periods indicated and includes the maximum 4.25% initial
sales charge.
2. Non-standardized cumulative total return represents the change in value of
an investment over the stated periods and does not include the maximum 4.25%
initial sales charge.
3. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended April 30, 1995.
4. Distribution rate is based on an annualization of the fund's current 6.7
cents per share monthly dividend and the maximum offering price of $10.63 on
April 30, 1995.
All total return calculations assume reinvestment of dividends and capital
gains at net asset value. Investment return and principal value will fluctuate
with market conditions, and you may have a gain or loss when you sell your
shares. Past performance is not indicative of future results.
The fund's manager has agreed to waive a portion of its management
fees and to assume responsibility for certain other expenses, which reduces
operating expenses and increases distribution rate, yield and total return to
shareholders. If the manager had not taken this action, the fund's distribution
rate and total return would have been lower and yield for the period would have
been 6.37%. The fee waiver may be discontinued at any time.
29
<PAGE>
FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND
FUND OBJECTIVE:
The Franklin Institutional MidCap Growth Fund seeks total return (capital
growth plus income) exceeding the total return of the aggregate U.S.
medium-capitalization stocks, as measured by the Standard & Poor's MidCap
400 Index(R). The fund invests in the common stocks of companies selected
by a structured quantitative investment strategy. Shares of the fund are
available only to institutional accounts.
Dear Shareholder: May 16, 1995
We are pleased to bring you the annual report of the Franklin Institutional
MidCap Growth Fund for the period ended April 30, 1995.
Despite fears of inflation, interest rate hikes by the Federal Reserve, mixed
responses to Washington's economic policy towards Mexico and the dollar's
weakening position against the Japanese yen and German mark, the U.S. equity
market finished the fiscal year with a strong rebound. Amidst the
uncertainties, U.S. corporate earnings showed no signs of slowing, benefiting
primarily from greater corporate efficiency and continuing product demand. In
addition, after the generally disappointing performance from international
markets (especially emerging markets) in 1994 and the stabilization of domestic
interest rates, investors shifted their focus back to U.S. stocks.
Many large capitalization stocks benefited, as numerous investors shifted
assets into these, relatively "safe" stocks, and the weakening dollar helped
large, export-oriented U.S. companies. Large capitalization companies, in
general, successfully defended their profit margins and showed strong earnings
growth by becoming more competitive and efficient. This group, as measured by
the Standard & Poor's 500 Index(R) (S&P 500(R)), produced a total return of
more than 17% for the year ended April 30, 1995. In comparison, the medium
capitalization segment, as measured by the Standard & Poor's MidCap 400
Index(R) (S&P MidCap 400(R)), posted
30
<PAGE>
a total return of approximately 10% during the same period.(1)
During the past fiscal year, we continued to select securities for the fund
based on a proprietary stock selection model that compares the attractiveness
of a company's growth factors relative to its value factors. In addition, our
selection process incorporates risk management technology, which analyzes each
stock's contribution to the portfolio's overall risk and reward attributes.
In seeking greater opportunity for capital growth, we gradually increased
positions in favorably ranked, medium capitalization companies not included in
the S&P MidCap 400, and scaled back several larger positions in the portfolio.
As of April 30, 1995, the fund was invested in 187 companies, with 28% of its
total net assets invested in stocks not included in the S&P MidCap 400,
compared with 76 companies and 12% of total net assets a year ago. A breakdown
of the fund's portfolio by industry is shown to the right.
GRAPHIC MATERIAL (13)OMITTED - SEE APPENDIX
The fund's top 10 holdings provide further illustration of the portfolio's
diversification, as the table on page 32 indicates. The top ten positions on
April 30, 1995, make up less than 14% of the fund's assets, compared with 28% a
year ago.
FOR A COMPLETE LIST OF HOLDINGS, PLEASE REFER TO PAGE 56 OF THIS REPORT.
1. The Franklin Institutional MidCap Growth Fund is not sponsored, endorsed,
sold, or promoted by Standard & Poor's. Total return shows the change in value
of an investment over the period indicated, assuming reinvestment of dividends.
Indices are unmanaged, and one cannot invest directly in an index.
31
<PAGE>
Our continued emphasis on stock selection and diversification helped reduce the
fund's return volatility, yet outperform its benchmark, the unmanaged S&P
MidCap 400. As indicated in the graph on page 33, the fund's risk/return
profile moved closer to that of its benchmark, during the fiscal year ended
April 30, 1995. This has been consistent with our goal of outperforming the S&P
MidCap 400 on a total return basis, while accepting a level of volatility
similar to that of the Index.
Our long-term outlook for medium capitalization stocks continues to remain
positive. We view investing in these companies as recruiting potential
corporate giants. Typically younger than large capitalization companies, they
tend to be leaders in highly specialized industries. Many of these companies
can grow with great efficiency because of their use of recent technology. Also,
their relatively smaller size may enable them to make changes more effectively
than many corporate giants, who must struggle to update and modify larger
corporate infrastructures.
- ----------------------------------------------
FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND
Top 10 Holdings on April 30, 1995
Based on Total Net Assets
<TABLE>
<CAPTION>
% OF TOTAL
COMPANY NET ASSETS
- ----------------------------------------------
<S> <C>
AFLAC, Inc. 1.77%
- ----------------------------------------------
Office Depot, Inc. 1.51%
- ----------------------------------------------
Dell Computer Corp. 1.47%
- ----------------------------------------------
Mirage Resorts, Inc. 1.40%
- ----------------------------------------------
Mylan Labs, Inc. 1.37%
- ----------------------------------------------
Cardinal Health, Inc. 1.32%
- ----------------------------------------------
Pinnacle West Cap Corp. 1.31%
- ----------------------------------------------
Bowater, Inc. 1.30%
- ----------------------------------------------
IBP, Inc. 1.26%
- ----------------------------------------------
Murphy Oil Corp. 1.25%
- ----------------------------------------------
TOTAL 13.96%
- ----------------------------------------------
</TABLE>
FOR A COMPLETE LIST OF HOLDINGS, PLEASE REFER TO PAGE 56 OF THIS REPORT.
32
<PAGE>
If they perform well and become large enough, they may eventually be included
in the S&P 500. These are the kinds of stocks which we seek to weight heavily
in the portfolio.
At the end of the reporting period, the medium capitalization segment continued
to offer attractive earnings growth potential of about 13%, at reasonable
valuations of about 15 times earnings, compared with 11% for large
capitalization stocks at the same valuation level.(2)
We appreciate your participation in the Franklin Institutional MidCap Growth
Fund and look forward to serving your investment needs in the months and years
to come.
2. Source: Templeton Quantitative Advisors, Inc., using Institutional Brokers
Estimate System (I/B/E/S) Data.
3. Total return represents the change in value of an investment over the period
shown. The fund's total return assumes initial purchase and the reinvestment of
dividends and capital gains at net asset value. The index's total return assumes
the reinvestment of dividends. Indices are unmanaged, and one cannot invest
directly in an index. Past performance cannot guarantee future results.
4. Risk is measured by the annualized standard deviation of monthly returns.
Standard deviation is a statistical measure of the volatility of a fund's or
index's total returns. In general, the higher the standard deviation, the
greater the volatility or risk.
33
<PAGE>
PERFORMANCE SUMMARY
The Franklin Institutional MidCap Growth Fund posted a total return of +10.06%
for the fiscal year ended April 30, 1995. Total return reflects a 76 cents
($0.76) per share increase in the fund's net asset value from $10.05 on April
30, 1994, to $10.81 on April 30, 1995, and assumes reinvestment of dividends
and capital gains at net asset value. During the reporting period, shareholders
received distributions totaling 20.4 cents ($0.204) per share in income
dividends and 1.5 cents ($0.015) per share in short-term capital gains.
Distributions will vary depending on income earned by the fund, as well as any
capital gains realized from the sale of individual holdings in the portfolio.
Past performance is not indicative of future results.
The graph on page 35 compares the fund's performance since its inception on
August 31, 1993, with the performance of the unmanaged S&P MidCap 400 Index and
unmanaged S&P 500 Index for the same period. As you can see, the Franklin
Institutional MidCap Growth Fund has consistently outperformed the benchmark
S&P MidCap 400 over the periods shown. Please remember that an index does not
contain cash (the fund generally carries a certain percentage of cash at any
given time) and includes no management expenses. Of course, one cannot invest
directly in an index.
GRAPHIC MATERIAL (14)OMITTED - SEE APPENDIX
34
<PAGE>
Note: Future index comparisons will include only the S&P MidCap 400(R) Stock
Index. While the S&P 500(R) was used to represent the broader domestic equity
market, this index generally represents larger capitalization stocks, which
make up a distinctly different segment of the domestic equity market. The S&P
MidCap 400 provides a more appropriate comparison for the fund, given the
fund's emphasis on middle capitalization stocks, and will continue to be used
going forward.
FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND
Performance Results
Periods ended April 30, 1995
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (8/31/93)
- -------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return 5 10.06% 11.85%
Average Annual Total Return 6 10.06% 6.95%
- -------------------------------------------------------------
</TABLE>
5. Cumulative total returns show the change in value of an investment over the
periods indicated, assuming initial purchase and reinvestment of dividends and
capital gains at net asset value. See note below.
6. Average annual total returns represent the average annual change in value of
an investment over the periods indicated, assuming initial purchase and the
reinvestment of dividends and capital gains at net asset value. See note below.
Note: Investment return and principal value fluctuate so that your shares, when
redeemed, may be worth more or less than their original cost. Past performance
cannot guarantee future results.
The fund's manager has agreed in advance to waive its management fees and made
payments for other expenses, which reduces operating expenses and increases
total return to shareholders. Without these reductions, the fund's total return
would have been lower. The fee waiver may be discontinued at any time, upon
notice to the fund's Board of Trustees.
35
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN CALIFORNIA GROWTH FUND (NOTE 1)
- -----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 80.3%
AUTOMOBILE .7%
3,500 Ford Motor Co. ........................................ $ 94,500
-----------
CONSUMER SERVICES 3.9%
3,000 Disney (Walt) Co. ..................................... 166,125
8,500 McClatchy Newspapers, Inc., Series A .................. 188,063
3,000 United Television, Inc. ............................... 189,375
-----------
543,563
-----------
ELECTRONIC TECHNOLOGY 18.7%
1,800 a 3Com Corp. ............................................ 100,800
4,000 a Applied Materials, Inc. ............................... 246,500
6,000 a Cisco Systems, Inc. ................................... 239,250
1,500 a Computer Sciences Corp. ............................... 74,063
5,612 ECI Telecommunications, Ltd. .......................... 94,702
6,000 Logicon, Inc. ......................................... 222,000
15,000 a Megatest Corp. ........................................ 157,500
7,500 a Network Peripherals, Inc. ............................. 143,437
13,300 a Read-Rite Corp. ....................................... 282,625
5,000 Rockwell International Corp. .......................... 218,125
1,000 a Silicon Graphics, Inc. ................................ 37,500
6,000 a Sun Microsystems, Inc. ................................ 239,250
8,500 a VeriFone, Inc. ........................................ 200,813
20,000 a Western Digital Corp. ................................. 320,000
-----------
2,576,565
-----------
ENERGY/MINERALS 6.0%
2,500 Atlantic Richfield Co. (ARCO) ......................... 286,250
4,000 Chevron Corp. ......................................... 189,500
5,000 Ultramar Corp. ........................................ 130,625
5,000 a Western Atlas, Inc. ................................... 225,000
-----------
831,375
-----------
FINANCIALS 3.1%
4,000 Mercury General Corp. ................................. 123,000
4,500 a Silicon Valley Bancshares ............................. 69,750
4,500 a The PMI Group, Inc. ................................... 167,625
5,000 ValliCorp Holdings, Inc. .............................. 75,000
-----------
435,375
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN CALIFORNIA GROWTH FUND (NOTE 1)
- -----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
HEALTH SERVICES 4.3%
6,000 a Foundation Health Corp. ............................... $ 166,500
2,000 a Homedco Group, Inc. ................................... 114,500
3,000 a PacifiCare Health Systems, Class A .................... 184,500
5,000 U.S. Healthcare, Inc. ................................. 133,750
-----------
599,250
-----------
HEALTH TECHNOLOGY 4.7%
2,500 a Amgen, Inc. ........................................... 181,719
1,235 a Chiron Corp. .......................................... 68,234
1,500 a Genentech, Inc. ....................................... 75,562
9,000 Mentor Corp. .......................................... 212,625
10,000 a Penederm, Inc. ........................................ 47,500
3,000 a Sola International, Inc. .............................. 65,625
-----------
651,265
-----------
OTHER
198 a,b Lynx Therapeutics, Inc. ............................... --
-----------
PRODUCER/MANUFACTURING 3.3%
4,000 Clorox Co. ............................................ 235,000
8,500 Superior Industries International, Inc. ............... 225,250
-----------
460,250
-----------
REAL ESTATE 2.9%
10,000 Bay Apartment Communities, Inc. ....................... 180,000
3,000 LTC Properties, Inc. .................................. 39,000
5,000 Nationwide Health Property, Inc. ...................... 180,625
-----------
399,625
-----------
RETAIL TRADE 5.4%
25,000 a Broadway Stores, Inc. ................................. 168,750
4,000 Dreyer's Grand Ice Cream, Inc. ........................ 119,000
4,343 a Price/Costco, Inc. .................................... 63,516
15,000 a Strouds, Inc. ......................................... 127,500
13,000 a Vons Companies, Inc. .................................. 266,500
-----------
745,266
-----------
SEMICONDUCTORS 9.0%
12,500 a Actel Corp. ........................................... 145,313
3,000 a Altera Corp. .......................................... 242,625
3,500 Intel Corp. ........................................... 358,313
800 Linear Technology Corp. ............................... 47,800
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN CALIFORNIA GROWTH FUND (NOTE 1)
- -----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
SEMICONDUCTORS (CONT.)
10,000 a National Semiconductor Corp. .......................... $ 228,750
2,500 a Solectron Corp. ....................................... 73,437
2,000 a Xilinx, Inc. .......................................... 153,500
-----------
1,249,738
-----------
TECHNOLOGY SERVICES 8.6%
4,300 Adobe Systems, Inc. ................................... 250,475
7,000 a Microtec Research, Inc. ............................... 110,250
4,500 a Oracle Systems Corp. .................................. 137,250
8,000 a Spectrum Holobyte, Inc. ............................... 122,000
3,000 a Sybase, Inc. .......................................... 72,750
8,000 a Transaction Systems Architects, Inc., Class A ......... 165,000
7,500 a Wavefront Technologies, Inc. .......................... 130,312
8,000 Wyle Laboratories ..................................... 196,000
-----------
1,184,037
-----------
TRANSPORTATION 5.2%
8,250 Air Express International Corp. ....................... 193,875
5,600 Expeditors International of Washington, Inc. .......... 128,800
2,000 a Fritz Companies, Inc. ................................. 120,500
2,500 Harper Group, Inc. .................................... 48,125
10,000 a Mesa Airlines, Inc. ................................... 61,250
10,000 a Southern Pacific Rail Corp. ........................... 173,750
-----------
726,300
-----------
UTILITIES 4.5%
8,000 a AirTouch Communications, Inc. ......................... 215,000
7,500 San Diego Gas & Electric Co. .......................... 158,437
10,000 SCEcorp ............................................... 167,500
5,000 Southern California Water ............................. 85,625
-----------
626,562
-----------
TOTAL COMMON STOCKS (COST $9,530,085) ........... 11,123,671
-----------
PREFERRED STOCKS 2.0%
OTHER
288 a,b Lynx Therapeutics, Inc., pfd., Series A ............... 288
-----------
REAL ESTATE 2.0%
6,800 c Catellus Development Corp., $3.625 cvt. pfd., Series B 280,500
-----------
TOTAL PREFERRED STOCKS (COST $256,988) .......... 280,788
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA GROWTH FUND (NOTE 1)
- -----------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS .8%
ELECTRONIC TECHNOLOGY
$ 100,000 c 3COM Corp., cvt. sub. notes, 10.25%, 11/01/01
(COST $115,500)....................................... $ 115,500
-----------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS
(COST $9,902,573)............................... 11,519,959
-----------
d RECEIVABLES FROM REPURCHASE AGREEMENTS 17.0%
1,351,239 e Joint Repurchase Agreement, 5.975%, 05/01/95 (Maturity
Value $1,339,952)
Collateral: U.S. Treasury Notes, 4.75% - 9.00%,
07/15/96 - 1/31/00 .................................. 1,339,285
997,000 Nikko Government Securities Co., Inc., 5.90%,
05/01/95 (Maturity Value $1,000,492)
Collateral: U.S. Treasury Notes, 6.75%, 05/31/99 ..... 1,000,000
-----------
TOTAL RECEIVABLES FROM REPURCHASE AGREEMENTS
(COST $2,339,285) 2,339,285
-----------
TOTAL INVESTMENTS (COST $12,241,858) 100.1% .... 13,859,244
-----------
LIABILITIES IN EXCESS OF OTHER ASSETS, NET (.1)% (14,977)
-----------
NET ASSETS 100.0% .............................. $13,844,267
===========
At April 30, 1995, the net unrealized appreciation
based on the cost of investments for income tax
purposes of $12,244,100 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there was an excess of value
over tax cost ...................................... $ 2,002,365
Aggregate gross unrealized depreciation for all
investments in which there was an excess of tax cost
over value ......................................... (387,221)
-----------
Net unrealized appreciation ........................... $ 1,615,144
===========
</TABLE>
a Non-income producing.
b See Note 7 regarding restricted securities.
c See Note 8 regarding Rule 144A securities.
d Face amount for repurchase agreements is for the underlying collateral.
e See Note 1(g) regarding Joint Repurchase Agreement.
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995
<TABLE>
<CAPTION>
VALUE
COUNTRY* SHARES FRANKLIN STRATEGIC INCOME FUND (NOTE 1)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCKS 3.1%
FINANCIAL SERVICES 1.6%
US 1,000 First Nationwide Bank, 11.50% pfd. ............. $ 105,000
----------
MEDIA & BROADCASTING 1.5%
US 100 PanAmSat Corp., L.P., 12.75% pfd., PIK ......... 101,250
----------
TOTAL PREFERRED STOCKS (COST $200,000) ... 206,250
----------
CONVERTIBLE PREFERRED STOCKS 7.2%
ENERGY .8%
US 2,525 Snyder Oil Corp., $1.50 cvt. exch. pfd. ........ 54,918
----------
FINANCIAL SERVICES 3.7%
US 2,200 Allstate Corp., 6.75% cvt. pfd. ................ 79,475
US 1,500 Integon Corp., $3.875 cvt. pfd. ................ 76,125
US 1,500 Roosevelt Financial Group, 6.50% cvt. pfd. ..... 94,500
----------
250,100
----------
INFORMATION/TECHNOLOGY 1.2%
US 950 National Semiconductor Corp. $3.25 cvt. pfd. ... 78,850
----------
METALS & MINING .5%
US 500 Magma Copper Co., 5.625% cvt. pfd., Series D ... 30,375
----------
REAL ESTATE INVESTMENT TRUST 1.0%
US 3,000 Property Trust of America, $1.75 cvt. pfd.,
Series A ...................................... 67,500
----------
TOTAL CONVERTIBLE PREFERRED STOCK
(COST $469,126) ......................... 481,743
----------
<CAPTION>
FACE
AMOUNT
---------
<S> <C> <C> <C>
CORPORATE BONDS 31.8%
CABLE TELEVISION 2.9%
US 150,000 g Bell Cablemedia, Plc., senior disc. notes,
zero coupon to 07/15/99, (original accretion
rate 11.95%), 11.95% thereafter, 07/15/04 ..... 96,000
US 100,000 Rogers Cablesystems, Inc., guaranteed notes,
9.625%, 08/01/02 .............................. 100,375
----------
196,375
----------
CONSUMER GOODS 2.9%
US 100,000 Playtex Family Products Corp., senior sub.
deb., 9.00%, 12/15/03 ......................... 94,750
US 100,000 Sealy Corp., senior sub. notes, 9.50%, 05/01/03 99,500
----------
194,250
----------
CONTAINERS & PACKAGING 3.1%
US 100,000 Owens Illinois, Inc., senior sub. deb., 10.50%,
06/15/02....................................... 103,125
US 100,000 Stone Container, senior notes, 11.50%, 10/01/04 107,000
----------
210,125
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT FRANKLIN STRATEGIC INCOME FUND (NOTE 1)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS (CONT.)
ENERGY 1.4%
US 100,000 Gulf Canada Resources, Ltd., senior sub. deb.,
9.25%, 01/15/04 ............................... $ 95,029
----------
FOOD/BEVERAGES 1.6%
US 100,000 Curtice-Burns Foods, Inc., senior sub. notes,
12.25%, 02/01/05 .............................. 106,500
----------
FOOD RETAILING 1.5%
US 100,000 c Dominick's Finer Foods, senior sub. deb.,
10.875%, 05/01/05 ............................. 100,750
----------
FOREST & PAPER PRODUCTS 3.1%
US 100,000 Repap New Brunswick, senior notes, second
priority, 10.625%, 04/15/05 ................... 102,000
US 100,000 c S.D. Waren Co., senior sub. notes, 12.00%,
12/15/04 ...................................... 109,000
----------
211,000
----------
GAMING & HOTELS 4.7%
US 100,000 Aztar Corp., senior sub. notes, 13.75%, 10/01/04 111,000
US 100,000 c Players International, Inc., senior notes,
10.875%, 04/15/05 ............................. 100,750
US 100,000 Showboat, Inc., senior sub. notes, 13.00%,
08/01/09 ...................................... 105,000
----------
316,750
----------
HEALTH CARE 3.2%
US 100,000 National Medical Enterprises, senior sub. notes,
10.125%, 03/01/05 ............................. 104,750
US 100,000 OrNda Healthcorp., guaranteed, senior sub.
notes, 11.375%, 08/15/04 ...................... 108,250
----------
213,000
----------
INDUSTRIAL 1.6%
US 150,000 g American Standard, Inc., senior sub. deb., zero
coupon to 06/01/98, (original accretion rate
10.50%), 10.50% thereafter, 06/01/05 .......... 111,000
----------
MEDIA & BROADCASTING 1.6%
US 100,000 American Media Operation, senior sub. notes,
11.625%, 11/15/04 ............................. 107,000
----------
METALS & MINING 2.8%
US 100,000 g Acme Metals, Inc., guaranteed senior secured
disc. notes, zero coupon to 08/01/97,
(original accretion rate 13.50%), 13.50%
thereafter, 08/01/04 .......................... 77,500
US 100,000 c Ucar Global Enterprises, Inc., senior sub.
notes, 12.00%, 01/15/05 ....................... 108,750
----------
186,250
----------
TEXTILE 1.4%
US 100,000 WestPoint Stevens, Inc., senior notes, 8.75%,
12/15/01 ...................................... 97,125
----------
TOTAL CORPORATE BONDS (COST $2,042,936) .. 2,145,154
----------
CONVERTIBLE BONDS 7.0%
CELLULAR TELEPHONE .7%
US 150,000 g Rogers Communications, Inc., cvt. sub. notes,
LYONs, (original accretion rate 5.50%),
0.00%, 05/20/13 ............................... 49,313
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT FRANKLIN STRATEGIC INCOME FUND (NOTE 1)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONVERTIBLE BONDS (CONT.)
FOOD/BEVERAGES .8%
US 65,000 Chock Full O'Nuts Corp., cvt. deb., 7.00%,
04/01/12 ...................................... $ 57,200
----------
HEALTH CARE 1.0%
US 70,000 Maxxim Medical, Inc., cvt. sub. deb., 6.75%,
03/01/03 ...................................... 65,450
----------
HOME BUILDING 1.1%
US 100,000 U.S. Home Corp., cvt. sub. notes, 4.875%,
11/01/05 ...................................... 70,750
----------
INDUSTRIAL 1.1%
US 60,000 Raymond Corp., cvt. sub. deb., 6.50%, 12/15/03 . 72,300
----------
REAL ESTATE INVESTMENT TRUST 1.0%
US 70,000 Liberty Property Trust, cvt. sub. deb., 8.00%,
07/01/01 ...................................... 67,200
----------
TELECOMMUNICATION 1.3%
US 25,000 c All American Communications, cvt. sub. deb.,
6.50%, 10/01/03 ............................... 21,719
US 60,000 c Aspect Telecommunication, cvt. sub. deb., 5.00%,
10/15/03 ...................................... 69,525
----------
91,244
----------
TOTAL CONVERTIBLE BONDS (COST $457,192) .. 473,457
----------
FOREIGN CORPORATE BONDS 3.7%
US 45,000 Compania de Telefonos de Chile, cvt. sub.,
4.50%, 01/15/03 ............................... 44,213
US 100,000 c Essar Guajarat, Ltd., floating rate deb., 9.40%,
07/15/99 ...................................... 100,250
US 100,000 Tjiwi Kimia International, 13.25%, 08/01/01 .... 101,500
----------
TOTAL FOREIGN CORPORATE BONDS
(COST $238,236) ......................... 245,963
----------
FOREIGN GOVERNMENT AGENCIES 16.7%
DD 140,000 Bundesobligation, 5.375%, 02/22/99 ............. 98,687
DD 68,000 Bundesobligation, 6.625%, 01/20/98 ............. 50,092
DD 60,000 Bundesschatzanweisungen, 6.875%, 12/02/98 ...... 44,364
DD 40,000 Deutsche Bundespost, 7.75%, 10/01/04 ........... 29,827
JP 6,000,000 European Investment Bank, 5.875%, 11/26/99 ..... 81,395
DD 42,000 German Unity Fund, 8.00%, 01/21/02 ............. 32,139
CA 100,000 Government of Canada, 10.25%, 12/01/98 ......... 78,989
CA 100,000 Government of Canada, 10.50%, 10/01/04 ......... 83,741
JP 6,000,000 International Bank of Reconstruction and
Development, 6.75%, 05/15/00 .................. 84,251
DD 20,000 International Bank of Reconstruction and
Development, 7.125%, 04/12/05 ................. 14,422
DK 167,000 Kingdom of Denmark, 8.00%, 05/15/03 ............ 29,637
AU 225,000 Queensland Treasury Corp., 8.875%, 11/08/96 .... 164,276
US 250,000 Republic of Argentina, BOCON PRE4, floating
rate notes, 6.125%, 09/01/02 .................. 128,750
GB 85,000 United Kingdom Treasury, 12.25%, 03/26/99 ...... 154,208
GB 30,000 United Kingdom Treasury, 9.50%, 04/18/05 ....... 51,454
----------
TOTAL FOREIGN GOVERNMENT AGENCIES
(COST $1,161,125) ....................... 1,126,232
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT FRANKLIN STRATEGIC INCOME FUND (NOTE 1)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT 3.7%
US $ 250,000 U.S. Treasury Notes, 6.75%, 05/31/97
(COST $248,668) ............................... $ 250,624
----------
U.S. GOVERNMENT AGENCIES/MORTGAGES 6.4%
US 50,374 FHLMC, 7.00%, 04/01/24 ......................... 47,966
US 49,046 FHLMC, 7.50%, 04/01/24 ......................... 47,897
US 50,365 FHLMC, 8.50%, 12/01/24 ......................... 51,184
US 50,315 FNMA, 8.00%, 01/01/25 .......................... 50,205
US 47,506 FNMA, 7.50%, 10/01/07 .......................... 47,314
US 49,195 GNMA, SF, 7.50%, 09/15/23 ...................... 47,950
US 99,389 GNMA, SF, 6.50%, 03/15/24 ...................... 90,879
US 50,187 GNMA, SF, 8.00%, 06/15/24 ...................... 50,156
----------
TOTAL U.S. GOVERNMENT AGENCIES/MORTGAGES
(COST $424,272) ......................... 433,551
----------
TOTAL LONG TERM INVESTMENTS
(COST $5,241,555) ....................... 5,362,974
----------
i SHORT TERM INVESTMENTS
COMMERCIAL PAPER 1.5%
US 105,000 Goldman Sachs Group, L.P., 14.00%, 06/15/95
(COST $105,000) ............................... 101,724
----------
FOREIGN CORPORATE AGENCIES 3.0%
TH 5,000,000 Thailand Military Bank Notes, 6.875%, 06/01/95
(COST $199,172) ............................... 202,072
----------
FOREIGN GOVERNMENT AGENCIES .6%
NZ 60,000 New Zealand Treasury Bills, 06/21/95
(COST $37,403) ................................ 39,806
----------
TOTAL INVESTMENTS BEFORE REPURCHASE
AGREEMENTS (COST $5,583,130) ............ 5,706,576
----------
d,e RECEIVABLES FROM REPURCHASE AGREEMENTS 12.4%
US 841,375 Joint Repurchase Agreement, 5.975%, 05/01/95
(Maturity Value $833,733) (COST $833,318)
Collateral: U.S. Treasury Notes, 4.75% -
9.00%, 07/15/96 - 01/31/00 ................... 833,318
----------
TOTAL INVESTMENTS (COST $6,416,448)
97.1% ................................. 6,539,894
OTHER ASSETS AND LIABILITIES, NET 2.9% 195,812
----------
NET ASSETS 100.0% ..................... $6,735,706
==========
At April 30, 1995, the net unrealized
appreciation based on the cost of investments
for income tax purposes of $6,416,448 was as
follows:
Aggregate gross unrealized appreciation for
all investments in which there was an excess
of value over tax cost ...................... $ 201,751
Aggregate gross unrealized depreciation for
all investments in which there was an excess
of tax cost over value ...................... (78,305)
----------
Net unrealized appreciation .................. $ 123,446
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995 (CONT.)
FRANKLIN STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO ABBREVIATIONS:
FHLMC - Federal Home Loan Mortgage Corp.
FNMA - Federal National Mortgage Association
GNMA - Government National Mortgage Association
L.P. - Limited Parnership
LYONs - Liquid Yield Option Notes
PIK - Payment-in-Kind
SF - Single Family
COUNTRY LEGEND:
AU - Australia
CA - Canada
DD - Germany
DK - Denmark
GB - United Kingdom
JP - Japan
NZ - New Zealand
TH - Thailand
US - United States of America
* Securities traded in currency of county indicated.
c See Note 8 regarding Rule 144A securities.
d Face amount for repurchase agreements is for the underlying collateral.
e See Note 1(g) regarding Joint Repurchase Agreement.
g Zero coupon/step-up bonds. The current effective yield may vary. The original
accretion rate will remain constant.
i Certain short-term securities are traded on a discount basis; the rates shown
are the discount rates at the time of purchase by the Fund. Other securities
bear interest at the rates shown, payable at fixed dates or upon maturity.
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995
<TABLE>
<CAPTION>
SHARES/ VALUE
COUNTRY* WARRANTS FRANKLIN GLOBAL UTILITIES FUND (NOTE 1)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS & WARRANTS 96.6%
ELECTRIC & GAS UTILITIES 71.6%
US 140,000 AES Corp. ...................................... $ 2,415,000
US 57,200 American Electric Power Co., Inc. .............. 1,873,300
US 49,500 Central & South West Corp. ..................... 1,218,938
HK 302,400 China Light & Power, Ltd. ...................... 1,425,862
US 175,000 CINergy Corp. .................................. 4,396,875
US 99,700 Dominion Resources, Inc. ....................... 3,639,050
US 22,300 DPL, Inc. ...................................... 465,513
US 60,950 Duke Power Co. ................................. 2,407,525
US 85,900 Empresa Nacional de Electricidad, ADR .......... 4,037,300
US 129,000 Enron Corp. .................................... 4,386,000
US 110,000 Entergy Corp. .................................. 2,392,500
FI 195,000 c Espoon Sahko Oy................................. 2,355,191
US 39,000 FPL Group, Inc. ................................ 1,433,250
US 49,600 General Public Utilities Corp. ................. 1,413,600
US 29,700 Hawaiian Electric Industries, Inc. ............. 1,028,363
HK 1,753,920 Hong Kong and China Gas Co., Ltd. .............. 2,548,973
HK 121,800 a Hong Kong and China Gas Co., Ltd., warrants .... 13,846
HK 1,180,000 Hong Kong Electric Holdings, Ltd. .............. 3,620,333
US 62,000 a Huaneng Power International, Inc., ADR ......... 899,000
ES 285,000 Iberdrola, SA .................................. 1,875,305
US 109,000 National Fuel Gas Co. .......................... 3,147,375
US 1,300 New England Electric System .................... 39,163
US 29,100 NIPSCO Industries, Inc. ........................ 938,475
US 40,400 Pacific Gas & Electric Co. ..................... 1,085,750
US 176,700 PacifiCorp ..................................... 3,357,300
US 141,000 Panhandle Eastern Corp. ........................ 3,384,000
US 117,500 Pinnacle West Capital Corp. .................... 2,526,250
US 50,000 Public Service Co. of Colorado ................. 1,506,250
US 33,800 SCEcorp ........................................ 566,150
GB 167,300 Scottish Power, Plc. ........................... 910,132
US 208,000 Southern Co. ................................... 4,290,000
US 41,200 Southern Indiana Gas & Electric Co. ............ 1,246,300
US 183,900 TECO Energy, Inc. .............................. 3,907,875
US 115,700 Texas Utilities Co. ............................ 3,774,713
US 255,000 Transportadora Gas Sur, ADR .................... 2,518,125
DD 10,700 Veba, Ag ....................................... 3,987,410
US 131,518 Williams Cos., Inc. ............................ 4,323,654
------------
85,354,646
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995 (CONT.)
<TABLE>
<CAPTION>
SHARES/ VALUE
COUNTRY* WARRANTS FRANKLIN GLOBAL UTILITIES FUND (NOTE 1)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS & WARRANTS (CONT.)
TELECOMMUNICATIONS SERVICES 25.0%
US 20,150 a AirTouch Communications, Inc. .................. $ 541,531
US 59,300 AT&T Corp. ..................................... 3,009,475
US 47,300 British Telecommunications, Plc., ADR .......... 2,956,250
GB 300,000 Cable & Wireless, Plc. ......................... 1,938,646
CA 88,900 a,c Call-Net Enterprises, Inc., Class B ............ 514,941
CA 321,000 a Call-Net Enterprises, Inc., Class B ............ 1,859,347
US 19,700 a Comcast UK Cable Partners, Ltd. ................ 275,800
US 16,700 Compania de Telefonos de Chile, ADR ............ 1,152,300
MX 44,400 a Grupo Iusacell, SA, Series D ................... 56,298
US 100,560 a Grupo Iusacell, SA, Series L, ADR .............. 1,458,120
US 55,300 GTE Corp. ...................................... 1,887,113
US 25,100 a International Cabletel, Inc. ................... 740,450
US 20,150 Pacific Telesis Group, Inc. .................... 622,131
IT 550,000 STET-Societa Finanziaria Telefonica ............ 1,567,843
US 74,750 Telecom de Argentina, SA, ADR .................. 3,270,312
US 85,000 Tele Danmark, A/S, ADS ......................... 2,231,250
US 20,400 Telefonica de Argentina, ADR ................... 479,400
US 65,950 Telefonica de Espana, ADR ...................... 2,423,662
US 45,700 Telefonos de Mexico, ADR ....................... 1,382,424
GB 57,500 a Telewest Communications, Plc. .................. 1,423,124
------------
29,790,417
------------
TOTAL COMMON STOCKS & WARRANTS
(COST $120,557,322) ..................... 115,145,063
------------
d,e RECEIVABLES FROM REPURCHASE AGREEMENTS 3.7%
US $4,497,075 Joint Repurchase Agreement, 5.975%, 05/01/95
(Maturity Value $4,458,289) (COST $4,456,070)
Collateral: U.S. Treasury Notes, 4.75% - 9.00%,
07/15/96 - 01/31/00 .......................... 4,456,070
------------
TOTAL INVESTMENTS (COST $125,013,392)
100.3% ................................ 119,601,133
------------
LIABILITIES IN EXCESS OF OTHER ASSETS,
NET (.3)% ............................ (350,651)
------------
NET ASSETS 100.0% ..................... $119,250,482
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
46
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995 (CONT.)
<TABLE>
<CAPTION>
VALUE
FRANKLIN GLOBAL UTILITIES FUND (NOTE 1)
- --------------------------------------------------------------------------------------
<S> <C>
At April 30, 1995, the net unrealized
depreciation based on the cost of investments
for income tax purposes of $125,016,195 was as
follows:
Aggregate gross unrealized appreciation for
all investments in which there was an excess
of value over tax cost ...................... $ 4,837,237
Aggregate gross unrealized depreciation for
all investments in which there was an excess
of tax cost over value ...................... (10,252,299)
------------
Net unrealized depreciation .................. $ (5,415,062)
============
</TABLE>
COUNTRY LEGEND:
CA - Canada
DD - Germany
ES - Spain
FI - Finland
GB - United Kingdom
HK - Hong Kong
IT - Italy
MX - Mexico
US - United States of America
* Securities traded in currency of country indicated.
a Non-income producing.
c See Note 8 regarding Rule 144A securities.
d Face amount for repurchase agreements is for the underlying collateral.
e See Note 1(g) regarding Joint Repurchase Agreement.
The accompanying notes are an integral part of these financial statements.
47
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN SMALL CAP GROWTH FUND (NOTE 1)
- -----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 89.0%
AEROSPACE .4%
20,000 a Tracor, Inc. .......................................... $ 260,000
-----------
BROADCASTING 2.6%
25,000 a Bell Cablemedia, Plc. ................................. 415,625
54,000 a Comcast UK Cable Partners, Ltd. ....................... 756,000
20,000 a Telewest Communications, Plc., ADR .................... 495,000
-----------
1,666,625
-----------
COMPONENT SUPPLIERS 3.2%
29,100 a Atchison Casting Corp. ................................ 436,500
50,000 a Easco, Inc. ........................................... 775,000
30,000 Roper Industries, Inc. ................................ 810,000
-----------
2,021,500
-----------
COMPUTER HARDWARE 4.3%
60,000 a Read-Rite Corp. ....................................... 1,275,000
90,000 a Western Digital Corp. ................................. 1,440,000
-----------
2,715,000
-----------
COMPUTER SOFTWARE 8.1%
9,500 a Integrated Systems, Inc. .............................. 199,500
15,000 a Lotus Development Corp. ............................... 472,500
49,000 a Microtec Research, Inc. ............................... 771,750
60,000 a Spectrum Holobyte, Inc. ............................... 915,000
25,000 a Sterling Software, Inc. ............................... 850,000
17,200 a Sybase, Inc. .......................................... 417,100
50,000 a Transaction Systems Architects, Inc. .................. 1,031,250
25,000 a Waverfront Technologies, Inc. ......................... 434,375
-----------
5,091,475
-----------
CONSUMER SERVICES .4%
10,000 The Loewen Group, Inc. ................................ 282,031
-----------
ELECTRONICS/ELECTRICAL EQUIPMENT 4.1%
10,000 Logicon, Inc. ......................................... 370,000
40,000 a Mentor Graphics Corp. ................................. 675,000
44,000 a Verifone, Inc. ........................................ 1,039,500
33,400 a Videonics, Inc. ....................................... 484,300
-----------
2,568,800
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
48
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN SMALL CAP GROWTH FUND (NOTE 1)
- -----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
FINANCIAL SERVICES 6.7%
30,000 ACE, Ltd. ............................................. $ 795,000
75,000 a ACMAT Corp., Class A .................................. 890,625
8,200 Leucadia National Corp. ............................... 366,950
15,000 Mercury General Corp. ................................. 461,250
25,500 a Silicon Valley Bancshares ............................. 395,250
35,000 a The PMI Group, Inc. ................................... 1,303,750
-----------
4,212,825
-----------
GAMING 1.2%
79,600 a Aztar Corp. ........................................... 736,300
-----------
HEALTH SERVICES 5.2%
90,500 a Advocat, Inc. ......................................... 1,074,688
16,000 a Homedco Group, Inc. ................................... 916,000
31,000 a Humana, Inc. .......................................... 604,500
25,000 a Sierra Health Services, Inc. .......................... 678,125
-----------
3,273,313
-----------
HEALTH TECHNOLOGY 1.0%
73,000 a Penederm, Inc. ........................................ 346,750
12,000 a Sola International, Inc. .............................. 262,500
-----------
609,250
-----------
HOMEBUILDERS 2.1%
45,000 a Beazer Homes USA, Inc. ................................ 641,250
45,000 Continental Homes Holding Corp. ....................... 517,500
29,200 a NVR, Inc. ............................................. 197,100
-----------
1,355,850
-----------
IRON/STEEL PRODUCTS 1.9%
25,000 a AK Steel Holding Corp. ................................ 671,875
42,000 a National Steel Corp., Class B ......................... 535,500
-----------
1,207,375
-----------
MACHINE - DIVERSIFIED .7%
30,000 a Bridgeport Machines, Inc. ............................. 438,750
-----------
METALS - DIVERSIFIED 1.7%
65,000 a Magma Copper Co. ...................................... 1,088,750
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
49
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN SMALL CAP GROWTH FUND (NOTE 1)
- -----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
NETWORKING 4.0%
25,000 a Cisco Systems, Inc. ................................... $ 996,875
25,000 a Silicon Graphics, Inc. ................................ 937,500
11,000 a 3Com Corp. ............................................ 616,000
-----------
2,550,375
-----------
OFFICE/BUSINESS EQUIPMENT 1.2%
6,000 Xerox Corp. ........................................... 738,750
-----------
OIL & GAS 3.3%
35,000 a Barrett Resources Corp. ............................... 822,500
30,000 Parker & Parsley Petroleum Co. ........................ 641,250
50,000 Total Petroleum (North America), Ltd. ................. 625,000
-----------
2,088,750
-----------
PHARMACEUTICAL 2.6%
60,000 a KV Pharmaceutical Co., Class B ........................ 382,500
50,000 a Matrix Pharmaceutical, Inc. ........................... 737,500
60,100 a Noven Pharmaceuticals, Inc. ........................... 510,850
-----------
1,630,850
-----------
REAL ESTATE 3.4%
66,000 Equity Inns, Inc. ..................................... 759,000
50,000 a Gillett Holdings, Inc. ................................ 1,000,000
8,400 Omega Healthcare Investors, Inc. ...................... 200,550
20,000 Winston Hotels, Inc. .................................. 200,000
-----------
2,159,550
-----------
RETAIL 2.4%
100,000 a Broadway Stores, Inc. ................................. 675,000
50,000 a Ernst Home Center, Inc. ............................... 506,250
35,800 a Strouds, Inc. ......................................... 304,300
-----------
1,485,550
-----------
SEMICONDUCTORS EQUIPMENT/SERVICES 12.1%
10,000 a ACT Manufacturing, Inc. ............................... 140,000
60,000 a Actel Corp. ........................................... 697,500
10,000 a Altera Corp. .......................................... 808,750
25,000 a ASM Lithography Holding ............................... 684,375
25,000 a Electro Scientific Industries, Inc. ................... 665,625
19,000 a Integrated Device Technology, Inc. .................... 724,375
13,000 a LSI Logic Corp. ....................................... 866,125
20,000 a Microchip Technology, Inc. ............................ 565,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
50
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN SMALL CAP GROWTH FUND (NOTE 1)
- -----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
SEMICONDUCTORS EQUIPMENT/SERVICES (CONT.)
25,000 a SGS-Thomson Microelectronics, Inc., ADR ............... $ 931,250
10,000 a Silicon Valley Group, Inc. ............................ 290,000
31,000 Wyle Electronics ...................................... 759,500
6,500 a Xilinx, Inc. .......................................... 498,875
-----------
7,631,375
-----------
TELECOMMUNICATIONS 8.4%
18,000 a Aspect Telecommunications Corp. ....................... 751,500
11,100 a,c Call-Net Enterprises, Inc., Class B ................... 64,295
75,600 a Call-Net Enterprises, Inc., Class B ................... 437,902
11,000 a Cellular Communications, Inc. ......................... 512,875
59,000 a Colonial Data Technologies Corp. ...................... 1,165,250
25,000 a Comnet Cellular, Inc. ................................. 650,000
7,600 a International Cabletel ................................ 224,200
28,000 a Spectrian Corp. ....................................... 815,500
10,000 a Tellabs, Inc. ......................................... 690,000
-----------
5,311,522
-----------
TEXTILES/APPAREL 1.7%
45,700 a Tommy Hilfiger Corp. .................................. 1,051,100
-----------
TRANSPORTATION 3.3%
33,000 Air Express International Corp. ....................... 775,500
247,500 a Atlantic Coast Airlines, Inc. ......................... 866,250
7,000 a Fritz Companies, Inc. ................................. 421,750
-----------
2,063,500
-----------
TRUCKING & LEASING 1.6%
20,000 a Landstar System, Inc. ................................. 580,000
40,000 a US Xpress Enterprises, Inc., Class A .................. 375,000
-----------
955,000
-----------
UTILITIES 1.4%
50,000 AES Corp. ............................................. 862,500
-----------
TOTAL COMMON STOCKS (COST $49,524,821) .......... 56,056,666
-----------
PREFERRED STOCKS 1.7%
ELECTRONICS/ELECTRICAL EQUIPMENT
26,000 Nokia Corp., pfd., ADR (COST $826,030) ................ 1,066,000
-----------
TOTAL COMMON STOCKS AND PREFERRED STOCKS (COST
$50,350,851) ................................... 57,122,666
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
51
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN SMALL CAP GROWTH FUND (NOTE 1)
- -----------------------------------------------------------------------------------
<S> <C> <C>
d RECEIVABLES FROM REPURCHASE AGREEMENTS 11.5%
$6,122,390 e Joint Repurchase Agreement, 5.975%, 05/01/95 (Maturity
Value $6,069,417)
Collateral: U.S. Treasury Notes, 4.75% - 9.00%,
07/15/96 - 01/31/00 ................................ $ 6,066,396
1,190,000 Lehman Government Securities, Inc., 5.99%, 05/01/95
(Maturity Value $1,180,589)
Collateral: U.S. Treasury Notes, 7.125%, 09/30/99 ... 1,180,000
-----------
TOTAL RECEIVABLES FROM REPURCHASE AGREEMENTS
(COST $7,246,396) .............................. 7,246,396
-----------
TOTAL INVESTMENTS (COST $57,597,247) 102.2% .... 64,369,062
LIABILITIES IN EXCESS OF OTHER ASSETS, NET
(2.2)% ......................................... (1,359,427)
-----------
NET ASSETS 100.0%............................... $63,009,635
===========
At April 30, 1995, the net unrealized appreciation
based on the cost of investments for income tax
purposes of $57,608,047 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there was an excess of value
over tax cost ...................................... $ 9,224,198
Aggregate gross unrealized depreciation for all
investments in which there was an excess of tax cost
over value ......................................... (2,463,183)
-----------
Net unrealized appreciation ......................... $ 6,761,015
===========
</TABLE>
a Non-income producing.
c See Note 8 regarding Rule 144A securities.
d Face amount for repurchase agreements is for the underlying collateral.
e See Note 1(g) regarding Joint Repurchase Agreement.
The accompanying notes are an integral part of these financial statements.
52
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995
<TABLE>
<CAPTION>
SHARES/ VALUE
COUNTRY* WARRANTS FRANKLIN GLOBAL HEALTH CARE FUND (NOTE 1)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS & WARRANTS 88.5%
BIOTECHNOLOGY 4.8%
US 4,000 a Biogen, Inc. ................................... $ 157,000
GB 20,000 a British Bio-Technology Group ................... 159,019
GB 3,750 a British Bio-Technology Group, warrants ......... 2,535
US 20,000 a CytoTherapeutics, Inc. ......................... 130,000
US 25,000 a Univax Biologics, Inc. ......................... 165,625
-----------
614,179
-----------
HEALTH MAINTENANCE ORGANIZATIONS 12.7%
US 10,000 a Foundation Health Corp. ........................ 277,500
US 17,000 a Humana, Inc. ................................... 331,500
US 4,500 a PacifiCare Health Systems, Inc., Class B ....... 279,000
US 10,000 a Physician Corporation of America ............... 178,750
US 13,000 a Sierra Health Services, Inc. ................... 352,625
US 6,000 United Healthcare Corp. ........................ 217,500
-----------
1,636,875
-----------
HOMECARE/ALTERNATE SITE 5.6%
US 5,000 a Homedco Group, Inc. ............................ 286,250
US 17,000 a Professional Sports Care Management, Inc. ...... 193,375
US 15,000 a Quantum Health Resources, Inc. ................. 243,750
-----------
723,375
-----------
HOSPITALS 4.2%
US 6,300 Columbia/HCA Healthcare Corp. .................. 264,600
US 5,000 a Quorum Health Group, Inc. ...................... 103,125
US 10,000 a Tenet Healthcare Corp. ......................... 170,000
-----------
537,725
-----------
MEDICAL TECHNOLOGY & SUPPLIES 16.7%
US 40,000 a Abaxis, Inc. ................................... 235,000
US 35,000 a Angeion Corp. .................................. 144,375
US 35,000 a Angeion Corp., warrants ........................ 12,031
US 6,000 Bard (C.R.), Inc. .............................. 174,750
US 10,666 a Healthdyne Technologies, Inc. .................. 128,659
US 7,000 a Heart Technology, Inc. ......................... 124,250
US 10,000 a MedCath, Inc. .................................. 130,000
US 20,000 a MediSense, Inc. ................................ 322,500
US 3,000 Medtronic, Inc. ................................ 223,125
US 8,000 Mentor Corp. ................................... 189,000
US 15,000 a Ostex International, Inc. ...................... 133,125
</TABLE>
The accompanying notes are an integral part of these financial statements.
53
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995
<TABLE>
<CAPTION>
SHARES/ VALUE
COUNTRY* WARRANTS FRANKLIN GLOBAL HEALTH CARE FUND (NOTE 1)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS & WARRANTS (CONT.)
MEDICAL TECHNOLOGY & SUPPLIES (CONT.)
US 3,000 Stryker Corp. .................................. $ 135,375
US 914 a Thermolase Corp. ............................... 20,793
US 9,000 a Thermotrex Corp. ............................... 178,875
-----------
2,151,858
-----------
NURSING HOMES/SUBACUTE 2.4%
US 15,000 a Advocat, Inc. .................................. 178,125
US 9,000 a Mariner Health Group, Inc. ..................... 131,625
-----------
309,750
-----------
PHARMACEUTICAL DISTRIBUTORS 1.7%
US 14,000 Grupo Casa Autrey, SA de C.V., ADR ............. 215,250
-----------
PHARMACEUTICALS 18.9%
SE 10,000 a Astra AB, Series B ............................. 284,947
CH 200 Ciba-Geiby, AG ................................. 136,883
US 10,000 Laboratorio Chile SA, ADR ...................... 191,250
US 20,000 Medeva, Plc., ADR .............................. 325,000
US 5,000 Pfizer, Inc. ................................... 433,125
CH 100 Roche Holding .................................. 601,048
CH 200 Sandoz, AG-R ................................... 130,773
FR 3,000 Sanofi, SA ..................................... 165,328
US 2,200 Schering-Plough Corp. .......................... 165,825
-----------
2,434,179
-----------
PHYSICIAN PRACTICE MANAGEMENT .8%
US 7,000 a Coastal Healthcare Group, Inc. ................. 109,375
-----------
SPECIALTY PHARMACEUTICALS 17.6%
US 10,000 a Alza Corp. ..................................... 195,000
US 7,000 Allergan, Inc. ................................. 189,875
CH 100 a Ares Serono, Inc., Series B .................... 55,434
US 10,000 a Circa Pharmaceuticals, Inc. .................... 243,750
US 7,000 a Elan Corp., Plc., ADR .......................... 247,625
US 25,000 a Gensia, Inc. ................................... 67,188
US 36,000 a KV Pharmaceutical Co., Class B ................. 229,500
US 25,000 a Matrix Pharmaceutical, Inc. .................... 368,750
US 42,000 a Noven Pharmaceuticals, Inc. .................... 357,000
US 70,000 a Penederm, Inc. ................................. 332,500
-----------
2,286,622
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
54
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995 (CONT.)
<TABLE>
<CAPTION>
SHARES/ VALUE
COUNTRY* WARRANTS FRANKLIN GLOBAL HEALTH CARE FUND (NOTE 1)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS & WARRANTS (CONT.)
SOFTWARE/INFORMATION SYSTEMS 3.1%
US 20,000 a Pyxis Corp. .................................... $ 397,500
-----------
TOTAL COMMON STOCKS & WARRANTS (COST
$10,824,706) ............................ 11,416,688
-----------
FACE
AMOUNT
----------
d,e RECEIVABLES FROM REPURCHASE AGREEMENTS 13.5%
US $1,757,315 Joint Repurchase Agreement, 5.975%, 05/01/95
(Maturity Value $1,742,067) (Cost $1,741,200)
Collateral: U.S. Treasury Notes, 4.75% -
9.00%, 07/15/96 - 01/31/00 .................. 1,741,200
-----------
TOTAL INVESTMENTS (COST $12,565,906)
102.0% .................................. 13,157,888
LIABILITIES IN EXCESS OF OTHER ASSETS,
NET (2.0)% .............................. (251,959)
-----------
NET ASSETS 100.0% ........................ $12,905,929
===========
At April 30, 1995, the net unrealized
appreciation based on the cost of investments
for income tax purposes of $12,571,287 was
as follows:
Aggregate gross unrealized appreciation for
all investments in which there was an
excess of value over tax cost ............... $ 1,508,912
Aggregate gross unrealized depreciation for
all investments in which there was an excess
of tax cost over value ........................ (922,311)
-----------
Net unrealized appreciation .................... $ 586,601
===========
</TABLE>
COUNTRY LEGEND:
CH - Switzerland
FR - France
GB - United Kingdom
SE - Sweden
US - United States of America
* Securities traded in currency of country indicated.
a Non-income producing.
d Face amount for repurchase agreements is for the underlying collateral.
e See Note 1(g) regarding Joint Repurchase Agreement.
The accompanying notes are an integral part of these financial statements.
55
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND (NOTE 1)
- ---------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 98.3%
ADVERTISING .4%
400 Omnicom Group, Inc. ................................... $ 22,250
----------
AEROSPACE/DEFENSE .1%
700 GenCorp, Inc. ......................................... 8,838
----------
CHEMICAL & MATERIALS 5.3%
200 a Applied Materials, Inc. ............................... 12,325
800 ARCO Chemical Co. ..................................... 37,200
400 Cabot Corp. ........................................... 15,700
2,300 Granite Construction, Inc. ............................ 46,000
1,200 IMC Global, Inc. ...................................... 58,950
200 Lubrizol Corp. ........................................ 6,975
100 a National Gypsum Co. ................................... 4,925
300 National Presto Industries, Inc. ...................... 13,875
800 a Southdown, Inc. ....................................... 15,200
1,300 a Sterling Chemicals, Inc. .............................. 16,250
1,000 The Geon Co. .......................................... 27,000
1,500 Wellman, Inc. ......................................... 40,500
----------
294,900
----------
COMMERCIAL SERVICES 2.1%
1,700 CPI Corp. ............................................. 28,475
500 Equifax, Inc. ......................................... 16,187
700 Kelly Services, Inc., Class A ......................... 23,625
1,000 Manpower, Inc. ........................................ 33,375
400 PHH Corp. ............................................. 16,100
----------
117,762
----------
COMMUNICATIONS EQUIPMENT 2.2%
200 a 3Com Corp. ............................................ 11,200
400 a ALC Communications Corp. .............................. 15,250
1,000 a Bay Networks, Inc. .................................... 36,375
1,100 a Cabletron Systems, Inc. ............................... 52,250
100 a Tellabs, Inc. ......................................... 6,900
----------
121,975
----------
COMPUTER HARDWARE 2.3%
1,500 a Dell Computer Corp. ................................... 82,125
700 a Exabyte Corp. ......................................... 8,837
300 a Seagate Technology, Inc. .............................. 9,563
700 a Silicon Graphics, Inc. ................................ 26,250
----------
126,775
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
56
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND (NOTE 1)
- ---------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
COMPUTER SOFTWARE 3.1%
900 Adobe Systems, Inc. ................................... $ 52,425
100 a BMC Software, Inc. .................................... 6,225
1,800 a Cadence Design Systems, Inc. .......................... 58,050
900 a Informix Corp. ........................................ 35,437
500 a Parametric Technology Corp. ........................... 23,750
----------
175,887
----------
CONTAINERS & PACKAGING 1.0%
1,000 Chesapeake Corp. ...................................... 31,000
700 Riverwood International Corp. ......................... 16,100
400 Sonoco Products Co. ................................... 9,950
----------
57,050
----------
ELECTRONIC COMPONENTS/TECHNOLOGY 10.7%
600 a Altera Corp. .......................................... 48,525
800 a Amphenol Corp., Class A ............................... 22,400
100 a Analog Devices, Inc. .................................. 2,687
1,000 Arrow Electronics, Inc. ............................... 46,500
2,300 Comdisco, Inc. ........................................ 64,687
1,000 Cypress Semiconductor Corp. ........................... 30,250
500 a KLA Instruments Corp. ................................. 31,000
400 a Lam Research Corp. .................................... 20,200
300 Linear Technology Corp. ............................... 17,925
1,500 a Litton Industries, Inc. ............................... 51,938
700 Micron Technology, Inc. ............................... 57,575
100 Molex, Inc. ........................................... 3,775
800 a Solectron Corp. ....................................... 23,500
900 a Symbol Technologies, Inc. ............................. 29,813
1,300 a Teradyne, Inc. ........................................ 65,812
600 Varian Associates, Inc. ............................... 27,600
400 a Vishay Intertechnology, Inc. .......................... 23,650
400 a Xilinx, Inc. .......................................... 30,700
----------
598,537
----------
ENVIRONMENTAL CONTROL .7%
300 a Air & Water Technologies Corp., Class A ............... 1,369
4,600 a American Waste Services, Inc., Class A ................ 6,325
12,600 a International Technology Corp. ........................ 33,075
----------
40,769
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
57
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND (NOTE 1)
- ---------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
FINANCE 7.9%
200 ADVANTA Corp. Class A ................................. $ 6,950
2,000 AT&T Capital Corp. .................................... 53,500
600 BanPonce Corp. ........................................ 19,387
1,600 Bank of New York Co., Inc. ............................ 52,600
800 BayBanks, Inc. ........................................ 50,000
100 Comerica, Inc. ........................................ 2,875
400 Edwards (AG), Inc. .................................... 9,150
1,400 First Bank System, Inc. ............................... 56,700
200 First USA, Inc. ....................................... 8,500
1,000 Green Tree Financial Corp. ............................ 40,875
1,000 Midlantic Corp., Inc. ................................. 36,500
300 Student Loan Marketing Association .................... 12,150
800 SunAmerica, Inc. ...................................... 39,200
700 Union Bank of San Francisco ........................... 27,125
1,000 West One Bancorp ...................................... 27,625
----------
443,137
----------
FOOD/BEVERAGES 3.2%
1,200 Coca-Cola Enterprises, Inc. .......................... 26,850
500 Flowers Industries, Inc. ............................. 8,688
800 Hormel Foods Corp. ................................... 21,900
1,900 IBP, Inc. ............................................ 70,300
1,500 International Multifoods Corp. ....................... 30,750
1,300 Michael Foods, Inc. .................................. 16,331
200 Tyson Foods, Inc., Class A ........................... 4,750
----------
179,569
----------
HEALTHCARE PRODUCTS 6.2%
500 a Acuson Corp. ......................................... 5,750
500 a Advanced Technology Laboratories, Inc. ............... 7,875
1,600 Cardinal Health, Inc. ................................ 73,800
600 a Cordis Corp. ......................................... 43,050
300 a Diagnostek, Inc. ..................................... 5,550
1,100 a Marquette Electronics, Inc., Class A ................. 20,900
1,500 McKesson Corp. ....................................... 59,437
2,500 Mylan Laboratories Corp. ............................. 76,875
600 a Nellcor, Inc. ........................................ 24,900
600 Stryker Corp. ........................................ 27,075
----------
345,212
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
58
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND (NOTE 1)
- ---------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
HEALTHCARE SERVICES 3.9%
900 a Coram Healthcare Corp. ................................ $ 18,450
1,400 a FHP International Corp. ............................... 33,250
200 a HealthCare COMPARE Corp. .............................. 6,013
3,200 a HEALTHSOUTH Rehabilitation Corp. ...................... 63,200
1,300 a Health Systems International, Inc., Class A ........... 33,150
400 a Mid-Atlantic Medical Services, Inc. ................... 6,900
1,000 a OrNda Healthcorp ...................................... 17,500
200 a Oxford Health Plans, Inc. ............................. 8,325
500 a PacifiCare Health Systems, Inc., Class B .............. 31,000
100 Surgical Care Affiliates, Inc. ........................ 2,325
----------
220,113
----------
INSURANCE 8.3%
500 20th Century Industries ............................... 6,063
2,400 AFLAC, Inc. ........................................... 99,000
1,500 Allmerica Property & Casualty Cos., Inc. .............. 28,500
900 Aon Corp. ............................................. 33,187
600 Bankers Life Holdings Corp. ........................... 12,600
100 Conseco, Inc. ......................................... 4,337
600 Equitable Cos., Inc. .................................. 14,250
600 Equitable of Iowa Cos. ................................ 21,975
1,500 Horace Mann Educators Corp. ........................... 30,938
1,000 a Humana, Inc. .......................................... 19,500
1,000 John Alden Financial Corp. ............................ 18,125
1,100 MGIC Investment Corp. ................................. 46,613
100 a Policy Management Systems Corp. ....................... 5,038
700 Progressive Corp. ..................................... 26,425
1,500 Reliastar Financial Corp. ............................. 53,812
700 Transatlantic Holdings, Inc. .......................... 44,450
----------
464,813
----------
LEISURE 2.7%
1,100 a Boyd Gaming Corp. ..................................... 14,987
3,600 Callaway Golf Co. ..................................... 44,550
1,800 CML Group, Inc. ....................................... 13,050
2,600 a Mirage Resorts, Inc. .................................. 78,000
----------
150,587
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
59
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND (NOTE 1)
- ---------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
MANUFACTURING - DIVERSIFIED .8%
600 Danaher Corp. .......................................... $ 17,850
600 Pentair, Inc. .......................................... 27,450
----------
45,300
----------
MANUFACTURING - SPECIALIZED INDUSTRIAL 2.2%
1,200 Breed Technologies, Inc. ............................... 24,150
900 Lancaster Colony Corp. ................................. 31,275
400 a Lear Seating Corp. ..................................... 7,700
200 Leggett & Platt, Inc. .................................. 7,700
1,500 Modine Manufacturing Co. ............................... 50,813
----------
121,638
----------
METALS & MINING 1.4%
1,500 a Alumax, Inc. ........................................... 42,375
200 Carpenter Technology Corp. ............................. 12,075
1,400 a Magma Copper Co. ....................................... 23,450
----------
77,900
----------
OFFICE SUPPLIES 1.5%
3,700 a Office Depot ........................................... 84,175
----------
OIL & GAS 5.1%
1,100 Apache Corp. ........................................... 29,700
800 a BJ Services Co. ........................................ 18,300
1,500 El Paso Natural Gas Co. ................................ 43,875
600 Equitable Resources, Inc. .............................. 17,175
200 FINA, Inc., Class A .................................... 17,800
1,600 Murphy Oil Corp. ....................................... 70,000
400 Questar Corp. .......................................... 11,850
3,700 Ranger Oil, Ltd. ....................................... 27,287
600 a Seagull Energy Corp. ................................... 10,650
1,400 Valero Energy Corp. .................................... 30,275
500 Western Gas Resources, Inc. ............................ 10,250
----------
287,162
----------
PAPER & FOREST PRODUCTS 2.7%
1,900 Bowater, Inc. .......................................... 72,675
800 Consolidated Papers, Inc. .............................. 39,200
1,400 Longview Fibre Co. ..................................... 23,275
300 Willamette Industries, Inc. ............................ 15,375
----------
150,525
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
60
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS,
APRIL 30, 1995 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND (NOTE 1)
- ----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
RESTAURANTS .5%
300 a International Dairy Queen, Inc., Class A ................ $ 5,700
3,000 a NPC International, Inc., Class A ........................ 17,438
100 a Outback Steakhouse, Inc. ................................ 2,525
--------
25,663
--------
RETAIL 6.0%
700 a Bed Bath & Beyond, Inc. ................................. 14,613
2,500 Dollar General Corp. .................................... 58,125
100 Duty Free International, Inc. ........................... 750
2,000 Family Dollar Stores, Inc. .............................. 23,750
1,200 Fingerhut Cos., Inc. .................................... 13,950
200 a General Nutrition Cos., Inc. ............................ 4,975
3,600 Hancock Fabrics, Inc. ................................... 36,000
3,400 a MacFrugals Bargains Closeouts, Inc. ..................... 50,150
700 a Michael Stores, Inc. .................................... 19,950
1,400 a Safeway, Inc. ........................................... 52,500
300 a Stop & Shop Cos., Inc. .................................. 7,987
3,100 a Waban, Inc. ............................................. 51,537
--------
334,287
--------
TELECOMMUNICATIONS 2.7%
2,300 Cincinnati Bell, Inc. ................................... 55,200
2,000 Frontier Corp. .......................................... 40,250
2,200 a LDDS Communications, Inc. ............................... 52,800
--------
148,250
--------
TEXTILES 2.1%
4,500 a Burlington Industries, Inc. ............................. 49,500
1,900 a Jones Apparel Group, Inc. ............................... 49,875
1,100 Phillips-Van Heusen Corp. ............................... 16,913
--------
116,288
--------
TRANSPORTATION 2.0%
100 Airborne Freight Corp. .................................. 1,950
500 American President Cos., Ltd. ........................... 11,625
300 GATX Corp. .............................................. 13,500
700 Illinois Central Corp. .................................. 24,587
1,800 a Northwest Airlines Corp., Class A ....................... 53,550
400 a Southern Pacific Rail Corp. ............................. 6,950
--------
112,162
--------
</TABLE>
The accompanying notes are an integral part of these financial statements.
61
<PAGE>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS,
APRIL 30, 1995 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND (NOTE 1)
- ------ ---------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
UTILITIES 11.2%
600 Atlantic Energy, Inc. ................................... $ 10,875
1,000 Centerior Energy Corp. .................................. 8,875
5,000 Central Maine Power Co. ................................. 55,625
2,000 Delmarva Power & Lighting Co. ........................... 39,000
1,400 General Public Utilities Corp. .......................... 39,900
1,600 Illinova Corp. .......................................... 37,200
3,100 Long Island Light Co. ................................... 46,113
1,200 New York State Electric & Gas Corp. ..................... 26,250
2,000 NIPSCO Industries, Inc. ................................. 64,500
1,500 Northeast Utilities ..................................... 32,813
3,000 Portland General Corp. .................................. 62,250
3,400 Pinnacle West Capital Corp. ............................. 73,100
4,100 a Public Service Co. of Mexico ............................ 52,275
1,500 Rochester Gas & Electric Corp. .......................... 30,937
1,100 Scana Corp. ............................................. 47,163
----------
626,876
----------
Total Common Stocks (Cost $5,042,149) ............. 5,498,400
----------
FACE
AMOUNT
- ------
d,e RECEIVABLES FROM REPURCHASE AGREEMENTS 2.1%
$118,901 JOINT REPURCHASE AGREEMENT, 5.975%, 05/01/95 (Maturity
Value $118,356) (Cost $118,297)
Collateral: U.S. Treasury Notes, 4.75% - 9.00%,
07/15/96 - 01/31/00 .................................... 118,297
----------
Total Investments (Cost $5,160,446) 100.4% ... 5,616,697
Liabilities in Excess of Other Assets, Net
(.4)% ........................................ (25,555)
----------
Net Assets 100.0% ............................ $5,591,142
==========
At April 30, 1995, the net unrealized appreciation based
on the cost of investments for income tax purposes of
$5,167,931 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there was an excess of value
over tax cost ....................................... $ 617,750
Aggregate gross unrealized depreciation for all
investments in which there was an excess of tax cost
over value .......................................... (168,984)
----------
Net unrealized appreciation .......................... $ 448,766
==========
</TABLE>
a Non-income producing.
d Face amount for repurchase agreements is for the underlying collateral.
e See Note 1(g) regarding Joint Repurchase Agreement.
The accompanying notes are an integral part of these financial statements.
62
<PAGE>
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1995
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
CALIFORNIA STRATEGIC GLOBAL
GROWTH FUND INCOME FUND UTILITIES FUND
------------ ----------- --------------
<S> <C> <C> <C>
Assets:
Investments in securities:
At identified cost ................................................................ $ 9,902,573 $5,583,130 $120,557,322
=========== ========== ============
At value .......................................................................... 11,519,959 5,706,576 115,145,063
Receivables from repurchase agreements, at value and cost .......................... 2,339,285 833,318 4,456,070
Cash ............................................................................... 369,687 7,563 65,434
Receivables:
Dividends and interest ............................................................ 15,649 130,420 601,230
Investment securities sold ........................................................ 189,420 748,357 29,609
Capital shares sold ............................................................... 79,989 -- 22,894
From affiliates ................................................................... -- 15,997 --
Unamortized organization costs (Note 2) ............................................. 9,981 -- 6,868
----------- ---------- ------------
Total assets ........................................................................ 14,523,970 7,442,231 120,327,168
----------- ---------- ------------
Liabilities:
Payables:
Investment securities purchased ................................................... 655,475 700,084 770,177
Capital shares repurchased ........................................................ -- -- 123,564
Payable upon return of securities loaned (Note 9) ................................. -- -- --
Management fees ................................................................... -- -- 59,798
Shareholder servicing cost ........................................................ 26 70 7,172
Distribution fees ................................................................. 6,901 438 68,031
Payables to Manager for organization costs ........................................ 9,981 -- --
Accrued expenses and other liabilities ............................................. 7,320 4,257 47,944
Unrealized loss on forward foreign currency contracts (Note 1) ..................... -- 1,676 --
----------- ---------- ------------
Total liabilities ............................................................. 679,703 706,525 1,076,686
----------- ---------- ------------
Net assets, at value ................................................................ $13,844,267 $6,735,706 $119,250,482
=========== ========== ============
Net assets consist of:
Undistributed net investment income ............................................... 71,512 16,544 1,475,101
Unrealized appreciation (depreciation) on investments and translation of assets
and liabilities denominated in foreign currencies................................ 1,617,386 121,865 (5,410,988)
Net realized gain (loss) from investments and foreign currency transactions ....... 530,562 (15,782) 1,316,428
Capital shares .................................................................... 9,865 6,617 97,528
Additional paid-in capital ........................................................ 11,614,942 6,606,462 121,772,413
----------- ---------- ------------
Net assets, at value ................................................................ $13,844,267 $6,735,706 $119,250,482
=========== ========== ============
Shares outstanding .................................................................. 986,512 661,744 9,752,780
=========== ========== ============
Net asset value per share ........................................................... $14.03 $10.18 $12.23
=========== ========== ============
Representative computation (Franklin California Growth Fund) of net asset value and
offering price per share:
Net asset value per share* ($13,844,267/986,512) .................................. $14.03
===========
Maximum offering price (100/95.5 of $14.03+) ...................................... $14.69
===========
</TABLE>
*Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
+The maximum offering price for the Franklin Strategic Income Fund is
calculated as follows: 100/95.75 of $10.18.
The accompanying notes are an integral part of these financial statements.
63
<PAGE>
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
APRIL 30, 1995
<TABLE>
<CAPTION>
FRANKLIN
FRANKLIN FRANKLIN INSTITUTIONAL
SMALL CAP GLOBAL HEALTH MIDCAP
GROWTH FUND CARE FUND GROWTH FUND
----------- ------------- -------------
<S> <C> <C> <C>
Assets:
Investments in securities:
At identified cost .............................. $50,350,851 $10,824,706 $5,042,149
=========== =========== ==========
At value ........................................ 57,122,666 11,416,688 5,498,400
Receivables from repurchase agreements, at
value and cost................................... 7,246,396 1,741,200 118,297
Cash .............................................. 203,876 12,311 --
Receivables:
Dividends and interest .......................... 20,549 2,517 7,890
Investment securities sold ...................... 1,165,725 -- 178,390
Capital shares sold ............................. 504,026 14,167 --
From affiliates ................................. -- 5,171 --
Unamortized organization costs (Note 2) ............ 6,726 6,395 --
----------- ----------- ----------
Total assets ....................................... 66,269,964 13,198,449 5,802,977
----------- ----------- ----------
Liabilities:
Payables:
Investment securities purchased ................. 2,005,526 259,305 211,835
Capital shares repurchased ...................... 5,800 13,365 --
Payable upon return of securities loaned (Note 9) 1,185,594 -- --
Management fees ................................. 13,126 -- --
Shareholder servicing cost ...................... 3,908 27 --
Distribution fees ............................... 26,884 6,523 --
Payables to Manager for organization costs ...... 6,726 6,395 --
Accrued expenses and other liabilities .......... 12,765 6,905 --
Unrealized loss on forward foreign currency
contracts (Note 1).............................. -- -- --
----------- ----------- ----------
Total liabilities .......................... 3,260,329 292,520 211,835
----------- ----------- ----------
Net assets, at value ............................... $63,009,635 $12,905,929 $5,591,142
=========== =========== ==========
Net assets consist of:
Undistributed net investment income ............. 49,242 31,883 41,792
Unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies.. 6,771,815 591,982 456,251
Net realized gain (loss) from investments and
foreign currency transactions.................. 2,211,296 556,003 (75,289)
Capital shares .................................. 42,283 11,272 5,174
Additional paid-in capital ...................... 53,934,999 11,714,789 5,163,214
----------- ----------- ----------
Net assets, at value .............................. $63,009,635 $12,905,929 $5,591,142
=========== =========== ==========
Shares outstanding ................................ 4,228,290 1,127,155 517,359
=========== =========== ==========
Net asset value per share ......................... $14.90 $11.45 $10.81
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
64
<PAGE>
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1995, EXCEPT AS NOTED BELOW
<TABLE>
<CAPTION>
FRANKLIN
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN INSTITUTIONAL
CALIFORNIA STRATEGIC GLOBAL SMALL CAP GLOBAL HEALTH MIDCAP
GROWTH FUND INCOME FUND* UTILITIES FUND GROWTH FUND CARE FUND GROWTH FUND
----------- ------------ -------------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Investment income
Dividends .......................... $ 72,258 $ 14,548 $5,040,695 $ 148,408 $ 28,932 $102,397
Interest ........................... 70,208 404,716 568,742 194,774 68,858 6,613
---------- --------- ---------- ----------- ---------- --------
Total income .................. 142,466 419,264 5,609,437 343,182 97,790 109,010
---------- --------- ---------- ----------- ---------- --------
Expenses:
Management fees, net (Note 6) ...... -- -- 737,090 56,120 -- --
Distribution fees (Note 6) ......... 9,924 939 283,696 72,963 17,787 --
Shareholder servicing costs (Note 6) 176 353 93,279 36,958 327 --
Reports to shareholders ............ 10,227 16,950 107,276 42,193 18,115 1,359
Custodian fees ..................... 732 1,853 36,552 4,318 1,822 431
Professional fees .................. 2,210 11,902 22,269 8,687 3,653 2,142
Registration and filing fees ....... 10,889 5,095 74,837 24,371 12,345 11,165
Amortization of organization costs
(Note 2) .......................... 6,653 -- 3,168 3,756 3,240 --
Other .............................. 537 1,347 8,029 2,084 1,888 1,892
Payments from Manager (Note 6) ..... (22,410) (25,618) -- -- (36,061) (16,989)
---------- --------- ---------- ----------- ---------- --------
Total expenses ................ 18,938 12,821 1,366,196 251,450 23,116 --
---------- --------- ---------- ----------- ---------- --------
Net investment income ......... 123,528 406,443 4,243,241 91,732 74,674 109,010
---------- --------- ---------- ----------- ---------- --------
Realized and unrealized gain (loss)
from investments and foreign currency:
Net realized gain (loss) on:
Investments ...................... 836,699 29,147 1,599,082 3,403,883 910,382 (75,022)
Foreign currency transactions .... -- (44,929) 3,766 1,192 33,123 --
Net unrealized appreciation
(depreciation) on:
Investments ...................... 1,235,649 121,770 (2,363,440) 6,619,781 189,307 478,214
Translation of assets and
liabilities denominated in
foreign currencies .............. -- 95 (1,289) -- -- --
---------- --------- ---------- ----------- ---------- --------
Net realized and unrealized gain
(loss) on investments and foreign
currency ........................... 2,072,348 106,083 (761,881) 10,024,856 1,132,812 403,192
---------- --------- ---------- ----------- ---------- --------
Net increase in net assets
resulting from operations ........ $2,195,876 $ 512,526 $3,481,360 $10,116,588 $1,207,486 $512,202
========== ========= ========== =========== ========== ========
</TABLE>
*For the period May 24, 1994 (effective date) to April 30, 1995.
The accompanying notes are an integral part of these financial statements.
65
<PAGE>
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended April 30, 1995 and 1994, except as noted below
<TABLE>
<CAPTION>
Franklin California Franklin Strategic Franklin Global
Growth Fund Income Fund* Utilities Fund
------------------------ ------------------ ---------------------------
1995 1994 1995 1995 1994
----------- ---------- ------------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income............................ $ 123,528 $ 47,698 $ 406,443 $ 4,243,241 $ 1,873,880
Net realized gain (loss) on investments and
foreign currency transactions................... 836,699 533,611 (15,782) 1,602,848 3,574,739
Net unrealized appreciation (depreciation)
on investments and translation of assets
and liabilities denominated in foreign
currencies...................................... 1,235,649 276,756 121,865 (2,364,729) (4,000,978)
----------- ---------- ---------- ------------ ------------
Net increase in net assets
resulting from operations.................. 2,195,876 858,065 512,526 3,481,360 1,447,641
Distributions to shareholders from:
Undistributed net investment income............... (64,537) (48,522) (389,899) (3,707,193) (1,053,413)
Net realized capital gains........................ (549,224) (195,872) -- (3,611,890) (249,283)
Increase (decrease) in net assets from
capital share transactions (Note 4)............... 7,616,445 620,455 6,613,079 (1,099,874) 109,816,315
----------- ---------- ---------- ------------ ------------
Net increase (decrease) in net assets....... 9,198,560 1,234,126 6,735,706 (4,937,597) 109,961,260
Net assets:
Beginning of year................................. 4,645,707 3,411,581 -- 124,188,079 14,226,819
----------- ---------- ---------- ------------ ------------
End of year....................................... $13,844,267 $4,645,707 $6,735,706 $119,250,482 $124,188,079
=========== ========== ========== ============ ============
Undistributed net investment income included
in net assets:
Beginning of year................................ $ 12,521 $ 13,345 $ -- $ 939,053 $ 118,586
=========== ========== ========== ============ ============
End of year...................................... $ 71,512 $ 12,521 $ 16,544 $ 1,475,101 $ 939,053
=========== ========== ========== ============ ============
</TABLE>
*For the period May 24, 1994 (effective date) to April 30, 1995.
The accompanying notes are an integral part of these financial statements.
66
<PAGE>
FRANKLIN STRATEGIC SERIES
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED APRIL 30, 1995 AND 1994, EXCEPT AS NOTED BELOW
<TABLE>
<CAPTION>
FRANKLIN SMALL CAP FRANKLIN GLOBAL FRANKLIN INSTITUTIONAL
GROWTH FUND HEALTH CARE FUND MIDCAP GROWTH FUND
---------------------- --------------------- ----------------------
1995 1994 1995 1994 1995 1994*
---------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income .................. $ 91,732 $ 32,254 $ 74,674 $ 31,543 $ 109,010 $ 75,987
Net realized gain (loss) on investments
and foreign currency transactions .... 3,405,075 1,627,612 943,505 361,025 (75,022) 24,817
Net unrealized appreciation (depreci-
ation) on investments and translation
of assets and liabilities denominated
in foreign currencies................. 6,619,781 156,594 189,307 438,510 478,214 (21,963)
---------- --------- --------- ---------- ---------- ----------
Net increase in net assets
resulting from operations..... 10,116,588 1,816,460 1,207,486 831,078 512,202 78,841
Distributions to shareholders from:
Undistibuted net investment income...... (50,170) (35,477) (49,631) (33,141) (103,704) (39,501)
Net realized capital gains.............. (2,378,735) (427,302) (469,438) (137,028) (7,584) (17,500)
Increase in net assets from capital
share transactions (Note 4)............. 31,406,861 16,535,237 6,422,416 1,711,689 111,288 5,057,100
----------- ----------- ---------- ---------- ---------- ----------
Net increase in net assets...... 39,094,544 17,888,918 7,110,833 2,372,598 512,202 5,078,940
Net assets:
Beginning of year....................... 23,915,091 6,026,173 5,795,096 3,422,498 5,078,940 --
----------- ----------- ----------- ---------- ---------- ----------
End of year............................. $63,009,635 $23,915,091 $12,905,929 $5,795,096 $5,591,142 $5,078,940
=========== =========== =========== ========== ========== ==========
Undistributed net investment income
included in net assets:
Beginning of year..................... $ 7,680 $ 10,903 $ 6,840 $ 8,438 $ 36,486 $ --
=========== =========== =========== ========== ========== ==========
End of year........................... $ 49,242 $ 7,680 $ 31,883 $ 6,840 $ 41,792 $ 36,486
=========== =========== =========== ========== ========== ==========
</TABLE>
*For the period August 17, 1993 (effective date) to April 30, 1994.
The accompanying notes are an integral part of these financial statements.
67
<PAGE>
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (the Series) is an open-end, management investment
company (mutual fund), registered under the Investment Company Act of 1940, as
amended. The Series currently consists of six separate funds (the Funds). There
are two separate diversified funds Franklin Small Cap Growth Fund (the Small
Cap Fund) and Franklin Institutional MidCap Growth Fund (the Institutional
MidCap Growth Fund); and four separate non-diversified funds: Franklin
California Growth Fund (the California Growth Fund), Franklin Strategic Income
Fund (the Strategic Income Fund), Franklin Global Health Care Fund (the Global
Health Fund) and Franklin Global Utilities Fund (the Global Utilities Fund).
Prior to June 21, 1994, the Institutional MidCap Growth Fund was known as the
FISCO MidCap Growth Fund. Each of the Funds issues a separate series of shares
and maintains a totally separate investment portfolio.
On January 13, 1993, the Board of Trustees approved the addition of Franklin
MidCap Growth Fund to the Series. The new fund is an open-end, diversified
management investment company registered under the Investment Company Act of
1940, as amended, and will invest all of its assets in the MidCap Growth
Portfolio, an open-end diversified management investment company. The Franklin
MidCap Growth Fund has been effective since June 15, 1993, but has not
commenced operations.
On February 16, 1995, the Board of Trustees approved the addition of a new fund
to the series. A registration statement relating to the new fund has been filed
with the Securities and Exchange Commission, but has not become effective as of
April 30, 1995.
The Global Utilities Fund will be offering an additional class of shares
effective May 1, 1995.
The following is a summary of significant accounting policies consistently
followed by the Series in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
A. SECURITIES VALUATIONS:
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. Other securities
for which market quotations are readily available, are valued at current market
values obtained from pricing services, which are 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 securities. Portfolio securities which are traded both in the
over-the-counter market and on a securities exchange are valued according to
the broadest and most representative market as determined by the Manager. Other
securities for which market quotations are not available, if any, are valued in
accordance with procedures established by the Board of Trustees.
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 New
York Stock Exchange, if that is earlier, and that 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 mean between the current bid and asked price
is used. Occasionally, events which 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 Fund's net asset value. If events materially affect the
value of these foreign securities occur during such period, then these
securities will be valued at fair value as determined by management and
approved in good faith by the Board of Directors.
The fair values of securities restricted as to resale, if any, are determined
following procedures established by the Board of Trustees -- see Note 7.
68
<PAGE>
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (CONT.)
1. SIGNIFICANT ACCOUNTING POLICIES (cont.)
B. INCOME TAXES:
The Funds intend to continue to qualify for the tax treatment applicable to
regulated investment companies under the Internal Revenue Code and to make the
requisite distributions to their shareholders which will be sufficient to
relieve them from income and excise taxes. Therefore, no income tax provision
is required. Each Fund is treated as a separate entity in the determination of
compliance with the Internal Revenue Code.
C. SECURITY TRANSACTIONS:
Security transactions are accounted for on the date the securities are
purchased or sold (trade date). Realized gains and losses on security
transactions are determined on the basis of specific identification for both
financial statement and income tax purposes.
D. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income and estimated expenses are accrued daily.
Bond discount is amortized as required by the Internal Revenue Code.
Net realized capital gains and losses differ for financial statement and tax
purposes primarily due to differing treatment of wash sale transactions.
E. EXPENSE ALLOCATION:
Common expenses incurred by the Series are allocated among the Funds based on
the ratio of net assets of each Fund to the combined net assets. In all other
respects, expenses are charged to each Fund as incurred on a specific
identification basis.
F. FOREIGN CURRENCY TRANSLATION:
The accounting records of the Series are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars at the rate of exchange of such currencies against U.S. dollars on the
date of valuation. Purchases and sales of securities, income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are recognized when reported by the custodian
bank.
The Series does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from fluctuations arising
from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales and
maturities of short-term securities, sales of foreign currencies, currency
gains or losses realized between the trade date and settlement dates on
securities transactions and the difference between the amounts of dividends,
interest, and foreign withholding taxes recorded on the Series books and the
U.S. dollar equivalent of the amounts actually received or paid. Net unrealized
appreciation (depreciation) on translation of assets and liabilities
denominated in foreign currencies arise from changes in the value of assets and
liabilities other than investments in securities at fiscal year end, resulting
from changes in exchange rates.
G. REPURCHASE AGREEMENTS:
The Series may enter into a Joint Repurchase Agreement whereby each fund's
uninvested cash balance is deposited into a joint cash account to be used to
invest in one or more repurchase agreements with government securities dealers
recognized by the Federal Reserve Board and/or member banks of the Federal
Reserve System. The value and face amount of the Joint Repurchase Agreement are
allocated to the Funds based on their pro-rata interest.
69
<PAGE>
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (CONT.)
1. SIGNIFICANT ACCOUNTING POLICIES (CONT.)
G. REPURCHASE AGREEMENTS (CONT):
In a repurchase agreement, the Fund purchases a U.S. government security from a
dealer or bank subject to an agreement to resell it at a mutually agreed upon
price and date. Such a transaction is accounted for as a loan by the Fund to
the seller, collateralized by the underlying security. The transaction requires
the initial collateralization of the seller's obligation by U.S. government
securities with market value, including accrued interest, of at least 102% of
the dollar amount invested by the Fund, with the value of the underlying
security marked to market daily to maintain coverage of at least 100%. The
collateral is delivered to the Fund's custodian and held until resold to the
dealer or bank. At April 30, 1995, all outstanding repurchase agreements held
by the Funds had been entered into on April 28, 1995.
H. CHANGE IN ACCOUNTING POLICY FOR FOREIGN CURRENCY PRESENTATION:
Effective April 30, 1995, the Series adopted AICPA Statement of Position (SOP)
93-4: Foreign Currency Accounting and Financial Statement Presentation for
Investment Companies. The adoption of SOP 93-4 had no effect on net assets at
April 30, 1995, but foreign currency transactions from assets and liabilities
other than investments in securities, have been reclassified for the year then
ended on the Statement of Operations.
I. FORWARD FOREIGN CURRENCY CONTRACTS:
A forward currency contract, which is individually negotiated and privately
traded by currency traders and their customers, is a commitment to purchase or
sell a specific currency for an agreed-upon price at a future date.
The Strategic Income Fund may enter into forward contracts with the objective
of minimizing the risk to the Fund from adverse changes in the relationship
between currencies or to enhance income. The Fund may also enter into a forward
contract in relation to a security denominated in a foreign currency or when it
anticipates receipt in a foreign currency of dividends or interest payments in
order to "lock in" the U.S. dollar price of a security or the U.S. dollar
equivalent of such dividend or interest payments.
Any gain or loss realized from a forward currency contract is recorded as a
realized gain or loss from investments. See the accompanying Statement of
Operations for the fund's total realized gains or losses from investments
during the year.
The Fund segregates in its custodian bank sufficient cash, cash equivalents or
readily marketable debt securities as collateral for commitments created by
open forward contracts. The Fund could be exposed to risk if counterparties to
the contracts are unable to meet the terms of their contracts or if the value
of the foreign currency changes unfavorably.
As of April 30, 1995, the Strategic Income Fund had the following forward
foreign currency contracts outstanding:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS TO SELL IN EXCHANGE FOR SETTLEMENT DATE GAIN (LOSS)
- ------------------------------------------------- --------------- --------------- ------------
<S> <C> <C> <C>
215,000 Canadian Dollars...................... U.S. $156,460 05/01/95 U.S. $(1,656)
215,000 Canadian Dollars...................... U.S. $158,019 05/15/95 11
------------- ------------
U.S. $314,479 (1,645)
------------- ------------
CONTRACTS TO BUY
- -------------------------------------------------
215,000 Canadian Dollars...................... U.S. $158,146 05/01/95 (31)
------------- ------------
Net unrealized depreciation.......................................................... U.S. $(1,676)
============
</TABLE>
70
<PAGE>
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (CONT.)
2. UNAMORTIZED ORGANIZATION COSTS
The organization costs of the Series are amortized on a straight-line basis
over a period of five years from the effective date of registration under the
Securities Act of 1933. In the event that Franklin Resources, Inc. (which was
the sole shareholder prior to the effective date of registration) redeems its
shares within the five-year period, the pro rata share of the then-unamortized
deferred organization costs will be deducted from the redemption price paid to
Franklin Resources, Inc. New investors purchasing shares of the Series
subsequent to that date bear such costs during the amortization period only as
such charges are accrued daily against investment income. The Series' Manager
advanced all of the organization costs of the Funds, except for the Global
Utilities Fund, which amounted to $33,267, $18,775 and $16,816 for the
California Growth Fund, the Small Cap Fund, and the Global Health Fund,
respectively; and paid $5,612 of the $15,648 organization cost of the Global
Utilities Fund. In an effort to reduce the Funds' expenses, the manager has
agreed in advance to waive repayment of the current period's amortization of
$6,653, $3,756 and $3,240 for the California Growth Fund, the Small Cap Fund,
and the Global Health Fund, respectively.
3. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At April 30, 1995, for tax purposes, the Funds have accumulated undistributed
net realized capital gains or capital loss carryovers as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
CALIFORNIA GLOBAL SMALL CAP GLOBAL HEALTH
GROWTH FUND UTILITIES FUND GROWTH FUND CARE FUND
----------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Accumulated net realized gains.......... $532,804 $1,315,465 $2,220,904 $528,260
======== ========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN
INSTITUTIONAL
MIDCAP
GROWTH FUND
-------------
<S> <C>
Capital loss carryovers
Expiring in: 2003..................... $67,804
=======
</TABLE>
The Strategic Income Fund has a deferred foreign currency loss of $15,782
deemed to be incurred on the first day of the following fiscal year for federal
income tax purposes.
For tax purposes, the aggregate cost of securities is higher (and unrealized
appreciation is lower or unrealized depreciation is higher) than for financial
reporting purposes at April 30, 1995 by $2,242 in the California Growth Fund,
$2,803 in the Global Utilities Fund, $10,800 in the Small Cap Growth Fund,
$5,381 in the Global Health Fund, and $7,485 in the Institutional MidCap Growth
Fund.
71
<PAGE>
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (CONT.)
4. TRUST SHARES
At April 30, 1995, there were an unlimited number of $.01 par value shares
authorized. Transactions in each of the Fund's shares for the years ended April
30, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA FRANKLIN STRATEGIC FRANKLIN GLOBAL
GROWTH FUND INCOME FUND* UTILITIES FUND
--------------------- --------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ----------- ------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
1995
Shares sold.................... 177,789 $ 2,286,030 591,961 $5,923,336 1,300,280 $ 15,677,001
Shares issued in reinvestment
of distributions............ 49,674 577,174 37,975 374,342 525,655 6,120,700
Shares redeemed............... (51,488) (652,107) (4,853) (49,419) (1,571,981) (18,781,605)
Changes from exercise of
exchange privilege:
Shares sold............... 517,956 6,624,501 51,246 509,787 1,108,116 13,411,365
Shares redeemed........... (92,961) (1,219,153) (14,585) (144,967) (1,468,342) (17,527,335)
-------- ----------- ------- ---------- ---------- ------------
Net increase (decrease)...... 600,970 $ 7,616,445 661,744 $6,613,029 (106,272) $ (1,099,874)
======== =========== ======= ========== ========== ============
</TABLE>
*For the period May 24, 1994 (effective date) to April 30, 1995.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1994
Shares sold.................... 50,123 $ 596,456 -- -- 4,597,333 $ 58,206,365
Shares issued in reinvestment
of distributions........... 20,366 232,835 -- -- 83,094 1,057,033
Shares redeemed.............. (32,139) (374,204) -- -- (531,949) (6,782,713)
Changes from exercise of
exchange privilege:
Shares sold............... 54,080 648,657 -- -- 5,765,127 73,837,870
Shares redeemed.......... (40,915) (483,289) -- -- (1,307,264) (16,502,240)
-------- ----------- ------- ---------- ---------- ------------
Net increase................. 51,515 $ 620,455 -- -- 8,606,341 $109,816,315
======== =========== ======= ========== ========== ============
</TABLE>
72
<PAGE>
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (CONT.)
4. TRUST SHARES (cont.)
<TABLE>
<CAPTION>
FRANKLIN
FRANKLIN SMALL CAP FRANKLIN GLOBAL INSTITUTIONAL MIDCAP
GROWTH FUND HEALTH CARE FUND GROWTH FUND*
------------------------- ----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------------ -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
1995
Shares sold ........................ 1,050,774 $ 14,073,399 295,333 $ 3,331,812 -- $ --
Shares issued in reinvestment of
distributions ..................... 165,206 1,980,868 43,569 460,121 11,755 111,288
Shares redeemed .................... (377,504) (4,925,437) (99,454) (1,111,831) -- --
Changes from exercise of
exchange privilege:
Shares sold ...................... 3,300,526 43,456,084 737,966 8,349,736 -- --
Shares redeemed .................. (1,785,818) (23,178,053) (405,973) (4,607,422) -- --
---------- ------------ -------- ----------- ------- ---------
Net increase ....................... 2,353,184 $ 31,406,861 571,441 $ 6,422,416 11,755 $ 111,288
========== ============ ======== =========== ======= ==========
1994
Shares sold ........................ 527,823 $ 6,523,254 174,501 $ 1,732,415 500,010 $5,000,099
Shares issued in reinvestment of
distributions ..................... 33,180 410,352 16,250 160,950 5,594 57,001
Shares redeemed .................... (111,639) (1,417,140) (66,382) (692,594) -- --
Changes from exercise of
exchange privilege:
Shares sold ...................... 1,634,135 21,097,953 329,826 3,285,773 -- --
Shares redeemed .................. (798,157) (10,079,182) (283,890) (2,774,855) -- --
---------- ------------ -------- ----------- ------- ----------
Net increase ....................... 1,285,342 $ 16,535,237 170,305 $ 1,711,689 505,604 $5,057,100
========== ============ ======== =========== ======= ==========
</TABLE>
*For the year ended April 30, 1995 and the period August 17, 1993 (effective
date) to April 30, 1994.
5. PURCHASES AND SALES OF SECURITIES
Aggregate purchases and sales of securities (excluding purchases and sales of
short-term securities) for the year ended April 30, 1995 were as follows:
<TABLE>
<CAPTION>
FRANKLIN
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN INSTITUTIONAL
CALIFORNIA STRATEGIC GLOBAL SMALL CAP GLOBAL HEALTH MIDCAP
GROWTH FUND INCOME FUND UTILITIES FUND GROWTH FUND CARE FUND GROWTH FUND
------------ ----------- -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Purchases ................... $10,540,970 $8,371,563 $28,525,250 $62,825,014 $12,425,994 $8,535,183
=========== ========== =========== =========== =========== ==========
Sales ....................... $ 5,239,514 $2,901,462 $18,471,832 $35,871,234 $ 7,671,107 $8,233,744
=========== ========== =========== =========== =========== ==========
</TABLE>
73
<PAGE>
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (CONT.)
6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Franklin Advisers, Inc., under the terms of a management agreement, provides
investment advice, administrative services, office space and facilities to each
Fund, except for the Institutional MidCap Growth Fund and Strategic Income
Fund, and receives fees computed monthly based on the net assets of each Fund,
at an annual rate of .625 of 1% of the average daily net assets up to and
including $100 million; .50 of 1% of the average daily net assets over $100
million, up to and including $250 million; .45 of 1% of the average daily net
assets over $250 million, up to and including $10 billion; .44 of 1% of the
average daily net assets over $10 billion, up to and including $12.5 billion;
.42 of 1% of the average daily net assets over $12.5 billion, up to and
including $15 billion; and .40 of 1% of the average daily net assets over $15
billion. For the Strategic Income Fund, Franklin Advisers, Inc. receives fees
computed monthly based on the net assets of this fund, at an annual rate of
.625 of 1 % of the average daily net assets up to and including $100 million;
.50 of 1% of the average daily net assets over $100 million, up to and
including $250 million; .45 of 1% of the average daily net assets over $250
million. Franklin Institutional Services Corporation (FISCO) serves as the
investment adviser for the Institutional MidCap Growth Fund, and receives fees
computed monthly at the annual rate of .65 of 1% the Fund's average daily net
assets.
The terms of the management agreements provide that aggregate annual expenses
of the Series' be limited to the extent necessary to comply with the
limitations set forth in the laws, regulations and administrative
interpretations of the states in which the Series' shares are registered. The
Series' expenses did not exceed these limitations; however, for the year ended
April 30, 1995, Franklin Advisers, Inc. and FISCO agreed in advance to waive
the management fees, as indicated below, in an effort to minimize the Series'
expenses. Additionally, Franklin Advisers, Inc. made payments, including waiver
of repayment of organization cost advances, of $22,410, $25,618, $36,061 and
$16,989 for other expenses as shown in the Statement of Operations for the
California Growth Fund, the Strategic Income Fund, the Global Health Fund and
the Institutional MidCap Growth Fund, respectively.
<TABLE>
<CAPTION>
FISCO
Franklin Advisers, Inc. -------------
-------------------------------------------------------------------------- Franklin
Franklin Franklin Franklin Franklin Franklin Institutional
California Strategic Global Small Cap Global Health MidCap
Growth Fund Income Fund Utilities Fund Growth Fund Care Fund Growth Fund
----------- ----------- -------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Management fees earned ........ $47,494 $32,160 $737,090 $228,800 $58,346 $33,417
Less reduction of fees ........ 47,494 32,160 -- 172,680 58,346 33,417
------- ------- -------- -------- ------- -------
Management fees paid .......... $ -- $ -- $737,090 $ 56,120 $ -- $ --
======= ======= ======== ======== ======= =======
</TABLE>
Pursuant to a shareholder service agreement with Franklin/Templeton Investor
Services, Inc., the Series pays costs on a per shareholder account basis.
Shareholder servicing costs of $146,572 were incurred for the year ended April
30, 1995, of which $136,784 was for services provided by Franklin/Templeton
Investor Services, Inc. In an effort to minimize such costs, Franklin/Templeton
Investor Services, Inc. agreed in advance to waive shareholder servicing costs
of $5,012 in the California Growth Fund, $9,924 in the Global Health Fund, and
$6 in the Institutional MidCap Growth Fund for the year ended April 30, 1995.
74
<PAGE>
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (CONT.)
6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
Under the terms of a Distribution Plan pursuant to Rule 12b-1 of the Investment
Company Act of 1940, the Funds, except for the Institutional MidCap Growth
Fund, will reimburse Franklin/Templeton Distributors, Inc. in an amount up to
.25% per annum of the Series' average daily net assets for costs incurred in
the promotion, offering and marketing of the Funds' shares. Costs incurred by
the Series under the agreement aggregated $385,309 for the year ended April 30,
1995.
In its capacity as underwriter for the shares of the Funds, except for the
Institutional MidCap Growth Fund, Franklin/Templeton Distributors, Inc.
received commissions on sales of the Funds' shares. Commissions received by
Franklin/Templeton Distributors, Inc., and the amounts which were subsequently
paid to other dealers for the year ended April 30, 1995 were as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
CALIFORNIA STRATEGIC GLOBAL SMALL CAP GLOBAL HEALTH
GROWTH FUND INCOME FUND UTILITIES FUND GROWTH FUND CARE FUND
----------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Total commissions received.... $89,678 $35,219 $664,553 $464,478 $134,715
======= ======= ======== ======== ========
Paid to other dealers......... $79,600 $34,232 $587,953 $411,761 $119,467
======= ======= ======== ======== ========
</TABLE>
Commissions are deducted from the gross proceeds received from the sales of the
Fund's shares, and as such are not expenses of the Funds.
Certain officers and trustees of the Series are also officers and/or directors
of Franklin/Templeton Distributors, Inc., Franklin Advisers, Inc., Franklin
Institutional Services Corporation, and Franklin/Templeton Investors Services,
Inc. all wholly-owned subsidiaries of Franklin Resources, Inc.
At April 30, 1995, Franklin Resources owned 24% of the California Growth Fund,
81% of the Strategic Income Fund, 10% of the Global Health Fund, and 100% of
the Institutional MidCap Growth Fund.
7. RESTRICTED SECURITIES
A restricted security is a security which has not been registered with the
Securities and Exchange Commission pursuant to the Securities Act of 1933. The
Series may purchase restricted securities through a private offering and they
cannot be sold without prior registration under the Securities Act of 1933
unless such sale is pursuant to an exemption therefrom. Subsequent costs of
registration of such securities are borne by the issuer. A secondary market
exists for certain privately placed securities. The Series values these
restricted securities as disclosed in Note 1. At April 30, 1995, the California
Growth Fund held restricted securities with a value aggregating $288,
representing less than one percent of the Fund's net assets. Such securities
are:
<TABLE>
<CAPTION>
ACQUISITION
SHARES SECURITY DATE COST VALUE
- ------ -------- ----------- ---- -----
<S> <C> <C> <C> <C>
198 Lynx Therapeutics, Inc.............................. 10/19/92 $ 40 $ --
288 Lynx Therapeutics, Inc., pfd., Series A............. 10/19/92 $288 $288
</TABLE>
75
<PAGE>
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (CONT.)
8. RULE 144A SECURITIES
Rule 144A provides a non-exclusive safe harbor exemption from the registration
requirements of the Securities Act of 1933 for specified resale of restricted
securities to qualified institutional investors. The Series values these
securities as disclosed in Note 1. At April 30, 1995, 144A securities were held
as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
CALIFORNIA STRATEGIC GLOBAL SMALL CAP
GROWTH FUND INCOME FUND UTILITIES FUND GROWTH FUND
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Value................................ $396,000 $610,744 $2,870,132 $64,295
======== ======== ========== =======
Ratio of value to net assets......... 2.86% 9.07% 2.41% 0.10%
======== ======== ========== =======
</TABLE>
See the accompanying Statement of Investments in Securities and Net Assets for
specific information on such securities.
9. LOANS OF PORTFOLIO SECURITIES
During the year ended April 30, 1995, the Small Cap Growth Fund loaned
securities to certain brokers for which it received cash collateral against the
loaned securities in an amount equal to at least 102% of the market value of
the loaned securities. The cash collateral received is invested by the Fund in
short-term instruments and any interest income in excess of a predetermined
rebate to the brokers is kept by the fund as interest income. Interest income
from this source amounted to $4,368 for the year ended April 30, 1995.
At April 30, 1995, the value of the loaned securities amounted to $1,165,250 in
the Small Cap Growth Fund. The Fund has received sufficient cash collateral to
meet these commitments.
10. SUBSEQUENT EVENTS
On May 16, 1995, the Board of Trustees declared distributions as follows:
<TABLE>
<CAPTION>
FROM NET FROM NET
INVESTMENT REALIZED
RECORD DATE PAYMENT DATE INCOME CAPITAl GAINS
----------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
Franklin California Growth Fund....... 6/14/95 6/30/95 $.115 $.538
Franklin Strategic Income Fund........ 5/31/95 6/15/95 .067 --
Franklin Global Utilities Fund:
Class I.............................. 6/14/95 6/30/95 .182 .135
Class II............................. 6/14/95 6/30/95 .174 .135
Franklin Small Cap Growth Fund........ 6/14/95 6/30/95 .014 .523
Franklin Global Health Care Fund...... 6/14/95 6/30/95 .082 --
Franklin Institutional MidCap
Growth Fund.......................... 6/14/95 6/30/95 .110 --
</TABLE>
76
<PAGE>
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (CONT.)
11. FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout each
year, by Fund, are as follows:
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------------------------
NET
REALIZED & NET
NET ASSET NET UNREALIZED DISTRIBUTIONS DISTRIBUTIONS ASSET
YEAR VALUE AT INVEST- GAIN (LOSS) TOTAL FROM FROM NET FROM VALUE
ENDED BEGINNING MENT ON INVESTMENT INVESTMENT CAPITAL TOTAL AT END TOTAL
APRIL 30 OF YEAR INCOME SECURITIES OPERATIONS INCOME GAINS DISTRIBUTIONS OF YEAR RETURN
- -------- --------- ------- ----------- ---------- ------------- ------------- ------------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FRANKLIN CALIFORNIA GROWTH FUND
1992 1 $10.04 $0.07 $(0.168) $(0.098) $(0.072) -- -- $ 9.87 (1.77)%**
1993 9.87 0.12 0.340 0.460 (0.120) -- -- 10.21 4.72
1994 10.21 0.14 2.425 2.565 (0.145) (0.580) (0.725) 12.05 25.55
1995 12.05 0.16 3.043 3.203 (0.124) (1.099) (1.223) 14.03 29.09
FRANKLIN STRATEGIC INCOME FUND
1995 5 10.00 0.70 0.154 0.854 (0.674) -- (0.674) 10.18 8.94
FRANKLIN GLOBAL UTILITIES FUND
1993 2 10.00 0.22 1.270 1.490 (0.130) -- -- 11.36 18.08**
1994 11.36 0.30 1.280 1.580 (0.299) (0.042) (0.341) 12.60 14.04
1995 12.60 0.42 (0.067) 0.353 (0.365) (0.358) (0.723) 12.23 3.17
FRANKLIN SMALL CAP GROWTH FUND
1992 3 10.00 0.04 (0.460) (0.420) -- -- -- 9.58 (19.96)**
1993 9.58 0.07 0.657 0.727 (0.087) -- -- 10.22 7.66
1994 10.22 0.03 2.944 2.974 (0.043) (0.401) (0.444) 12.75 29.26
1995 12.75 0.03 3.138 3.168 (0.021) (0.997) (1.018) 14.90 27.05
FRANKLIN GLOBAL HEALTH CARE FUND
1992 3 10.00 0.02 (1.180) (1.160) -- -- -- 8.84 (55.14)**
1993 8.84 0.09 0.037 0.127 (0.087) -- -- 8.88 1.41
1994 8.88 0.07 1.856 1.926 (0.078) (0.298) (0.376) 10.43 21.93
1995 10.43 0.08 1.560 1.640 (0.061) (0.559) (0.620) 11.45 16.33
FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND
1994 4 10.00 0.15 0.014 0.164 (0.079) (0.035) (0.114) 10.05 1.62
1995 10.05 0.21 0.769 0.979 (0.204) (0.015) (0.219) 10.81 10.06
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
- -------------------------------------------------------------
RATIO OF NET
NET RATIO OF INVESTMENT
ASSETS EXPENSES INCOME TO
YEAR AT END TO AVERAGE AVERAGE PORTFOLIO
ENDED OF YEARS NET NET ASSETS TURNOVER
APRIL 30 (IN 000'S) ASSETS*** (SEE NOTE 6) RATE
- --------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
FRANKLIN CALIFORNIA GROWTH FUND
1992 1 $ 3,091 --% 1.27%** 13.73%
1993 3,412 -- 1.23 38.28
1994 4,646 0.09 1.16 135.12
1995 13,844 0.25 1.63 79.52
FRANKLIN STRATEGIC INCOME FUND
1995 5 6,736 0.25 7.93 68.43
FRANKLIN GLOBAL UTILITIES FUND
1993 2 14,227 -- 3.89** --
1994 124,188 0.84 2.95 16.28
1995 119,250 1.12 3.47 16.65
FRANKLIN SMALL CAP GROWTH FUND
1992 3 1,268 -- 2.45** 2.41
1993 6,026 -- 0.84 63.15
1994 23,915 0.30 0.24 89.60
1995 63,010 0.69 0.25 104.84
FRANKLIN GLOBAL HEALTH CARE FUND
1992 3 1,368 -- 1.68** 41.01
1993 3,422 -- 1.13 62.74
1994 5,795 0.10 0.68 110.82
1995 12,906 0.25 0.80 93.79
FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND
1994 4 5,079 -- 2.21** 70.53
1995 5,591 -- 2.12 163.54
</TABLE>
1 For the period October 18, 1991 (effective date) to April 30, 1992.
2 For the period July 2, 1992 (effective date) to April 30, 1993.
3 For the period February 14, 1992 (effective date) to April 30, 1992.
4 For the period August 17, 1993 (effective date) to April 30, 1994.
5 For the period May 24,1994 (effective date) to April 30, 1995.
* Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum initial
sales charge and assumes reinvestment of dividends and capital gains, if any,
at net asset value.
** Annualized
*** During the periods indicated, Franklin Advisers, Inc. and FISCO agreed to
waive in advance a portion of their management fees and made payments of other
expenses incurred by the Funds in the Series. Had such action not been taken,
the ratios of operating expenses to average net assets would have been as
follows:
77
<PAGE>
FRANKLIN STRATEGIC SERIES
NOTES TO FINANCIAL STATEMENTS (CONT.)
11. FINANCIAL HIGHLIGHTS (CONT.)
<TABLE>
<CAPTION>
RATIO OF EXPENSES
TO AVERAGE NET ASSETS
---------------------
<S> <C>
FRANKLIN CALIFORNIA GROWTH FUND
1992(1).................................... 1.61%**
1993....................................... 1.99
1994....................................... 1.89
1995....................................... 1.27
FRANKLIN STRATEGIC INCOME FUND
1995....................................... 1.38**
FRANKLIN GLOBAL UTILITIES FUND
1993(2) ................................... 1.51%**
1994....................................... 1.28
</TABLE>
**Annualized
<TABLE>
<CAPTION>
RATIO OF EXPENSES
TO AVERAGE NET ASSETS
---------------------
<S> <C>
FRANKLIN SMALL CAP GROWTH FUND
1992(3).................................... 1.74%**
1993....................................... 1.95
1994....................................... 1.58
1995....................................... 1.16
FRANKLIN GLOBAL HEALTH CARE FUND
1992(3).................................... 1.62%**
1993....................................... 2.16
1994....................................... 1.74
1995....................................... 1.37
FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND
1994(4).................................... 0.91%**
1995....................................... 0.98
</TABLE>
- -----------------------------------------------------------------------------
Of the income distributions paid by the Funds during the year ended April 30,
1995 the following estimated amounts qualify for the 70% dividends-received
deduction for corporations:*
<TABLE>
<S> <C>
Franklin California Growth Fund.......... 52.66%
Franklin Small Cap Growth Fund........... 83.34
Franklin Global Health Care Fund......... 20.12
Franklin Global Utilities Fund........... 70.15
Franklin Institutional MidCap Growth Fund 92.65
Franklin Strategic Income Fund........... 3.69
</TABLE>
The amounts reported above are estimated percentages and should be used for
information purposes only. Information on the final percentages that qualify
for this deduction for calendar year 1995 will be available shortly after the
end of this calendar year.
*The Funds hereby designate the amounts above as qualifying for the
dividends-received deduction for corporations for the year ended April 30,
1995.
- -----------------------------------------------------------------------------
78
<PAGE>
FRANKLIN STRATEGIC SERIES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
of Franklin Strategic Series
We have audited the accompanying statements of assets and liabilities of the
funds comprising the Franklin Strategic Series, including each Fund's
statements of investments in securities and net assets, as of April 30, 1995
and the related statements of operations, the statements of changes in net
assets, and the financial highlights for each of the periods indicated thereon.
These financial statements and financial highlights are the responsibility of
the Trust'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
April 30, 1995 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
funds comprising the Franklin Strategic Series as of April 30, 1995, and the
results of their operations, the changes in their net assets, and their
financial highlights for the periods indicated thereon, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
June 2, 1995
79
FRANKLIN STRATEGIC SERIES
<TABLE>
<CAPTION>
Statement of Investments in Securities and Net Assets, October 31, 1995 (unaudited)
Value
Shares Franklin California Growth Fund (Note 1)
Common Stocks 85.7%
Business Services 3.5%
<S> <C> <C>
15,000 Avery-Dennison Corp. ............................................................ $ 671,250
16,500 aRobert Half International, Inc. ................................................. 602,250
1,273,500
Consumer Services 2.7%
3,700 Disney (Walt) Co. ............................................................... 213,212
17,000 McClatchy Newspapers, Inc., Series A ............................................ 335,750
5,000 United Television, Inc. ......................................................... 426,250
975,212
Electronic Technology 16.0%
3,600 a3Com Corp. ...................................................................... 169,200
14,000 aBay Networks, Inc. .............................................................. 927,500
8,000 aCisco Systems, Inc. ............................................................. 620,000
5,000 aComputer Sciences Corp. ......................................................... 334,375
25,000 aConner Peripherals, Inc. ........................................................ 450,000
20,000 Logicon, Inc. ................................................................... 457,500
15,000 aNovell, Inc. .................................................................... 247,500
13,000 aRead-Rite Corp. ................................................................. 453,375
11,800 aSeagate Technology, Inc. ........................................................ 528,050
40,000 aSilicon Graphics, Inc. .......................................................... 1,330,000
13,000 aVeriFone, Inc. .................................................................. 351,000
5,868,500
Energy/Minerals 7.0%
6,000 Atlantic Richfield Co. (ARCO) ................................................... 640,500
10,000 Chevron Corp. ................................................................... 467,500
25,000 Ultramar Corp. .................................................................. 609,375
20,000 Unocal Corp. .................................................................... 525,000
7,500 aWestern Atlas, Inc. ............................................................. 329,063
2,571,438
Finance 2.4%
20,600 aSilicon Valley Bancshares ....................................................... 396,550
10,000 The PMI Group, Inc. ............................................................. 480,000
876,550
Health Services 4.9%
15,000 aAccess Health, Inc. ............................................................. 466,875
15,000 aFoundation Health Corp. ......................................................... 635,625
10,000 aPacifiCare Health Systems, Class A .............................................. 705,000
1,807,500
Health Technology 3.2%
6,000 aAmgen, Inc. ..................................................................... $ 288,000
5,000 aGenentech, Inc. ................................................................. 250,625
25,000 Mentor Corp. .................................................................... 550,000
10,000 aPenederm, Inc. .................................................................. 98,750
1,187,375
Leisure Time 3.8%
60,000 aAldila, Inc. .................................................................... 266,250
25,000 Anthony Industries, Inc. ........................................................ 465,625
40,000 Callaway Golf Co. ............................................................... 655,000
1,386,875
Other
486 a,bLynx Therapeutics, Inc. ......................................................... -
Producer/Manufacturing 4.1%
7,000 Clorox Co. ...................................................................... 502,250
22,000 Mattel, Inc. .................................................................... 632,500
13,000 Superior Industries International, Inc. ......................................... 365,625
1,500,375
Real Estate 4.3%
30,000 Bay Apartment Communities, Inc. ................................................. 618,750
30,000 Irvine Apartment Communities, Inc. .............................................. 536,250
10,000 Nationwide Health Property, Inc. ................................................ 411,250
1,566,250
Retail Trade 2.9%
17,000 aPrice/Costco, Inc. .............................................................. 289,000
35,000 aStrouds, Inc. ................................................................... 161,875
25,000 aVons Companies, Inc. ............................................................ 634,375
1,085,250
Semiconductors/Equipment 11.3%
15,000 aAdaptec, Inc. ................................................................... 667,500
6,000 aApplied Materials, Inc. ......................................................... 300,750
7,000 aElectroglas, Inc. ............................................................... 491,750
12,000 Intel Corp. ..................................................................... 838,500
9,800 Linear Technology Corp. ......................................................... 428,750
25,000 aNational Semiconductor Corp. .................................................... 609,375
10,000 aXilinx, Inc. .................................................................... 460,000
10,000 aZilog, Inc. ..................................................................... 355,000
4,151,625
Technology Services 6.8%
8,000 aBusiness Objects SA, ADR ........................................................ $ 346,000
12,700 aDendrite International, Inc. .................................................... 220,662
10,000 aInformix Corp. .................................................................. 291,250
10,000 aIntegrated Systems, Inc. ........................................................ 350,000
4,000 aMicrosoft Corp. ................................................................. 400,000
12,000 aOracle Systems Corp. ............................................................ 523,500
27,000 aSystemsoft Corp. ................................................................ 388,125
2,519,537
Telecommunications 1.7%
18,000 aSpectrian Corp. ................................................................. 391,500
15,000 aTekelec ......................................................................... 217,500
609,000
Transportation 4.6%
14,750 Air Express International Corp. ................................................. 306,063
10,600 Expeditors International of Washington, Inc. .................................... 279,575
25,000 Harper Group, Inc. .............................................................. 450,000
40,000 aMesa Airlines, Inc. ............................................................. 380,000
12,459 aSouthern Pacific Rail Corp. ..................................................... 277,212
1,692,850
Utilities 6.5%
17,000 aAirTouch Communications, Inc. ................................................... 484,500
20,000 Pacific Enterprises ............................................................. 495,000
23,000 San Diego Gas & Electric Co. .................................................... 534,750
30,000 SCEcorp ......................................................................... 510,000
20,000 Southern California Water ....................................................... 377,500
2,401,750
Total Common Stocks (Cost $28,455,209) .................................... 31,473,587
Preferred Stocks .7%
Real Estate
6,800 cCatellus Development Corp., $3.625 cvt. pfd., Series B (Cost $256,700) .......... 259,250
Convertible Bonds .8%
Electronic Technology
$195,000 c3COM Corp., cvt. sub. notes, 10.25%, 11/01/01 (Cost $243,275) ................... $ 311,025
Total Investments before Repurchase Agreements (Cost $28,955,184) ......... 32,043,862
dReceivables from Repurchase Agreements 14.8%
3,000,000 Citicorp Securities, Inc., 5.85%, 11/01/95 (Maturity Value $3,000,488)
Collateral: U.S. Treasury Notes, 6.125%, 07/31/96 ............................... 3,000,000
425,000 Daiwa Government Securities, Inc., 5.90%, 11/01/95 (Maturity Value $425,070)
Collateral: U.S. Treasury Notes, 6.125%, 09/30/00 ............................... 425,000
1,976,693 eJoint Repurchase Agreement, 5.887%, 11/01/95
Daiwa Securities America, Inc., (Maturity Value $441,685)
Collateral: U.S. Treasury Bills, 04/25/96
U.S. Treasury Notes, 6.125%, 09/30/00
Donaldson, Lufkin & Jenrette, (Maturity Value $521,991)
Collateral: U.S. Treasury Notes, 5.125% - 8.25%, 07/31/96 - 03/31/00
Swiss Bank Corp., (Maturity Value $521,991)
Collateral: U.S. Treasury Notes, 6.875%, 03/31/00
UBS Securities, Inc., (Maturity Value $521,991)
Collateral: U.S. Treasury Notes, 5.125% - 8.50%, 11/15/95 - 01/31/00 ........... 2,007,330
Total Receivables from Repurchase Agreements (Cost $5,432,330) ............ 5,432,330
Total Investments (Cost $34,387,514) 102.0% .......................... 37,476,192
Liabilities in Excess of Other Assets, Net (2.0)% .................... (733,610)
Net Assets 100.0% .................................................... $36,742,582
At October 31, 1995, the net unrealized appreciation based on
the cost of investments for income tax purposes of $34,387,514 was as follows:
Aggregate gross unrealized appreciation for all investments in which
there was an excess of value over tax cost ................................... $ 3,917,443
Aggregate gross unrealized depreciation for all investments in which
there was an excess of value over tax cost ................................... (828,765)
Net unrealized appreciation ................................................... $ 3,088,678
</TABLE>
aNon-income producing.
bSee Note 7 regarding restricted securities.
cSee Note 8 regarding Rule 144A securities.
dFace amount for repurchase agreements is for the underlying collateral.
eSee Note 1(h) regarding Joint Repurchase Agreement.
FRANKLIN STRATEGIC SERIES
<TABLE>
<CAPTION>
Statement of Investments in Securities and Net Assets, October 31, 1995 (unaudited)
Value
Country Shares Franklin Strategic Income Fund (Note 1)
Preferred Stocks 2.5%
Financial Services 1.3%
<S> <C> <C> <C>
US 1,000 First Nationwide Bank, 11.50% pfd. ................................. $ 113,500
Media & Broadcasting 1.2%
US 103 PanAmSat Corp., L.P., 12.75% pfd., PIK ............................. 111,985
Total Preferred Stocks (Cost $203,094) ....................... 225,485
Convertible Preferred Stocks 2.5%
Financial Services 2.1%
US 1,500 Integon Corp., $3.875 cvt. pfd. .................................... 80,813
US 2,500 cParker & Parsley Capital, 6.25% cvt. pfd. .......................... 111,250
192,063
Real Estate Investment Trust .4%
US 1,400 Property Trust of America, $1.75 cvt. pfd., Series A ............... 33,250
Total Convertible Preferred Stocks (Cost $223,383) ........... 225,313
Face
Amount*
Corporate Bonds 26.0%
Cable Television 2.3%
US 150,000 fBell Cablemedia, Plc., senior disc. notes, zero coupon to 07/15/99,
(original accretion rate 11.95%), 11.95% thereafter, 07/15/04 ....... 102,563
US 100,000 Rogers Cablesystems, Inc., guaranteed notes, 9.625%, 08/01/02 ...... 102,250
204,813
Consumer Goods 3.3%
US 100,000 cHerff Jones Inc., senior sub. notes, 11.00%, 08/15/05 .............. 103,500
US 100,000 Playtex Family Products Corp., senior sub. deb., 9.00%, 12/15/03 ... 90,500
US 100,000 Sealy Corp., senior sub. notes, 9.50%, 05/01/03 .................... 101,000
295,000
Containers & Packaging 1.2%
US 100,000 Owens Illinois, Inc., senior sub. deb., 10.50%, 06/15/02 ........... 105,500
Energy 1.2%
US 100,000 Gulf Canada Resources, Ltd., senior sub. deb., 9.25%, 01/15/04 ..... 103,063
Food/Beverages 1.2%
US 100,000 Curtice-Burns Foods, Inc., senior sub. notes, 12.25%, 02/01/05 ..... 104,500
Food Retailing 3.4%
US 100,000 Brunos, Inc., senior sub. notes, 10.50%, 08/01/05 .................. 98,500
US 100,000 Dominick's Finer Foods, senior sub. notes, 10.875%, 05/01/05 ....... 105,375
US 100,000 Grand Union Co., senior notes, 12.00%, 09/01/04 .................... 96,750
300,625
Forest & Paper Products 2.4%
US 100,000 Repap New Brunswick, senior notes, second priority, 10.625%, 04/15/05 $ 102,500
US 100,000 S.D. Warren Co., senior sub. notes, 12.00%, 12/15/04 ............... 111,500
214,000
Gaming & Hotels 3.5%
US 100,000 Aztar Corp., senior sub. notes, 13.75%, 10/01/04 ................... 108,500
US 100,000 cPlayers International, Inc., senior notes, 10.875%, 04/15/05 ....... 95,375
US 100,000 Showboat, Inc., senior sub. notes, 13.00%, 08/01/09 ................ 109,500
313,375
Health Care 2.4%
US 100,000 OrNda Healthcorp., guaranteed senior sub. notes, 11.375%, 08/15/04 . 112,000
US 100,000 Tenet Healthcare Corp., senior sub. notes, 10.125%, 03/01/05 ....... 107,500
219,500
Industrial 1.4%
US 150,000 fAmerican Standard, Inc., senior sub. deb., zero coupon to 06/01/98,
(original accretion rate 10.50%), 10.50% thereafter, 06/01/05 ....... 126,375
Media & Broadcasting 1.1%
US 100,000 American Media Operation, senior sub. notes, 11.625%, 11/15/04 ..... 102,500
Metals & Mining 1.5%
US 100,000 fAcme Metals, Inc., guaranteed senior secured disc. notes, zero coupon to
08/01/97, (original accretion rate 13.50%), 13.50% thereafter, 08/01/04 78,625
US 50,000 Ucar Global Enterprises, Inc., senior sub. notes, 12.00%, 01/15/05 . 56,375
135,000
Textile 1.1%
US 100,000 WestPoint Stevens, Inc., senior notes, 8.75%, 12/15/01 ............. 101,500
Total Corporate Bonds (Cost $2,210,203) ...................... 2,325,751
Convertible Bonds 9.7%
Electronics 3.6%
US 65,000 cAltera Corp., cvt. sub. notes, 5.75%, 10/15/02 ..................... 87,588
US 125,000 cDovatron International, Inc., cvt. sub. notes, 6.00%, 10/15/02 ..... 127,500
US 100,000 cSanmina Corp., sub. notes, 5.50%, 08/15/02 ......................... 111,500
326,588
Food/Beverages .7%
US 65,000 Chock Full O'Nuts Corp., cvt. deb., 7.00%, 10/15/02 ................ 59,475
Health Care 1.2%
US 40,000 Integrated Health Services, Inc., senior sub. deb., 5.75%, 01/01/01 $ 40,200
US 70,000 Maxxim Medical, Inc., cvt. sub. deb., 6.75%, 03/01/03 .............. 69,300
109,500
Industrial 1.0%
US 70,000 Raymond Corp., cvt. sub. deb., 6.50%, 12/15/03 ..................... 87,675
Information/Technology .8%
US 65,000 cBay Networks Inc., cvt. sub. deb., 5.25%, 05/15/03 ................. 73,369
Lodging 1.2%
US 100,000 Prime Hospitality Corp., cvt. sub. notes, 7.00%, 04/15/02 .......... 105,625
Telecommunications 1.2%
US 110,000 cAll American Communications, cvt. sub. deb., 6.50%, 10/01/03 ....... 107,800
Total Convertible Bonds (Cost $817,827) ...................... 870,032
Foreign Corporate Bonds 6.2%
US 100,000 Bridas Corp., senior notes, 12.50%, 11/15/99 ....................... 96,000
US 120,000 Centrais Eletricas Brasileiras SA, 10.00%, 10/30/98 ................ 119,400
US 100,000 cEssar Guajarat, Ltd., floating rate deb., 9.40%, 07/15/99 .......... 99,625
US 125,000 cSEI Holdings IX, Inc., senior notes, 11.00%, 11/30/00 .............. 127,031
US 100,000 Tjiwi Kimia International, 13.25%, 08/01/01 ........................ 109,500
Total Foreign Corporate Bonds (Cost $541,442) ................ 551,556
Foreign Government Agencies 24.6%
ES 9,480,000 hBonos y Obligacion del Estado, 12.25%, 03/25/00 .................... 82,208
DD 60,000 Bundesschatzanweisungen, 6.875%, 12/02/98 .......................... 45,012
IT 135,000,000 hBuoni Poliennali del Tesoro, 9.188%, 07/15/00 ...................... 82,718
DD 80,000 Deutsche Bundespost, 7.75%, 10/01/04 ............................... 60,818
DD 75,000 Deutschland Bundesrepublik, 8.375%, 05/21/01 ....................... 59,682
DD 70,000 Deutschland Bundesrepublik, 8.250%, 09/20/01 ....................... 55,440
DD 75,000 Deutschland Bundesrepublik, 7.125%, 12/20/02 ....................... 56,079
DD 80,000 Deutschland Bundesrepublik, 6.50%, 07/15/03 ........................ 57,446
DD 150,000 German Unity Fund, 8.00%, 01/21/02 ................................. 117,211
CA 100,000 Government of Canada, 10.25%, 12/01/98 ............................. 81,560
CA 100,000 Government of Canada, 5.75%, 03/01/99 .............................. 72,075
CA 53,000 Government of Canada, 6.50%, 06/01/04 .............................. 36,948
CA 100,000 Government of Canada, 10.50%, 10/01/04 ............................. 88,518
CA 20,000 Government of Canada, 9.00%, 12/01/04 .............................. 16,305
FR 470,000 Government of France, 8.50%, 03/28/00 .............................. 103,566
FR 442,000 Government of France, 9.50%, 01/25/01 .............................. 101,723
DD 20,000 International Bank of Reconstruction and Development, 7.125%, 04/12/05 $ 14,672
DK 108,000 Kingdom of Denmark, 9.00%, 11/15/98 ................................ 21,159
DK 501,000 Kingdom of Denmark, 8.00%, 11/15/01 ................................ 95,118
DK 167,000 Kingdom of Denmark, 8.00%, 05/15/03 ................................ 31,263
DK 327,000 Kingdom of Denmark, 7.00%, 12/15/04 ................................ 56,935
AU 100,000 New South Wales Treasury Corp., 7.00%, 04/01/04 .................... 67,594
NZ 100,000 New Zealand Government, 6.50%, 02/15/00 ............................ 64,323
NZ 80,000 New Zealand Government, 10.00%, 03/15/02 ........................... 60,247
NZ 80,000 New Zealand Government, 8.00%, 04/15/04............................. 55,411
AU 225,000 Queensland Treasury Corp., 8.875%, 11/08/96 ........................ 173,347
AU 25,000 Queensland Treasury Corp., 8.00%, 05/14/03 ......................... 18,152
US 170,000 Republic of Argentina, 6.813%, 03/31/05 ............................ 100,513
US 166,250 Republic of Brazil, 6.688%, 01/01/01 ............................... 142,040
US 408,594 Republic of Equador, 3.00%, 02/27/15 ............................... 135,858
AU 65,000 Treasury Corp. of Victoria, 8.25%, 10/15/03 ........................ 47,786
Total Foreign Government Agencies (Cost $2,134,830) .......... 2,201,727
U.S. Government 2.8%
US 250,000 U.S. Treasury Notes, 6.75%, 05/31/97 (Cost $248,974) ............... 254,297
U.S. Government Agencies/Mortgages 6.8%
US 28,262 FHLMC, 7.00%, 01/01/09 ............................................. 28,527
US 28,143 FHLMC, 6.00%, 04/01/09 ............................................. 27,493
US 50,097 FHLMC, 7.00%, 04/01/24 ............................................. 49,814
US 48,380 FHLMC, 7.50%, 04/01/24 ............................................. 49,014
US 43,055 FHLMC, 8.50%, 12/01/24 ............................................. 44,710
US 46,225 FNMA, 7.50%, 10/01/07 .............................................. 47,222
US 34,924 FNMA, 6.50%, 02/01/09 .............................................. 34,695
US 44,371 FNMA, 6.50%, 01/01/24 .............................................. 43,137
US 24,547 FNMA, 7.00%, 05/01/24 .............................................. 24,386
US 47,664 FNMA, 8.00%, 01/01/25 .............................................. 48,960
US 21,686 FNMA, 9.00%, 05/01/25 .............................................. 22,696
US 23,574 GNMA, SF, 7.50%, 09/15/23 .......................................... 23,934
US 49,711 GNMA, SF, 6.50%, 03/15/24 .......................................... 48,390
US 49,957 GNMA, SF, 8.00%, 06/15/24 .......................................... 51,517
US 9,568 GNMA, SF, 9.00%, 01/15/25 .......................................... 10,066
US 59,321 GNMA, SF, 7.00%, 09/20/25 .......................................... 58,690
Total U.S. Government Agencies/Mortgages (Cost $585,101) ..... 613,251
Total Long Term Investments (Cost $6,964,854) ................ 7,267,412
g Short Term Investments
Foreign Corporate Agencies 2.2%
TH 5,000,000 Thailand Military Bank Notes, 11.00%, 06/05/96 (Cost $203,128) ..... $ 198,690
Total Investments before Repurchase Agreements (Cost $7,167,982) 7,466,102
d,eReceivables from Repurchase Agreements 11.7%
US 1,032,062 Joint Repurchase Agreement, 5.887 %, 11/01/95 (Cost $1,047,641)
Daiwa Securities America, Inc., (Maturity Value $230,519)
Collateral: U.S. Treasury Bills, 04/25/96
Collateral: U.S. Treasury Notes, 6.125%, 09/30/00
Donaldson, Lufkin & Jenrette, (Maturity Value $272,431)
Collateral: U.S. Treasury Notes, 5.125% - 8.25%, 07/31/96 - 03/31/00
Swiss Bank Corp., (Maturity Value $272,431)
Collateral: U.S. Treasury Notes, 6.875%, 03/31/00
UBS Securities, Inc., (Maturity Value $272,431)
Collateral: U.S. Treasury Notes, 5.125% - 8.50%, 11/15/95 - 01/31/00 1,047,641
Total Investments (Cost $8,215,623) 95.0% ............... 8,513,743
Other Assets and Liabilities, Net 5.0% .................. 450,001
Net Assets 100.0% ....................................... $8,963,744
At October 31, 1995, the net unrealized appreciation based on the cost
of investments for income tax purposes of $8,215,623 was as follows:
Aggregate gross unrealized appreciation for all investments in which
there was an excess of value over tax cost ...................... $ 321,316
Aggregate gross unrealized depreciation for all investments in which
there was an excess of tax cost over value ...................... (23,196)
Net unrealized appreciation ...................................... $ 298,120
</TABLE>
PORTFOLIO ABBREVIATIONS:
FHLMC - Federal Home Loan Mortgage Corp.
FNMA - Federal National Mortgage Association
GNMA - Government National Mortgage Association
LP - Limited Partnership
LYONs - Liquid Yield Option Notes
PIK - Payment-in-Kind
SF - Single Family
COUNTRY LEGEND:
AU - Australia
CA - Canada
DD - Germany
DK - Denmark
ES - Spain
FR - France
IT - Italy
NZ - New Zealand
TH - Thailand
US - United States of America
*Face amount is stated in the currency of country indicated and value is stated
in U.S. dollars.
cSee Note 8 regarding Rule 144A securities.
dFace amount for repurchase agreements is for the underlying collateral.
eSee Note 1(h) regarding Joint Repurchase Agreement.
fZero coupon/step-up bonds. The current effective yield may vary. The original
accretion rate will remain constant. gCertain short-term securities are traded
on a discount basis; the rates shown are the discount rates at the time of
purchase by the Fund. Other securities bear interest at the rates shown, payable
at fixed rates or upon maturity. hSee Note 1(e) regarding securities purchased
on a when-issued or delayed delivery basis.
FRANKLIN STRATEGIC SERIES
<TABLE>
<CAPTION>
Statement of Investments in Securities and Net Assets, October 31, 1995 (unaudited)
Value
Country* Shares Franklin Global Utilities Fund (Note 1)
Common Stocks 92.6%
Electric & Gas Utilities 66.7%
<S> <C> <C> <C>
US 166,000 aAES Corp. .......................................................... $ 3,278,500
US 57,200 American Electric Power Co., Inc. .................................. 2,180,750
US 49,500 Central & South West Corp. ......................................... 1,324,125
HK 227,400 China Light & Power, Ltd. .......................................... 1,211,748
US 150,000 CINergy Corp. ...................................................... 4,256,250
US 49,700 Dominion Resources, Inc. ........................................... 1,975,575
US 22,300 DPL, Inc. .......................................................... 529,625
US 60,950 Duke Power Co. ..................................................... 2,727,513
US 62,900 Empresa Nacional de Electricidad, ADR .............................. 3,160,725
US 127,000 Enron Corp. ........................................................ 4,365,625
US 107,700 Enron Global Power & Pipelines ..................................... 2,598,263
US 110,000 Entergy Corp. ...................................................... 3,135,000
US 195,000 cEspoon Sahko Oy .................................................... 2,618,070
US 39,000 FPL Group, Inc. .................................................... 1,633,125
US 49,600 General Public Utilities Corp. ..................................... 1,550,000
HK 1,180,000 Hong Kong Electric Holdings, Ltd. .................................. 4,013,865
US 62,000 aHuaneng Power International, Inc., ADR ............................. 1,030,750
KR 33,700 Korea Electric Power Corp. ......................................... 1,526,113
US 109,000 National Fuel Gas Co. .............................................. 3,242,750
US 6,900 New England Electric System ........................................ 269,100
US 29,100 NIPSCO Industries, Inc. ............................................ 1,062,150
US 126,000 Pacific Enterprises ................................................ 3,118,500
US 20,200 Pacific Gas & Electric Co. ......................................... 593,375
US 176,700 PacifiCorp ......................................................... 3,335,213
US 133,500 Panhandle Eastern Corp. ............................................ 3,370,875
US 59,000 Pinnacle West Capital Corp. ........................................ 1,622,500
US 50,000 Public Service Co. of Colorado ..................................... 1,706,250
GB 360,000 Scottish Power, Plc. ............................................... 1,986,246
US 208,000 Southern Co. ....................................................... 4,966,000
US 41,200 Southern Indiana Gas & Electric Co. ................................ 1,390,500
US 183,900 TECO Energy, Inc. .................................................. 4,344,638
US 51,500 Texas Utilities Co. ................................................ 1,892,625
US 146,000 TransCanada Pipelines, Ltd. ........................................ 1,952,750
US 160,000 Transportadora Gas Sur, ADR ........................................ 1,640,000
US 4,600 Wicor, Inc. ........................................................ 136,275
US 53,400 Williams Cos., Inc. ................................................ 2,062,575
81,807,944
Telecommunications Services 25.9%
US 20,150 aAirTouch Communications, Inc. ...................................... $ 574,275
US 30,000 Ameritech Corp. .................................................... 1,620,000
US 59,300 AT&T Corp. ......................................................... 3,795,200
GB 300,000 Cable & Wireless, Plc. ............................................. 1,963,481
US 19,700 aComcast UK Cable Partners, Ltd. .................................... 253,638
MX 44,400 aGrupo Iusacell, SA, Series D ....................................... 39,826
US 100,560 aGrupo Iusacell, SA, Series L, ADR .................................. 1,194,150
US 55,300 GTE Corp. .......................................................... 2,281,125
US 124,000 aNynex Cablecomms Group, ADR ........................................ 2,526,500
US 130,000 Portugal Telecom SA, ADR ........................................... 2,437,500
US 40,000 SBC Communications, Inc. ........................................... 2,235,000
IT 550,000 STET-Societa Finanziaria Telefonica ................................ 1,556,040
US 120,000 Tele Danmark, A/S, ADS ............................................. 3,135,000
US 62,750 Telecom de Argentina, SA, ADR ...................................... 2,408,030
US 20,400 Telefonica de Argentina, ADS ....................................... 423,300
US 65,950 Telefonica de Espana, ADR .......................................... 2,481,369
US 45,700 Telefonos de Mexico, ADR ........................................... 1,256,750
US 57,500 aTelewest Communications, Plc., ADR ................................. 1,595,625
31,776,809
Total Common Stocks (Cost $109,638,643) ...................... 113,584,753
Face
Amount
d,eReceivables from Repurchase Agreements 4.7%
US $5,707,700 Joint Repurchase Agreement, 5.887%, 11/01/95 (Cost $5,798,095)
Daiwa Securities America, Inc., (Maturity Value $1,275,790)
Collateral: U.S. Treasury Bills, 04/25/96
U.S. Treasury Notes, 6.125%, 09/30/00
Donaldson, Lufkin & Jenrette, (Maturity Value $1,507,751)
Collateral: U.S. Treasury Notes, 5.125% - 8.25%, 07/31/96 - 03/31/00
Swiss Bank Corp., (Maturity Value $1,507,751)
Collateral: U.S. Treasury Notes, 6.875%, 03/31/00
UBS Securities, Inc., (Maturity Value $1,507,751)
Collateral: U.S. Treasury Notes, 5.125% - 8.50%, 11/15/95 - 01/31/00 . 5,798,095
Total Investments (Cost $115,436,738) 97.3% ............. 119,382,848
Other Assets and Liabilities, Net 2.7% .................. 3,364,637
Net Assets 100.0% ....................................... $122,747,485
At October 31, 1995, the net unrealized appreciation based on the cost of
investments for income tax purposes of $115,438,556 was as follows:
Aggregate gross unrealized appreciation for all investments in which
there was an excess of value over tax cost ..................... $ 9,336,798
Aggregate gross unrealized depreciation for all investments in which
there was an excess of tax cost over value ..................... (5,392,506)
Net unrealized appreciation ...................................... $ 3,944,292
</TABLE>
COUNTRY LEGEND:
GB - United Kingdom
HK - Hong Kong
IT - Italy
KR - South Korea
MX - Mexico
US - United States of America
*Securities traded in currency of country indicated.
aNon-income producing.
cSee Note 8 regarding Rule 144A securities.
dFace amount for repurchase agreements is for the underlying collateral.
eSee Note 1(h) regarding Joint Repurchase Agreement.
FRANKLIN STRATEGIC SERIES
<TABLE>
<CAPTION>
Statement of Investments in Securities and Net Assets, October 31, 1995 (unaudited)
Value
Shares Franklin Small Cap Growth Fund (Note 1)
Common Stocks 95.2%
Commercial Services 1.3%
<S> <C> <C>
71,000 aRobert Half International, Inc. ................................................ $ 2,591,500
Consumer Durables 5.4%
330,000 aAldila, Inc. ................................................................... 1,464,375
160,000 aBeazer Homes USA, Inc. ......................................................... 2,800,000
185,000 Callaway Golf Co. .............................................................. 3,029,375
65,000 Continental Homes Holding Corp. ................................................ 1,332,500
29,200 aNVR, Inc. ...................................................................... 292,000
114,000 aSouthern Energy Homes, Inc. .................................................... 1,681,500
10,599,750
Consumer Non-Durables 1.9%
25,000 aGucci Group .................................................................... 750,000
80,700 aTommy Hilfiger Corp. ........................................................... 3,076,688
3,826,688
Consumer Services 3.4%
319,600 aAztar Corp. .................................................................... 2,596,750
50,000 Gillett Holdings, Inc. ......................................................... 1,050,000
152,100 aRed Lion Hotels, Inc. .......................................................... 3,003,975
6,650,725
Electronic Technology 16.9%
60,000 a3Com Corp. ..................................................................... 2,820,000
40,000 aAspect Telecommunications Corp. ................................................ 1,375,000
275,000 Aviall, Inc. ................................................................... 2,303,125
75,000 aBay Networks, Inc. ............................................................. 4,968,750
88,000 aBell & Howell Holdings Co. ..................................................... 2,200,000
45,000 aDSC Communications Corp. ....................................................... 1,665,000
180,000 aECI Telecommunications, Ltd. ................................................... 3,420,000
60,000 aGeneral Instrument Corp. ....................................................... 1,140,000
15,000 aKomag, Inc. .................................................................... 855,000
100,000 Logicon, Inc. .................................................................. 2,287,500
80,000 aSilicon Graphics, Inc. ......................................................... 2,660,000
90,100 aSpectrian Corp. ................................................................ 1,959,675
120,000 aTekelec ........................................................................ 1,740,000
105,000 aTracor, Inc. ................................................................... 1,680,000
79,000 aVerifone, Inc. ................................................................. 2,133,000
33,207,050
Energy Minerals 4.8%
615,000 aAbacan Resource Corp. .......................................................... $ 1,515,118
65,000 aBarrett Resources Corp. ........................................................ 1,511,250
230,000 aForcenergy Gas Exploration, Inc. ............................................... 2,242,500
110,000 Parker & Parsley Petroleum Co. ................................................. 2,035,000
210,000 Total Petroleum (North America), Ltd. .......................................... 2,126,250
9,430,118
Financials 7.8%
200,000 ACMAT Corp., Class A ........................................................... 2,350,000
200,000 aAmeriCredit Corporation ........................................................ 2,450,000
18,200 Leucadia National Corp. ........................................................ 1,003,275
49,300 aPrudential Reinsurance Holdings, Inc. .......................................... 1,004,488
166,900 aRisk Capital Holdings, Inc. .................................................... 3,671,800
110,000 aSilicon Valley Bancshares ...................................................... 2,117,500
50,000 aThe PMI Group, Inc. ............................................................ 2,400,000
15,600 aWFS Financial, Inc. ............................................................ 259,350
15,256,413
Health Services 4.8%
50,000 aAccess Health, Inc. ............................................................ 1,556,250
185,000 aAdvocat, Inc. .................................................................. 1,988,750
10,500 Integrated Health Services, Inc. ............................................... 240,188
10,000 aMedic Computer Systems, Inc. ................................................... 532,500
150,000 aSierra Health Services, Inc. ................................................... 4,293,750
75,000 aSun Healthcare Group, Inc. ..................................................... 890,625
9,502,063
Health Technology 1.4%
60,000 aKV Pharmaceutical Co., Class B ................................................. 495,000
50,000 aMatrix Pharmaceutical, Inc. .................................................... 725,000
88,200 aNoven Pharmaceutical, Inc. ..................................................... 904,050
73,000 aPenederm, Inc. ................................................................. 720,875
2,844,925
Industrial Services 1.1%
112,000 AES Corp. ...................................................................... 2,212,000
Non-Energy Minerals 1.9%
80,000 Freeport-McMoRan Copper & Gold, Inc., Class B .................................. 1,820,000
110,000 aMagma Copper Co. ............................................................... 1,842,500
3,662,500
Process Industries 1.3%
92,600 aUcar International, Inc. ....................................................... $ 2,639,100
Producer Manufacturing 2.6%
61,300 aAtchison Casting Corp. ......................................................... 973,138
205,000 aEasco, Inc. .................................................................... 1,537,500
15,000 aRaymond Corp. .................................................................. 300,000
65,000 Roper Industries, Inc. ......................................................... 2,356,250
5,166,888
Real Estate 4.0%
175,000 Equity Inns, Inc. .............................................................. 2,056,250
55,000 FelCor Suite Hotels, Inc. ...................................................... 1,588,125
90,000 Omega Healthcare Investors, Inc. ............................................... 2,283,750
165,500 Winston Hotels, Inc. ........................................................... 1,841,188
7,769,313
Retail 2.4%
100,000 aBorders Group, Inc. ............................................................ 1,712,500
37,500 aErnst Home Center, Inc. ........................................................ 173,438
15,000 aGadzooks, Inc. ................................................................. 277,500
252,800 aStrouds, Inc. .................................................................. 1,169,200
75,000 aWilliams-Sonoma, Inc. .......................................................... 1,303,125
4,635,763
Semiconductors 17.6%
70,000 aAdaptec, Inc. .................................................................. 3,115,000
105,000 aAdvanced Semiconductor Materials International N.V. ............................ 4,921,875
40,000 aAltera Corp. ................................................................... 2,420,000
30,000 aElectroglas, Inc. .............................................................. 2,107,500
50,000 aElectro Scientific Industries, Inc. ............................................ 1,550,000
2,000 aESS Technology, Inc. ........................................................... 60,000
55,000 aExar Corp. ..................................................................... 1,306,250
80,000 aLattice Semiconductor Corp. .................................................... 3,140,000
60,000 Linear Technology Corp. ........................................................ 2,625,000
150,000 aMicro Linear Corp. ............................................................. 2,306,250
55,000 aSGS-Thomson Microelectronics, Inc., ADR ........................................ 2,488,750
60,000 aSilicon Valley Group, Inc. ..................................................... 1,935,000
70,000 aUniphase Corp. ................................................................. 2,047,500
40,000 aXilinx, Inc. ................................................................... 1,840,000
75,000 aZilog, Inc. .................................................................... 2,662,500
34,525,625
Technology Services 8.4%
70,000 aBusiness Objects SA, ADR ....................................................... $ 3,027,500
54,000 aIntegrated Systems, Inc. ....................................................... 1,890,000
45,000 aIntersolv, Inc. ................................................................ 708,750
110,000 aMapInfo Corp. .................................................................. 2,213,750
160,000 aMicrotec Research, Inc. ........................................................ 2,230,000
55,000 aSterling Software, Inc. ........................................................ 2,536,875
142,000 aSystemsoft Corp. ............................................................... 2,041,250
41,200 Wyle Electronics ............................................................... 1,756,150
16,404,275
Transportation 6.0%
74,000 Air Express International Corp. ................................................ 1,535,500
348,200 aAtlantic Coast Airlines, Inc. .................................................. 2,850,887
110,000 Harper Group, Inc. ............................................................. 1,980,000
116,000 aLandstar System, Inc. .......................................................... 3,045,000
250,000 aMesa Airlines, Inc. ............................................................ 2,375,000
11,786,387
Utilities/Communication 2.2%
140,000 aBell Cablemedia, Plc. .......................................................... 2,082,500
25,000 aCellular Communications, Inc. .................................................. 1,340,624
25,000 aComnet Cellular, Inc. .......................................................... 628,124
8,000 aSilver King Communications, Inc. ............................................... 234,000
4,285,248
Total Common Stocks (Cost $179,523,630) .................................. 186,996,331
Preferred Stocks 1.0%
Electronic Technology
35,000 Nokia Corp., pfd., ADR (Cost $1,341,320) ....................................... 1,951,250
Total Common Stocks and Preferred Stocks (Cost $180,864,950) ............. 188,947,581
dReceivables from Repurchase Agreements 8.2%....................................
$ 3,140,000 Daiwa Securities America, Inc., 5.90%, 11/01/95 (Maturity Value $3,128,513)
Collateral: U.S. Treasury Notes, 6.125%, 09/30/00 .............................. $ 3,128,000
12,776,277 eJoint Repurchase Agreement, 5.887%, 11/01/95
Daiwa Securities America, Inc., (Maturity Value $2,855,941)
Collateral: U.S. Treasury Bills, 04/25/96
U.S. Treasury Notes, 6.125%, 09/30/00
Donaldson, Lufkin & Jenrette, (Maturity Value $3,375,203)
Collateral: U.S. Treasury Notes, 5.125% - 8.25%, 07/31/96 - 03/31/00
Swiss Bank Corp., (Maturity Value $3,375,203)
Collateral: U.S. Treasury Notes, 6.875%, 03/31/00
UBS Securities, Inc., (Maturity Value $3,375,203)
Collateral: U.S. Treasury Notes, 5.125% - 8.50%, 11/15/95 - 01/31/00 ........... 12,979,426
Total Receivables from Repurchase Agreements (Cost $16,107,426) .......... 16,107,426
Total Investments (Cost $196,972,376) 104.4% ........................ 205,055,007
Liabilities in Excess of Other Assets, Net (4.4)% ................... (8,671,722)
Net Assets 100.0% ................................................... $196,383,285
At October 31, 1995, the net unrealized appreciation based on
the cost of investments for income tax purposes of $197,154,626 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was
an excess of value over tax cost ............................................. $ 20,322,597
Aggregate gross unrealized depreciation for all investments in which there was
an excess of tax cost over value ............................................. (12,422,216)
Net unrealized appreciation .................................................. $ 7,900,381
aNon-income producing.
dFace amount for repurchase agreements is for the underlying collateral.
eSee Note 1(h) regarding Joint Repurchase Agreement.
FRANKLIN STRATEGIC SERIES
Statement of Investments in Securities and Net Assets, October 31, 1995 (unaudited)
Shares/ Value
Country* Warrants Franklin Global Health Care Fund (Note 1)
Common Stocks & Warrants 80.3%
Biotechnology 9.2%
<S> <C> <C>
US 4,000 aBiogen, Inc. ......................................................... $ 245,000
GB 20,000 aBritish Bio-Technology Group ......................................... 281,084
GB 3,750 aBritish Bio-Technology Group, warrants ............................... 21,816
US 20,000 aCytoTherapeutics, Inc. ............................................... 205,000
US 10,000 aMyriad Genetics, Inc. ................................................ 270,000
US 10,000 aNeurogen Corp. ....................................................... 222,500
US 42,000 aSerologicals, Corp. .................................................. 661,500
US 25,000 aUnivax Biologics, Inc. ............................................... 157,813
2,064,713
Homecare/Alternate Site 1.1%
US 17,000 aProfessional Sports Care Management, Inc. ............................ 93,500
US 15,000 aQuantum Health Resources, Inc. ....................................... 159,375
252,875
Hospitals 2.2%
US 6,300 Columbia/HCA Healthcare Corp. ........................................ 309,488
US 10,000 aTenet Healthcare Corp. ............................................... 178,750
488,238
Managed Care/HMOs 14.1%
US 12,000 aCompdent Corp. ....................................................... 373,500
US 5,000 aFoundation Health Corp. .............................................. 211,875
US 17,100 aOrNda HealthCorp. .................................................... 301,388
US 5,000 aOxford Health Plans, Inc. ............................................ 391,250
US 10,000 aPacifiCare Health Systems, Inc., Class B ............................. 727,500
US 14,000 aSierra Health Services, Inc. ......................................... 400,750
US 10,000 United Healthcare Corp. .............................................. 531,250
US 10,000 aValue Health, Inc. ................................................... 228,750
3,166,263
Medical Technology & Supplies 8.5%
US 40,000 aAbaxis, Inc. ......................................................... 275,000
US 10,000 Bard (C.R.), Inc. .................................................... 282,500
US 10,000 aCygnus, Inc. ......................................................... 163,750
US 19,666 aHealthdyne Technologies, Inc. ........................................ 211,410
US 20,000 aMediSense, Inc. ...................................................... 427,500
US 16,000 Mentor Corp. ......................................................... 352,000
US 10,000 aVentritex, Inc. ...................................................... 196,250
1,908,410
Nursing Homes/Subacute 1.2%
US 25,000 aAdvocat, Inc. ........................................................ $ 268,750
Pharmaceutical Distributors .8%
US 14,000 Grupo Casa Autrey, SA de C.V., ADR ................................... 178,500
Pharmaceuticals 14.6%
SE 7,500 aAstra AB, Series B ................................................... 271,144
CH 500 Ciba-Geigy, AG ....................................................... 432,697
US 20,000 Medeva, Plc., ADR .................................................... 342,500
DD 15,000 aMerck KGaA ........................................................... 626,888
US 2,000 Pfizer, Inc. ......................................................... 114,750
CH 50 Roche Holding ........................................................ 363,148
CH 500 Sandoz, AG-R ......................................................... 412,448
FR 3,300 Sanofi, SA ........................................................... 210,765
US 4,400 Schering-Plough Corp. ................................................ 235,950
US 6,000 aWatson Pharmaceuticals, Inc. ......................................... 268,500
3,278,790
Physician Practice Management 3.6%
US 19,500 aAHI Healthcare Systems, Inc. ......................................... 273,000
US 25,000 aPediatrix Medical Group, Inc. ........................................ 540,625
813,625
Software/Information Systems 4.8%
US 8,300 aDendrite International, Inc. ......................................... 144,212
US 16,000 aImnet Systems, Inc. .................................................. 406,000
US 15,000 aOwen Healthcare, Inc. ................................................ 273,750
US 20,000 aPyxis Corp. .......................................................... 252,500
1,076,462
Specialty Pharmaceuticals 19%
US 7,000 aAllergan, Inc. ....................................................... 205,625
US 15,000 aAlza Corp. ........................................................... 330,000
US 40,000 aAnesta Corp. ......................................................... 425,000
CH 100 aAres Serono, Inc., Series B .......................................... 65,587
US 50,000 aEthical Holdings, Plc., ADR .......................................... 450,000
US 25,000 aGensia, Inc. ......................................................... 106,250
US 36,000 aKV Pharmaceutical Co., Class B ....................................... 297,000
US 25,000 aMatrix Pharmaceutical, Inc. .......................................... 362,500
US 82,100 aNoven Pharmaceuticals, Inc. .......................................... 841,525
US 95,000 aPenederm, Inc. ....................................................... 938,124
US 12,500 aRoberts Pharmaceutical Corp. ......................................... 242,187
4,263,798
Temporary Staffing 1.2%
US 15,000 aRomac International, Inc. ............................................ $ 277,500
Total Common Stocks & Warrants (Cost $ 14,935,862) ............. 18,037,924
Face
Amount
dReceivables from Repurchase Agreements 20.9%
US $2,040,000 Citicorp Securities Inc., 5.85%, 11/01/95 (Maturity Value $2,000,325)
Collateral: U.S. Treasury Notes, 4.625%, 02/29/96...................... 2,000,000
US 2,653,330 eJoint Repurchase Agreement, 5.887%, 11/01/95 Daiwa Securities
America, Inc., (Maturity Value $592,944) Collateral: U.S. Treasury Bills,
04/25/96 U.S. Treasury Notes, 6.125%, 09/30/00
Donaldson, Lufkin & Jenrette, (Maturity Value $700,751)
Collateral: U.S. Treasury Notes, 5.125% - 8.25%, 07/31/96 - 03/31/00
Swiss Bank Corp., (Maturity Value $700,751)
Collateral: U.S. Treasury Notes, 6.875%, 03/31/00
UBS Securities, Inc., (Maturity Value $700,751)
Collateral: U.S. Treasury Notes, 5.125% - 8.50%, 11/15/95 - 01/31/00 . 2,694,757
Total Receivables from Repurchase Agreement (Cost $4,694,757) .. 4,694,757
Total Investments (Cost $19,630,619) 101.2% ............... 22,732,681
Liabilities in Excess of Other Assets, Net (1.2)% ......... (266,349)
Net Assets 100.0% ......................................... $22,466,332
At October 31, 1995, the net unrealized appreciation based on the cost of
investments for income tax purposes of $19,633,800 was as follows:
Aggregate gross unrealized appreciation for all investments
in which there was an excess of value over tax cost ............... $ 3,798,504
Aggregate gross unrealized depreciation for all investments
in which there was an excess of tax cost over value ............... (699,623)
Net unrealized appreciation ........................................ $ 3,098,881
</TABLE>
COUNTRY LEGEND:
CH - Switzerland
DD - Germany
FR - France
GB - United Kingdom
SE - Sweden
US - United States of America
*Securities traded in currency of country indicated.
aNon-income producing.
dFace amount for repurchase agreements is for the underlying collateral.
eSee Note 1(h) regarding Joint Repurchase Agreement.
FRANKLIN STRATEGIC SERIES
<TABLE>
<CAPTION>
Statement of Investments in Securities and Net Assets, October 31, 1995 (unaudited)
Value
Shares Franklin Institutional MidCap Growth Fund (Note 1)
Advertising .2%
<S> <C> <C>
200 Omnicom Group, Inc. ................................................................ $ 12,775
Aerospace/Defense .5%
1,200 GenCorp, Inc. ...................................................................... 12,600
200 General Motors, Class H ............................................................ 8,400
400 Thiokol Corp. ...................................................................... 13,850
34,850
Chemical & Materials 5.6%
300 Albemarle Corp. .................................................................... 5,588
800 ARCO Chemical Co. .................................................................. 39,200
1,300 Cabot Corp. ........................................................................ 61,750
2,300 Granite Construction, Inc. ......................................................... 65,263
400 Hanna (M.A.) Co. ................................................................... 10,250
1,200 IMC Global, Inc. ................................................................... 84,000
200 Olin Corp. ......................................................................... 12,800
800 aSouthdown, Inc. .................................................................... 13,000
800 aSterling Chemicals, Inc. ........................................................... 6,400
1,000 The Geon Co. ....................................................................... 24,875
600 TriMas Corp. ....................................................................... 12,450
1,500 Wellman, Inc. ...................................................................... 35,250
370,826
Commercial Services 1.5%
1,700 CPI Corp. .......................................................................... 31,025
700 Kelly Services, Inc., Class A ...................................................... 17,588
1,200 Manpower, Inc. ..................................................................... 32,550
400 PHH Corp. .......................................................................... 17,500
98,663
Communications Equipment 1.1%
1,100 aBay Networks, Inc. ................................................................. 72,875
Computer Hardware 4.5%
1,200 aCirrus Logic, Inc. ................................................................. 50,550
2,600 aDell Computer Corp. ................................................................ 121,225
800 aLSI Logic Corp. .................................................................... 37,700
700 aQuantum Corp. ...................................................................... 12,163
1,100 aSeagate Technology, Inc. ........................................................... 49,225
900 aSilicon Graphics, Inc. ............................................................. 29,925
300,788
Computer Software 3.2%
800 Adobe Systems, Inc. ................................................................ $ 45,600
400 aBMC Software, Inc. ................................................................. 14,250
1,650 aCadence Design Systems, Inc. ....................................................... 53,212
1,400 aInformix Corp. ..................................................................... 40,775
600 aParametric Technology Corp. ........................................................ 40,125
800 aSymantec Corp. ..................................................................... 19,450
213,412
Containers & Packaging 1.1%
1,600 Chesapeake Corp. ................................................................... 49,000
900 Sonoco Products Co. ................................................................ 22,275
71,275
Electronic Components/Technology 12.1%
1,200 aAltera Corp. ....................................................................... 72,600
1,400 aAmphenol Corp., Class A ............................................................ 30,275
1,000 aAnalog Devices, Inc. ............................................................... 36,125
1,000 Arrow Electronics, Inc. ............................................................ 50,750
2,300 Comdisco, Inc. ..................................................................... 70,150
1,300 Cypress Semiconductor Corp. ........................................................ 45,825
200 Diebold, Inc. ...................................................................... 10,600
1,000 aKLA Instruments Corp. .............................................................. 42,750
800 aLam Research Corp. ................................................................. 48,700
800 Linear Technology Corp. ............................................................ 35,000
600 aLitton Industries, Inc. ............................................................ 23,775
1,000 aSolectron Corp. .................................................................... 40,250
400 Sundstrand Corp. ................................................................... 24,500
1,500 aSymbol Technologies, Inc. .......................................................... 52,312
2,600 aTeradyne, Inc. ..................................................................... 86,775
900 Varian Associates, Inc. ............................................................ 46,238
800 aVishay Intertechnology, Inc. ....................................................... 28,200
1,200 aXilinx, Inc. ....................................................................... 55,200
800,025
Environmental Control 1.2%
1,200 aAir & Water Technologies Corp., Class A ............................................ 6,000
14,600 aAmerican Waste Services, Inc., Class A ............................................. 38,325
12,600 aInternational Technology Corp. ..................................................... 34,650
78,975
Finance 7.8%
1,800 AT&T Capital Corp. ................................................................. $ 72,000
1,300 Bank of New York Co., Inc. ......................................................... 54,600
600 BanPonce Corp. ..................................................................... 23,175
800 BayBanks, Inc. ..................................................................... 64,800
200 Bear Stearns Cos., Inc. ............................................................ 3,975
700 Comerica, Inc. ..................................................................... 23,537
700 First Bank System, Inc. ............................................................ 34,825
2,000 Green Tree Financial Corp. ......................................................... 53,250
1,400 Hibernia Corp., Class A............................................................. 13,825
700 Midlantic Corp., Inc. .............................................................. 37,100
400 Old National Bancorp ............................................................... 13,500
1,200 Signet Banking Corp. ............................................................... 28,500
300 SunAmerica, Inc. ................................................................... 18,675
700 Union Bank of San Francisco ........................................................ 35,088
1,000 West One Bancorp ................................................................... 42,500
519,350
Food/Beverages 2.7%
2,100 Coca-Cola Enterprises, Inc. ........................................................ 55,912
800 Hormel Foods Corp. ................................................................. 18,400
1,800 IBP, Inc. .......................................................................... 107,775
182,087
Healthcare Products 5.9%
800 Beckman Instruments, Inc. .......................................................... 26,500
1,600 Cardinal Health, Inc. .............................................................. 82,200
600 aCordis Corp. ....................................................................... 66,300
1,900 McKesson Corp. ..................................................................... 90,725
3,750 Mylan Laboratories Corp. ........................................................... 71,250
900 aNellcor, Inc. ...................................................................... 51,750
388,725
Healthcare Services 3.1%
1,300 aCoram Healthcare Corp. ............................................................. 5,200
500 aHealth Care and Retirement Corp. ................................................... 14,688
3,200 aHEALTHSOUTH Rehabilitation Corp. ................................................... 83,600
700 aHealth Systems International, Inc., Class A ........................................ 21,262
1,441 aHorizon/CMS Healthcare Corp. ....................................................... 29,180
Healthcare Services (cont.)
1,100 aOrNda Healthcorp ................................................................... $ 19,388
400 aPacifiCare Health Systems, Inc., Class B ........................................... 29,100
202,418
Insurance 10.1%
2,500 AFLAC, Inc. ........................................................................ 101,875
2,500 Allmerica Property & Casualty Cos., Inc. ........................................... 56,875
700 American Re Corp. .................................................................. 26,775
1,800 Aon Corp. .......................................................................... 74,025
600 Bankers Life Holdings Corp. ........................................................ 10,875
300 aCNA Financial Corp. ................................................................ 34,200
600 Equitable of Iowa Cos. ............................................................. 21,000
200 GEICO Corp. ........................................................................ 13,800
2,600 Horace Mann Educators Corp. ........................................................ 69,225
1,400 aHumana, Inc. ....................................................................... 29,575
200 MBIA, Inc. ......................................................................... 13,925
1,100 MGIC Investment Corp. .............................................................. 62,562
700 Progressive Corp. .................................................................. 29,050
1,500 Reliastar Financial Corp. .......................................................... 62,625
900 Transatlantic Holdings, Inc. ....................................................... 60,638
667,025
Leisure 2.6%
900 aBoyd Gaming Corp. .................................................................. 12,263
4,400 Callaway Golf Co. .................................................................. 72,050
2,600 aMirage Resorts, Inc. ............................................................... 85,150
169,463
Manufacturing - Diversified .5%
600 Pentair, Inc. ...................................................................... 30,300
Manufacturing - Specialized Industrial 2.2%
1,400 Breed Technologies, Inc. ........................................................... 26,075
1,600 Lancaster Colony Corp. ............................................................. 53,200
500 aLear Seating Corp. ................................................................. 13,875
400 Leggett & Platt, Inc. .............................................................. 9,600
1,500 Modine Manufacturing Co. ........................................................... 41,250
144,000
Metals & Mining 1.4%
1,000 aAlumax, Inc. ....................................................................... 29,500
500 Lukens, Inc. ....................................................................... 15,375
Metals & Mining (cont.)
1,400 aMagma Copper Co. ................................................................... $ 23,450
600 Newmont Gold Co. ................................................................... 21,600
89,925
Office Supplies 1.6%
3,700 aOffice Depot ....................................................................... 105,912
Oil & Gas 3.7%
1,600 Apache Corp. ....................................................................... 40,800
1,500 El Paso Natural Gas Co. ............................................................ 40,500
700 Equitable Resources, Inc. .......................................................... 20,475
1,600 Murphy Oil Corp. ................................................................... 60,600
900 Parker & Parsley Petroleum Co. ..................................................... 16,650
6,000 Ranger Oil, Ltd. ................................................................... 34,500
1,400 Valero Energy Corp. ................................................................ 33,075
246,600
Paper & Forest Products 2.5%
1,700 Bowater, Inc. ...................................................................... 75,225
800 Consolidated Papers, Inc. .......................................................... 45,800
1,400 Longview Fibre Co. ................................................................. 20,300
500 aManville Corp. ..................................................................... 5,813
300 Willamette Industries, Inc. ........................................................ 17,400
164,538
Publishing .4%
100 Washington Post Co. ................................................................ 29,000
Restaurants .6%
1,700 aBuffets, Inc. ...................................................................... 21,250
3,000 aNPC International, Inc., Class A ................................................... 19,500
40,750
Retail 4.6%
100 aBest Buy Co., Inc. ................................................................. 2,075
2,500 Dollar General Corp. ............................................................... 61,250
2,800 Fingerhut Cos., Inc. ............................................................... 38,150
2,600 Ruddick Corp. ...................................................................... 33,150
1,400 aSafeway, Inc. ...................................................................... 66,150
4,000 aSouthland Corp. .................................................................... 15,250
600 aStop & Shop Cos., Inc. ............................................................. 12,450
Retail (cont.)
1,000 aVons Cos., Inc. .................................................................... $ 25,375
3,100 aWaban, Inc. ........................................................................ 48,437
302,287
Telecommunications 2.2%
2,200 Cincinnati Bell, Inc. .............................................................. 64,625
500 aGlenayre Technologies, Inc. ........................................................ 32,125
1,500 aWorldCom, Inc. ..................................................................... 48,937
145,687
Textiles 2.2%
5,400 aBurlington Industries, Inc. ........................................................ 60,075
1,900 aJones Apparel Group, Inc. .......................................................... 65,075
2,200 Phillips-Van Heusen Corp. .......................................................... 22,275
147,425
Transportation 1.6%
400 American President Cos., Ltd. ...................................................... 9,700
300 GATX Corp. ......................................................................... 14,250
700 Illinois Central Corp. ............................................................. 26,775
1,400 aNorthwest Airlines Corp., Class A .................................................. 56,175
106,900
Utilities 12.4%
4,400 Central Maine Power Co. ............................................................ 61,050
2,200 Delmarva Power & Lighting Co. ...................................................... 48,400
200 Florida Progress Corp. ............................................................. 6,625
1,000 General Public Utilities Corp. ..................................................... 31,250
3,100 Illinova Corp. ..................................................................... 87,961
3,100 Long Island Light Co. .............................................................. 52,700
200 New England Electric System ........................................................ 7,800
1,600 New York State Electric & Gas Corp. ................................................ 40,400
2,200 NIPSCO Industries, Inc. ............................................................ 80,300
1,500 Northeast Utilities ................................................................ 37,125
3,500 Pinnacle West Capital Corp. ........................................................ 96,250
3,000 Portland General Corp. ............................................................. 81,375
1,000 Public Service Co. of Colorado ..................................................... 34,125
4,100 aPublic Service Co. of New Mexico ................................................... 68,675
Utilities (cont.)
1,500 Rochester Gas & Electric Corp. ..................................................... $ 35,250
2,200 Scana Corp. ........................................................................ 55,825
825,111
Total Common Stocks (Cost $5,263,725) ........................................ 6,561,967
Face
Amount
d,eReceivables from Repurchase Agreements .8%
$ 51,318 Joint Repurchase Agreement, 5.887%, 11/01/95 (Cost $51,630)
Daiwa Securities America, Inc., (Maturity Value $11,360)
Collateral: U.S. Treasury Bills, 04/25/96
U.S. Treasury Notes, 6.125%, 09/30/00
Donaldson, Lufkin & Jenrette, (Maturity Value $13,426)
Collateral: U.S. Treasury Notes, 5.125% - 8.25%, 07/31/96 - 03/31/00
Swiss Bank Corp., (Maturity Value $13,426)
Collateral: U.S. Treasury Notes, 6.875%, 03/31/00
USB Securities, Inc., (Maturity Value $13,426)
Collateral: U.S. Treasury Notes, 5.125% - 8.50%, 11/15/95 - 01/31/00 ............... $ 51,630
Total Investments (Cost $5,315,355) 99.9% ............................... 6,613,597
Other Assets & Liabilities, Net .1% ..................................... 9,204
Net Assets 100.0% ....................................................... $6,622,801
At October 31, 1995, the net unrealized appreciation based on the
cost of investments for income tax purposes of $5,319,459 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was
an excess of value over tax cost ................................................ $1,433,546
Aggregate gross unrealized depreciation for all investments in which there was
an excess of tax cost over value ................................................ (139,408)
Net unrealized appreciation ...................................................... $1,294,138
</TABLE>
aNon-income producing.
dFace amount for repurchase agreements is for the underlying collateral.
eSee Note 1(h) regarding Joint Repurchase Agreement.
FRANKLIN STRATEGIC SERIES
<TABLE>
<CAPTION>
Statement of Investments in Securities and Net Assets, October 31, 1995 (unaudited)
Value
Shares Franklin Natural Resources Fund (Note 1)
Common Stocks 92.9%
Chemicals 12.1%
<S> <C> <C>
2,000 Arcadian Corp. ..................................................................... $ 41,250
2,400 Avery-Dennison Corp. ............................................................... 107,400
1,000 Loctite Corp. ...................................................................... 47,250
2,900 Lubrizol Corp. ..................................................................... 83,375
1,000 Potash Corp. of Saskatchewan, Inc. ................................................. 69,625
3,100 Praxair, Inc. ...................................................................... 83,700
432,600
Environmental Control/Construction 5.2%
10,400 aAllwaste, Inc. ..................................................................... 50,700
2,300 Browning-Ferris Industries, Inc. ................................................... 66,988
4,400 Hanson, Plc. ....................................................................... 68,200
185,888
Forest Products and Paper 1.0%
5,500 a,cPortucel Industrial, SA ............................................................ 38,520
Iron/Steel 10.2%
5,400 aGibraltar Steel Corp. .............................................................. 63,450
200 Huntco, Inc., Class A .............................................................. 2,600
1,700 J&L Specialty Steel, Inc. .......................................................... 27,838
2,500 Nucor Corp. ........................................................................ 120,313
700 Pohang Iron & Steel Co., Ltd., ADR ................................................. 17,669
1,300 aUCAR International, Inc. ........................................................... 37,050
5,700 Worthington Industries, Inc. ....................................................... 94,763
363,683
Machine - Diversified/Construction and Mining 2.9%
1,000 Caterpillar, Inc. .................................................................. 56,125
1,500 Harnischfeger Industries, Inc. ..................................................... 47,250
103,375
Metal - Diversified 6.5%
800 Alcan Aluminum, Ltd. ............................................................... 25,300
300 Aluminum Co. of America (ALCOA) .................................................... 15,300
2,100 aCastech Aluminum Group, Inc. ....................................................... 29,400
1,800 Commonwealth Aluminum Corp. ........................................................ 29,025
2,700 Freeport-McMoran Copper & Gold, Inc. ............................................... 61,763
400 Phelps Dodge Corp. ................................................................. 25,350
4,000 a,cPT Tambang Timah, .................................................................. 48,100
234,238
Mining - Precious Metals 14.0%
23,000 aAcacia Resources, Ltd. ............................................................. $ 37,668
4,400 cAshanti Goldfields Co. Ltd., ADR ................................................... 78,100
5,900 Compania de Minas Buenaventure, SA ................................................. 32,388
500 De Beers Consolidated Mines, Ltd., ADR ............................................. 13,750
4,500 Driefontein Consolidated, Ltd., ADR ................................................ 49,500
13,350 aGoldfields, Ltd. ................................................................... 33,050
2,200 Newmont Mining Corp. ............................................................... 83,050
2,600 Rustenburg Platinum Holdings, Ltd., ADR ............................................ 45,623
8,100 Santa Fe Pacific Gold Corp. ........................................................ 79,988
6,700 Sons of Gwalia, Ltd. ............................................................... 33,174
1,000 a,cStillwater Mining Co. .............................................................. 15,188
501,479
Oil/Gas - Domestic 7.0%
2,900 Phillips Petroleum Co. ............................................................. 93,525
1,600 Tosco Corp. ........................................................................ 55,200
5,100 Total Petroleum (North America), Ltd. .............................................. 51,638
2,100 Ultramar Corp. ..................................................................... 51,188
251,551
Oil/Gas - Equipment & Services 5.7%
1,411 Coflexip, Sponsored ADR ............................................................ 19,754
3,000 aENSCO International, Inc. .......................................................... 50,625
4,500 aSmith International, Inc. .......................................................... 72,000
2,600 aWeatherford Enterra, Inc. .......................................................... 62,725
205,104
Oil/Gas - Exploration 11.0%
19,000 aAbacan Resource Corp. .............................................................. 46,809
2,400 aBarrett Resources Corp. ............................................................ 55,800
3,700 Enron Oil & Gas Co. ................................................................ 74,000
6,400 aForcenergy Gas Exploration, Inc .................................................... 62,400
3,700 Noble Affiliates, Inc. ............................................................. 91,575
2,700 aUnion Pacific Resources Group, Inc.................................................. 61,425
392,009
Oil/Gas - International 10.5%
4,300 Repsol, SA ......................................................................... 127,925
500 Royal Dutch Petroleum Co. .......................................................... 61,437
3,700 Total, SA, ADR ..................................................................... 114,237
4,300 YPF, SA, ADR ....................................................................... 73,637
377,236
Real Estate Investment Trusts 3.8%
500 Equity Residential Properties Trust ................................................ $ 14,000
300 Felcor Suite Hotels, Inc. .......................................................... 8,662
800 Oasis Residential, Inc. ............................................................ 17,400
900 OMEGA Healthcare Investors, Inc. ................................................... 22,837
1,100 Storage Trust Realty ............................................................... 21,587
700 The Macerich Company ............................................................... 14,087
3,200 Winston Hotels, Inc. ............................................................... 35,600
134,173
Utilities 3.0%
1,800 aAES Corp. .......................................................................... 35,550
900 Enron Global Power & Pipelines ..................................................... 21,713
1,000 Pacific Enterprises ................................................................ 24,750
800 Wicor, Inc. ........................................................................ 23,700
105,713
Total Common Stocks (Cost $3,501,184) ........................................ 3,325,569
Face
Amount
Convertible Bonds .5%
Mining - Precious Metals
$ 15,000 Bema Gold Corp., cvt. sub. notes, 7.50%, 02/28/00 (Cost $16,600) ................... 16,050
Total Investments before Repurchase Agreements (Cost $3,517,784) ............. 3,341,619
d,eReceivables from Repurchase Agreements 8.4%
296,504 Joint Repurchase Agreement, 5.887%, 11/01/95 (Cost $301,232)
Daiwa Securities America, Inc., (Maturity Value $66,282)
Collateral: U.S. Treasury Bills, 04/25/96
U.S. Treasury Notes, 6.125%, 09/30/00
Donaldson, Lufkin & Jenrette, (Maturity Value $78,333)
Collateral: U.S. Treasury Notes, 5.125% - 8.25%, 07/31/96 - 03/31/00
Swiss Bank Corp., (Maturity Value $78,333)
Collateral: U.S. Treasury Notes, 6.875%, 03/31/00
UBS Securities, Inc., (Maturity Value $78,333)
Collateral: U.S. Treasury Notes, 5.125% - 8.50%, 11/15/95 - 01/31/00 ............... 301,232
Total Investments (Cost $3,819,016) 101.8% .............................. 3,642,851
Liabilities in Excess of Other Assets, Net (1.8)% ....................... (64,861)
Net Assets 100.0% ....................................................... $3,577,990
At October 31, 1995, the net unrealized depreciation based on the
cost of investments for income tax purposes of $3,825,001 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was
an excess of value over tax cost ................................................ $ 72,272
Aggregate gross unrealized depreciation for all investments in which there was
an excess of tax cost over value ................................................ (254,422)
Net unrealized depreciation ...................................................... $(182,150)
aNon-income producing.
cSee Note 8 regarding Rule 144A securities.
dFace amount for repurchase agreements is for the underlying collateral.
eSee Note 1(h) regarding Joint Repurchase Agreement.
The accompanying notes are an integral part of these financial statements.
</TABLE>
FRANKLIN STRATEGIC SERIES
Financial Statements
Statements of Assets and Liabilities
October 31, 1995 (unaudited)
<TABLE>
<CAPTION>
Franklin Franklin Franklin
California Strategic Global
Growth Fund Income FundUtilities Fund
-------- -------- --------
Assets:
Investments in securities:
<S> <C> <C> <C>
At identified cost........................................................ $28,955,184 $7,167,982$109,638,643
======== ======== ========
At value.................................................................. 32,043,862 7,466,102 113,584,753
Receivables from repurchase agreements, at value and cost.................. 5,432,330 1,047,641 5,798,095
Cash....................................................................... 259,761 28,207 --
Foreign currencies (Cost $48,155).......................................... -- 48,270 --
Receivables:
Dividends and interest.................................................... 40,122 174,094 321,769
Investment securities sold................................................ -- 474,131 3,391,238
Capital shares sold....................................................... 96,175 87,501 104,190
Unamortized organization costs (Note 2).................................... 5,547 -- 5,284
Prepaid Expenses........................................................... 36,690 15,689 --
-------- -------- --------
Total assets.......................................................... 37,914,487 9,341,635 123,205,329
-------- -------- --------
Liabilities:
Payables:
Investment securities purchased:
Regular delivery......................................................... 722,750 202,050 189,750
When-issued basis (Note 1)............................................... -- 164,913 --
Payable upon return of securities loaned (Note 9)......................... 425,920 -- --
Capital shares repurchased................................................ -- -- 90,865
Management fees........................................................... 2,691 -- 61,851
Distribution fees......................................................... 14,726 7,686 75,825
Shareholder servicing costs............................................... 271 -- --
Payables to Manager for organization costs (Note 2) ...................... 5,547 -- 5,284
Accrued expenses and other liabilities..................................... -- -- 34,269
Unrealized loss on forward foreign currency contracts (Note 1)............. -- 3,242 --
-------- -------- --------
Total liabilities..................................................... 1,171,905 377,891 457,844
-------- -------- --------
Net assets, at value........................................................ $36,742,582 $8,963,744$122,747,485
======== ======== ========
Net assets consist of:
Undistributed net investment income........................................ 197,286 25,361 1,423,871
Unrealized appreciation on investments
and translation of assets and liabilities denominated in
foreign currencies......................................................... 3,088,678 295,692 3,941,683
Net realized gain from investments and foreign currency transactions....... 3,371,526 94,972 1,737,539
Class I Capital shares..................................................... 21,461 8,473 91,949
Class II Capital shares.................................................... -- -- 737
Additional paid-in capital................................................. 30,063,631 8,539,246 115,551,706
-------- -------- --------
Net assets, at value........................................................ $36,742,582 $8,963,744$122,747,485
======== ======== ========
Class I shares:
Net assets, at value....................................................... $36,742,582 $8,963,744$121,774,956
======== ======== ========
Shares outstanding......................................................... 2,146,147 847,268 9,194,912
======== ======== ========
Net asset value per share*................................................. $17.12 $10.58 $13.24
======== ======== ========
Class II shares:
Net assets, at value....................................................... $ 972,529
========
Shares outstanding......................................................... 73,657
========
Net asset value per share*................................................. $13.20
========
*Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
FRANKLIN STRATEGIC SERIES Financial Statements (cont.)
Statements of Assets and Liabilities (cont.)
October 31, 1995 (unaudited)
Franklin Franklin
Franklin Franklin Institutional Natural
Small Cap Global Health MidCap Resources
Growth Fund Care Fund Growth Fund Fund
-------- -------- -------- -------
Assets:
Investments in securities:
<S> <C> <C> <C> <C>
At identified cost.............................................$180,864,950 $14,935,862 $5,263,725$3,517,784
======== ======== ======== =======
At value....................................................... 188,947,581 18,037,924 6,561,967 3,341,619
Receivables from repurchase agreements, at value and cost....... 16,107,426 4,694,757 51,630 301,232
Cash............................................................ 699,600 23,942 -- --
Foreign currencies (Cost $3,660 and $4,920, respectively)....... -- 3,686 -- 4,928
Receivables:
Dividends and interest......................................... 127,850 1,789 9,204 2,522
Investment securities sold..................................... 273,904 174,327 -- --
Capital shares sold............................................ 1,204,807 278,357 -- 301
Unamortized organization costs (Note 2)......................... 4,848 4,775 -- 23,585
Prepaid Expenses................................................ 29,277 20,702 -- 948
-------- -------- -------- -------
Total assets............................................... 207,395,293 23,240,259 6,622,801 3,675,135
-------- -------- -------- -------
Liabilities:
Payables:
Investment securities purchased................................ 7,668,824 759,513 -- 28,258
Payable upon return of securities loaned (Note 9).............. 3,132,452 -- -- --
Capital shares repurchased..................................... 14,255 -- -- 4,945
Management fees................................................ 89,953 -- -- --
Distribution fees.............................................. 101,676 9,639 -- 1,776
Bank Overdraft................................................. -- -- -- 38,581
Payables to Manager for organization costs (Note 2) ........... 4,848 4,775 -- 23,585
-------- -------- -------- -------
Total liabilities.......................................... 11,012,008 773,927 -- 97,145
-------- -------- -------- -------
Net assets, at value.............................................$196,383,285 $22,466,332 $6,622,801$3,577,990
======== ======== ======== =======
Net assets consist of:
Undistributed net investment income............................. 52,530 12,108 35,372 12,731
Unrealized appreciation (depreciation)
on investments and translation of assets and
liabilities denominated in foreign currencies................... 8,082,631 3,102,088 1,298,242 (176,085)
Net realized gain from investments and
foreign currency transactions 12,520,779 1,846,308 63,889 28,163
Class I Capital shares.......................................... 113,248 15,287 5,224 3,619
Class II Capital shares......................................... 638 -- -- --
Additional paid-in capital...................................... 175,613,459 17,490,541 5,220,074 3,709,562
-------- -------- -------- -------
Net assets, at value.............................................$196,383,285 $22,466,332 $6,622,801$3,577,990
======== ======== ======== =======
Class I shares:
Net assets, at value............................................$195,283,821 $22,466,332 $6,622,801$3,577,990
======== ======== ======== =======
Shares outstanding.............................................. 11,324,756 1,528,711 522,378 361,934
======== ======== ======== =======
Net asset value per share*...................................... $17.24 $14.70 $12.68 $9.89
======== ======== ======== =======
Class II shares:
Net assets, at value............................................ $ 1,099,464
========
Shares outstanding.............................................. 63,836
========
Net asset value per share*...................................... $17.22
========
*Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
FRANKLIN STRATEGIC SERIES Financial Statements (cont.)
Statements of Operations
for the six months ended October 31, 1995 (unaudited)
Franklin Franklin Franklin
California Strategic Global
Growth Fund Income FundUtilities Fund
-------- -------- ---------
Investment income:
<S> <C> <C> <C>
Dividends................................................................ $ 126,814 $ 16,921 $ 2,183,113
Interest................................................................. 152,441 321,067 260,700
-------- -------- ---------
Total Income........................................................ 279,255 337,988 2,443,813
-------- -------- ---------
Expenses:
Management fees, (Note 6)................................................ 80,606 24,543 368,765
Distribution fees Class I (Note 6)....................................... 19,960 8,856 148,281
Distribution fees Class II (Note 6)...................................... -- -- 2,664
Shareholder servicing costs (Note 6)..................................... 15,282 1,071 63,186
Reports to shareholders.................................................. 5,916 8,676 31,239
Registration and filing fees............................................. 5,445 2,628 31,235
Custodian fees........................................................... 627 1,095 17,168
Professional fees........................................................ 1,635 969 10,619
Amortization of organization costs (Note 2).............................. 4,434 -- 1,584
Other.................................................................... 1,272 906 2,487
Payments from Manager (Note 6)........................................... (104,603) (38,953) --
-------- -------- ---------
Total expenses...................................................... 30,574 9,791 677,228
-------- -------- ---------
Net investment income.............................................. 248,681 328,197 1,766,585
-------- -------- ---------
Realized and unrealized gain (loss) from investments and foreign currency:
Net realized gain (loss) on:
Investments............................................................. 3,374,800 88,283 1,773,797
Foreign currency transactions........................................... -- (2,053) (34,971)
Net unrealized appreciation (depreciation) on:
Investments............................................................. 1,471,292 173,109 9,358,369
Translation of assets and liabilities denominated in foreign currency... -- 718 (5,698)
-------- -------- ---------
Net realized and unrealized gain on investments and foreign currency...... 4,846,092 260,057 11,091,497
-------- -------- ---------
Net increase in net assets resulting from operations...................... $5,094,773 $588,254 $12,858,082
======== ======== =========
The accompanying notes are an integral part of these financial statements.
FRANKLIN STRATEGIC SERIES Financial Statements (cont.)
Statements of Operations (cont.)
for the six months ended October 31, 1995 (unaudited)
Franklin Franklin
Franklin Franklin Institutional Natural
Small Cap Global Health MidCap Resources
Growth Fund Care Fund Growth Fund Fund*
--------- -------- -------- --------
Investment income:
<S> <C> <C> <C> <C>
Dividends.................................................... $ 312,850 $ 26,240 $ 48,469 $ 11,208
Interest..................................................... 382,597 66,560 2,021 9,430
--------- -------- -------- --------
Total Income............................................ 695,447 92,800 50,490 20,638
--------- -------- -------- --------
Expenses:
Management fees (Note 6)..................................... 393,791 50,218 20,539 5,075
Distribution fees Class I (Note 6)........................... 153,245 16,851 -- 1,776
Distribution fees Class II (Note 6).......................... 413 -- -- --
Shareholder servicing costs (Note 6)......................... 78,895 17,897 -- 567
Reports to shareholders...................................... 44,289 8,124 660 810
Registration and filing fees................................. 25,972 6,174 5,583 810
Custodian fees............................................... 6,655 1,209 189 324
Professional fees............................................ 10,205 1,530 1,047 876
Amortization of organization costs (Note 2).................. 1,878 1,620 -- 2,145
Other........................................................ 4,479 877 1,209 648
Payments from Manager (Note 6)............................... (103,368) (83,692) (29,227) (5,124)
--------- -------- -------- --------
Total expenses.......................................... 616,454 20,808 -- 7,907
--------- -------- -------- --------
Net investment income.................................. 78,993 71,992 50,490 12,731
--------- -------- -------- --------
Realized and unrealized gain (loss)
from investments and foreign currency:
Net realized gain (loss) on:
Investments................................................ 12,532,694 1,291,147 139,178 28,587
Foreign currency transactions.............................. 4,680 (842) -- (424)
Net unrealized appreciation (depreciation) on:
Investments................................................ 1,310,816 2,510,080 841,991 (176,165)
Translation of assets and liabilities denominated in foreign
currency..................................................... -- 26 -- 80
--------- -------- -------- --------
Net realized and unrealized gain (loss) on investments and
foreign currency............................................. 13,848,190 3,800,411 981,169 (147,922)
--------- -------- -------- --------
Net increase (decrease) in net assets resulting from operations $13,927,183 $3,872,403 $1,031,659 $(135,191)
========= ======== ======== ========
*For the period June 5, 1995 (effective date) to October 31, 1995.
The accompanying notes are an integral part of these financial statements.
FRANKLIN STRATEGIC SERIES Financial Statements (cont.)
Statements of Changes in Net Assets for the six months ended October 31, 1995
(unaudited) and the year ended April 30, 1995
Franklin California Franklin Strategic Franklin Global
Growth Fund Income Fund Utilities Fund
------------------- ------------------ ---------------------
Six months Year ended Six months Year ended Six months Year ended
ended 10/31/95 4/30/85 ended 10/31/95 4/30/95* ended 10/31/95 4/30/85
--------- --------- --------- -------- ---------- ----------
Increase (decrease) in net assets:
Operations:
Net investment income......... $ 248,681 $ 123,528 $ 328,197 $ 406,443 $ 1,766,585 $ 4,243,241
Net realized gain (loss) from
investments and foreign
currency transactions.......... 3,374,800 836,699 86,230 (15,782) 1,738,826 1,602,848
Net unrealized appreciation
(depreciation) on investments
and translation of assets and
liabilities denominated in
foreign currencies.............. 1,471,292 1,235,649 173,827 121,865 9,352,671 (2,364,729)
--------- --------- --------- -------- ---------- ----------
Net increase in net
assets resulting from
operations..................... 5,094,773 2,195,876 588,254 512,526 12,858,082 3,481,360
Distributions to shareholders from:
Undistributed net investment
income:
Class I...................... (122,907) (64,537) (294,856) (389,899) (1,813,634) (3,707,193)
Class II..................... -- -- -- -- (4,181) --
Net realized capital gains:
Class I....................... (533,836) (549,224) -- -- (1,314,584) (3,611,890)
Class II...................... -- -- -- -- (3,131) --
Increase (decrease) in net assets
from capital share transactions
(Note 4)....................... 18,460,285 7,616,445 1,934,640 6,613,079 (6,225,549) (1,099,874)
--------- --------- --------- -------- ---------- ----------
Net increase (decrease)
in net assets.................. 22,898,315 9,198,560 2,228,038 6,735,706 3,497,003 (4,937,597)
Net assets:
Beginning of Period............ 13,844,267 4,645,707 6,735,706 -- 119,250,482 124,188,079
--------- --------- --------- -------- ---------- ----------
End of Period.................. $36,742,582 $13,844,267 $8,963,744 $6,735,706 $122,747,485 $119,250,482
========= ========= ========= ======== ========== ==========
Undistributed net investment
income included in net assets:
Beginning of Period........... $ 71,512 $ 12,521 $ 16,544 $ -- $ 1,475,101 $ 939,053
========= ========= ========= ======== ========== ==========
End of Period................. $ 197,286 $ 71,512 $ 25,361 $ 16,544 $ 1,423,871 $ 1,475,101
========= ========= ========= ======== ========== ==========
*For the period May 24, 1994 (effective date) to April 30, 1995.
The accompanying notes are an integral part of these financial statements.
FRANKLIN STRATEGIC SERIES Financial Statements (cont.)
Statements of Changes in Net Assets (cont.)
for the six months ended October 31, 1995 (unaudited)
and the year ended April 30, 1995
Franklin Small Cap Franklin Global
Growth Fund Health Care Fund
-------------------- -------------------
Six months Year ended Six months Year ended
ended 10/31/95 4/30/95 ended 10/31/95 4/30/95
------------ ----------- ----------- -----------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income................................... $ 78,993 $ 91,732 $ 71,992 $ 74,674
Net realized gain from investments and foreign currency
transactions............................................. 12,537,374 3,405,075 1,290,305 943,505
Net unrealized appreciation on investments and translation
of assets and liabilities denominated in foreign currencies 1,310,816 6,619,781 2,510,106 189,307
------------ ----------- ----------- -----------
Net increase in net assets resulting from
operations............................................... 13,927,183 10,116,588 3,872,403 1,207,486
Distributions to shareholders from:
Undistributed net investment income:
Class I................................................. (75,705) (50,170) (91,767) (49,631)
Net realized capital gains:
Class I................................................. (2,227,891) (2,378,735) -- (469,438)
Increase in net assets from capital
share transactions (Note 4) 121,750,063 31,406,861 5,779,767 6,422,416
------------ ----------- ----------- -----------
Net increase in net assets.......................... 133,373,650 39,094,544 9,560,403 7,110,833
Net assets:
Beginning of Period...................................... 63,009,635 23,915,091 12,905,929 5,795,096
------------ ----------- ----------- -----------
End of Period............................................ $196,383,285 $63,009,635 $22,466,332 $12,905,929
============ =========== =========== ===========
Undistributed net investment income included in net assets:
Beginning of Period..................................... $ 49,242 $ 7,680 $ 31,883 $ 6,840
============ =========== =========== ===========
End of Period........................................... $ 52,530 $ 49,242 $ 12,108 $ 31,883
============ =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
FRANKLIN STRATEGIC SERIES Financial Statements (cont.)
Statements of Changes in Net Assets (cont.)
for the six months ended October 31, 1995 (unaudited)
and the year ended April 30, 1995
Franklin Institutional Franklin Natural
MidCap Growth Fund Resources Fund
------------------ ------------
Six months Year ended For the period
ended 10/31/95 4/30/95 ended 10/31/95**
----------- ---------- ------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C>
Net investment income................................................. $ 50,490 $ 109,010 $ 12,731
Net realized gain (loss) from investments and foreign currency
transactions........................................................... 139,178 (75,022) 28,163
Net unrealized appreciation (depreciation) on investments and translation
of assets and liabilities denominated in foreign currencies............ 841,991 478,214 (176,085)
----------- ---------- ------------
Net increase (decrease) in net assets resulting from operations... 1,031,659 512,202 (135,191)
Distributions to shareholders from:
Undistributed net investment income:
Class I............................................................... (56,910) (103,704) --
Net realized capital gains:
Class I............................................................... -- (7,584) --
Increase in net assets from capital share transactions (Note 4)......... 56,910 111,288 3,713,181
----------- ---------- ------------
Net increase in net assets........................................ 1,031,659 512,202 3,577,990
Net assets:
Beginning of Period.................................................... 5,591,142 5,078,940 --
----------- ---------- ------------
End of Period.......................................................... $6,622,801 $5,591,142 $3,577,990
=========== ========== ============
Undistributed net investment income included in net assets:
Beginning of Period.................................................... $ 41,792 $ 36,486 $--
=========== ========== ============
End of Period.......................................................... $ 35,372 $ 41,792 $ 12,731
=========== ========== ============
</TABLE>
**For the period June 5, 1995 (effective date) to October 31, 1995.
The accompanying notes are an integral part of these financial statements.
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (the Trust) is an open-end, management investment
company (mutual fund), registered under the Investment Company Act of 1940, as
amended. The Trust currently consists of eight separate series (the Funds).
There are three separate diversified funds Franklin Small Cap Growth Fund (the
Small Cap Growth Fund), Franklin Institutional MidCap Growth Fund (the
Institutional MidCap Growth Fund) and Franklin MidCap Growth Fund (the MidCap
Growth Fund); and five separate non-diversified funds: Franklin California
Growth Fund (the California Growth Fund), Franklin Strategic Income Fund (the
Strategic Income Fund), Franklin Global Health Care Fund (the Global Health
Fund), Franklin Global Utilities Fund (the Global Utilities Fund), and Franklin
Natural Resources Fund (the Natural Resources Fund). Each of the Funds issues a
separate series of shares and maintains a totally separate investment portfolio.
The Natural Resources Fund became effective on June 5, 1995. The MidCap Growth
Fund has been effective since June 15, 1993, but has not commenced operations.
The Global Utilities Fund and the Small Cap Growth Fund offer two classes of
shares, Class I and Class II. Class I shares are sold with a higher front-end
sales charge than Class II shares. Each class of shares may be subject to a
contingent deferred charge and has the same rights, except with respect to the
effect of the respective sales charges, the distribution fees borne by each
class, voting rights on matters affecting a single class and the exchange
privilege of each class.
The offering of Class II shares for the Global Utilities Fund began May 1, 1995
and for the Small Cap Growth Fund began October 1, 1995. At the time of the
offering, all previously outstanding shares became Class I shares. Realized and
unrealized gains or 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.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
a. Security Valuations:
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 asked prices. Other
securities for which market quotations are readily available are valued at
current market values, obtained from pricing services, which are 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 securities. Portfolio securities which are
traded both in the over-the-counter market and on a securities exchange are
valued according to the broadest and most representative market as determined by
the investment manager. Securities for which market quotations are not
available, if any, are valued in accordance with procedures established by the
Board of Trustees.
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 New
York Stock Exchange, if that is earlier, and that 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 mean between the current bid and asked price
is used. Occasionally, events which 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 Fund's net asset value, unless material. If events which
materially affect the value of these foreign securities occur during such
period, then these securities will be valued in accordance with procedures
established by the Board of Trustees.
The fair values of securities restricted as to resale, if any, are determined
following procedures established by the Board of Trustees.
1. SIGNIFICANT ACCOUNTING POLICIES (cont.)
b. Income Taxes:
The Funds intend to continue to qualify for the tax treatment applicable to
regulated investment companies under the Internal Revenue Code and to make the
requisite distributions to its shareholders which will be sufficient to relieve
it from income and excise taxes. Therefore, no income tax provision is required.
Each Fund is treated as a separate entity in the determination of compliance
with the Internal Revenue Code.
c. Security Transactions:
Security transactions are accounted for on the date the securities are purchased
or sold (trade date). Realized gains and losses on security transactions are
determined on the basis of specific identification for both financial statement
and income tax purposes.
d. Investment Income, Expenses and Distributions:
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income and estimated expenses are accrued daily. Bond
discount is amortized as required by the Internal Revenue Code.
A portion of the distributions received by the Fund from investments in Real
Estate Investment Trust (REIT) securities may be characterized as tax basis
return of capital (ROC) distributions, which are not recorded as dividend
income, but reduce the cost basis of the REIT securities. ROC distributions
exceeding the cost basis for the REIT security are recognized by the Fund as
capital gain.
Net realized capital gains and losses differ for financial statement and tax
purposes primarily due to differing treatments of wash sales and foreign
currency transactions.
e. Securities Purchased on a When-Issued or Delayed Delivery Basis:
The Funds may trade securities on a when-issued or delayed delivery basis, with
payment and delivery scheduled for a future date. These transactions are subject
to market fluctuations and are subject to the risk that the value at delivery
may be more or less than the trade date purchase price. Although the Funds will
generally purchase these securities with the intention of acquiring such
securities, they may sell such securities before the settlement date. These
securities are identified on the accompanying Statement of Investments in
Securities and Net Assets. The Funds have set aside sufficient investment
securities as collateral for these purchase commitments.
f. Expense Allocation:
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets. In all other
respects, expenses are charged to each Fund as incurred on a specific
identification basis.
g. Foreign Currency Translation:
The accounting records of the Trust are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars at the rate of exchange of such currencies against U.S. dollars on the
date of valuation. Purchases and sales of securities, income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are recognized when reported by the custodian
bank.
The Trust does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from fluctuations arising
from changes in market prices of securities held. Such fluctuations are included
with the net realized and unrealized gain or loss from investments.
1. SIGNIFICANT ACCOUNTING POLICIES (cont.)
g. Foreign Currency Translation (cont.):
Reported net realized foreign exchange gains or losses arise from sales and
maturities of short-term securities, sales of foreign currencies, currency gains
or losses realized between the trade and settlement dates on securities
transactions and the difference between the amounts of dividends, interest and
foreign withholding taxes recorded on the Trust's books and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized appreciation
(depreciation) on translation of assets and liabilities denominated in foreign
currencies arise from changes in the value of assets and liabilities other than
investments in securities at semi-fiscal year end, resulting from changes in
exchange rates.
h. Repurchase Agreements:
The Funds may enter into Joint Repurchase Agreements whereby their uninvested
cash balances are deposited into a joint cash account to be used to invest in
one or more repurchase agreements with government securities dealers recognized
by the Federal Reserve Board and/or member banks of the Federal Reserve System.
The value and face amount of the Joint Repurchase Agreement are allocated to the
Funds based on their pro-rata interest.
In a repurchase agreement, the Fund purchases a U.S. government security from a
dealer or bank subject to an agreement to resell it at a mutually agreed upon
price and date. Such a transaction is accounted for as a loan by the Fund to the
seller, collateralized by the underlying security. The transaction requires the
initial collateralization of the seller's obligation by U.S. government
securities with market value, including accrued interest, of at least 102% of
the dollar amount invested by the Fund, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. The
collateral is delivered to the fund's custodian bank and held until resold to
the dealer or bank. At October 31, 1995, all outstanding repurchase agreements
held by the Funds had been entered into on that date.
i. Forward Foreign Currency Contracts:
A forward currency contract, which is individually negotiated and privately
traded by currency traders and their customers, is a commitment to purchase or
sell a specific currency for an agreed-upon price at a future date.
The Strategic Income Fund may enter into forward contracts with the objective of
minimizing the risk to the Fund from adverse changes in the relationship between
currencies or to enhance fund value. The Fund may also enter into a forward
contract in relation to a security denominated in a foreign currency or when it
anticipates receipt in a foreign currency of dividends or interest payments in
order to "lock in" the U.S. dollar price of a security or the U.S. dollar
equivalent of such dividend or interest payments.
Any gain or loss realized from a forward currency contract is recorded as a
realized gain or loss from investments. See the accompanying Statement of
Operations for the Fund's total realized gains or losses from investments during
the period.
The Fund segregates in its custodian bank sufficient cash, cash equivalents or
readily marketable debt securities as collateral for commitments created by open
forward contracts. The Fund could be exposed to risk if counterparties to the
contracts are unable to meet the terms of their contracts or if the value of the
foreign currency changes unfavorably.
1. SIGNIFICANT ACCOUNTING POLICIES (cont.)
i. Forward Foreign Currency Contracts: (cont.)
As of October 31, 1995, the Strategic Income Fund had the following forward
foreign currency contracts outstanding:
<TABLE>
<CAPTION>
Unrealized
Contracts to Sell In Exchange for U.S. Settlement DateGain (Loss) U.S.
- --------------------------------------------- ------------- ---------- ----------
<S> <C> <C> <C>
275,000 Canadian Dollars ................................. $201,653 11/07/95 $(3,639)
105,000 Canadian Dollars ................................. $ 76,819 11/08/95 (1,565)
------------- ----------
$278,472 (5,204)
------------- ----------
Contracts to Buy
- ---------------------------------------------
105,000Canadian Dollars ..................................... $ 76,422 11/08/95 1,962
------------- ----------
Net unrealized depreciation ....................................................................... $(3,242)
==========
</TABLE>
2. ORGANIZATION COSTS
The organization costs of the Trust are amortized on a straight-line basis over
a period of five years from the effective date of registration under the
Securities Act of 1933. In the event that Franklin Resources, Inc. ("Resources")
(which was the sole shareholder prior to the effective date of registration)
redeems its shares within the five-year period, the pro rata share of the
then-unamortized deferred organization costs will be deducted from the
redemption price paid to Resources. New investors purchasing shares of the Trust
subsequent to that date bear such costs during the amortization period only as
such charges are accrued daily against investment income. The Trust's investment
manager advanced all of the organization costs of the Funds (except for the
Global Utilities Fund) which amounted to $33,267, $18,775, $16,816 and $25,730
for the California Growth Fund, the Small Cap Fund, the Global Health Fund and
the Natural Resources Fund, respectively. In an effort to reduce the Funds'
expenses, the manager has agreed in advance to waive repayment of the current
period's amortization of $4,434, $1,878, $1,620 and $2,145, for the California
Growth Fund, the Small Cap Growth Fund, the Global Health Fund and the Natural
Resources Fund, respectively.
3. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At April 30, 1995, for tax purposes, the Funds had accumulated net realized
gains or capital loss carryovers as follows:
<TABLE>
<CAPTION>
Franklin Franklin Franklin Franklin
California Global Small Cap Global Health
Growth FundUtilities FundGrowth Fund Care Fund
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Accumulated net realized gains ................................ $532,804 $1,315,465 $2,220,904 $528,260
======== ======== ======== ========
Franklin
Institutional
Midcap
Growth Fund
--------
Capital loss carryovers
Expiring in: 2003............................................. $67,804
========
</TABLE>
The Strategic Income Fund has a deferred foreign currency loss of $15,782 deemed
to be incurred on the first day of the following fiscal year for federal income
tax purposes.
3. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS (cont.)
For tax purposes, the aggregate cost of securities is higher (and unrealized
appreciation is lower or unrealized depreciation is higher) than for financial
reporting purposes at October 31, 1995 by $1,818 in the Global Utilities Fund,
$182,250 in the Small Cap Growth Fund, $3,181 in the Global Health Fund, $4,104
in the Institutional MidCap Growth Fund, and $5,985 in the Natural Resources
Fund.
4. TRUST SHARES
At October 31, 1995, there was an unlimited number of $.01 par value of
beneficial interest authorized. Transactions in each of the Funds' shares for
the six months ended October 31, 1995 and for the year ended April 30, 1995 were
as follows:
<TABLE>
<CAPTION>
Franklin California Franklin Strategic Franklin Global
Growth Fund Income Fund* Utilities Fund
------------------ ---------------- -------------------
Class I Shares: Shares Amount Shares Amount Shares Amount
-------- --------- ------ -------- -------- ----------
Six months ended October 31, 1995
<S> <C> <C> <C> <C> <C> <C>
Shares sold ......................... 514,779 $ 8,286,105 114,710 $1,196,390 260,234 $ 3,326,163
Shares issued in reinvestment of
distributions ....................... 38,862 570,497 26,727 277,274 215,040 2,677,243
Shares redeemed ..................... (49,571) (810,523) (9,793) (102,473) (822,451) (10,521,922)
Changes from exercise of exchange
privilege:
Shares sold ....................... 1,053,263 16,955,173 57,118 597,149 1,559,854 20,050,460
Shares redeemed ................... (397,698) (6,540,967) (3,238) (33,700) (1,770,537) (22,696,993)
-------- --------- ------ -------- -------- ----------
Net increase (decrease) .............. 1,159,635 $18,460,285 185,524 $1,934,640 (557,860) $ (7,165,049)
======== ========= ====== ======== ======== ==========
Year ended April 30, 1995
Shares sold.......................... 177,789 $ 2,286,030 591,961 $5,923,336 1,300,280 $15,677,001
Shares issued in reinvestment of
distributions........................ 49,674 577,174 37,975 374,342 525,655 6,120,700
Shares redeemed...................... (51,488) (652,107) (4,853) (49,419) (1,571,981) (18,781,605)
Changes from exercise of exchange
privilege:
Shares sold........................ 517,956 6,624,501 51,246 509,787 1,108,116 13,411,365
Shares redeemed.................... (92,961) (1,219,153) (14,585) (144,967) (1,468,342) (17,527,335)
-------- --------- ------ -------- -------- ----------
Net increase (decrease) .............. 600,970 $ 7,616,445 661,744 $6,613,079 (106,272) $ (1,099,874)
======== ========= ====== ======== ======== ==========
Class II Shares:
Six months ended October 31, 1995
Shares sold ......................... 74,073 $ 945,198
Shares issued in reinvestment of
distributions ....................... 416 5,182
Changes from exercise of exchange
privilege:
Shares sold ....................... 3,389 44,047
Shares redeemed ................... (4,229) (54,927)
-------- ----------
Net increase.......................... 73,649 $ 939,500
======== ==========
*For the six months ended October 31, 1995 and the period May 24, 1994
(effective date) to April 30, 1995.
4. TRUST SHARES (cont.)
Franklin
Franklin Small Cap Franklin Global Institutional MidCap
Growth Fund Health Care Fund Growth Fund
-------------------- ----------------- -------------
Class I Shares: Shares Amount Shares Amount Shares Amount
-------- ---------- ------- --------- ----- -------
Six months ended October 31, 1995
<S> <C> <C> <C> <C> <C> <C>
Shares sold ............................... 4,504,214 $ 76,872,271 292,308 $4,072,412 -- $ --
Shares issued in reinvestment of
distributions ............................. 123,747 1,949,021 6,734 81,346 5,019 56,910
Shares redeemed............................ (329,636) (5,617,678) (49,518) (646,492) -- --
Changes from exercise of exchange privilege:
Shares sold .............................. 5,124,993 87,332,240 509,577 7,171,316 -- --
Shares redeemed .......................... (2,326,852) (39,887,692) (357,545) (4,898,815) -- --
-------- ---------- ------- --------- ----- -------
Net increase ............................... 7,096,466 $120,648,162 401,556 $5,779,767 5,019 $ 56,910
======== ========== ======= ========= ===== =======
Year ended April 30, 1995
Shares sold................................ 1,050,774 $ 14,073,399 295,333 $ 3,331,812 -- $ --
Shares issued in reinvestment of
distributions............................. 165,206 1,980,868 43,569 460,121 11,755 111,288
Shares redeemed............................ (377,504) (4,925,437) (99,454) (1,111,831) -- --
Changes from exercise of exchange privilege:
Shares sold............................... 3,300,526 43,456,084 737,966 8,349,736 -- --
Shares redeemed........................... (1,785,818) (23,178,053) (405,973) (4,607,422) -- --
-------- ---------- ------- --------- ----- -------
Net increase................................ 2,353,184 $ 31,406,861 571,441 $ 6,422,416 11,755 $111,288
======== ========== ======= ========= ===== =======
Class II Shares:
Six months ended October 31, 1995**
Shares sold ............................... 53,790 $ 927,904
Shares redeemed ........................... (60) (1,035)
Changes from exercise of exchange privilege:
Shares sold .............................. 10,106 175,032
-------- ----------
Net increase................................ 63,836 $ 1,101,901
======== ==========
**For the period October 1, 1995 (effective date for Class II shares) to October
31, 1995.
Franklin Natural
Resources Fund
----------------
Class I Shares: Shares Amount
------ ---------
Six months ended October 31, 1995***
<S> <C> <C>
Shares sold ............................................................................ 300,397 $3,075,939
Shares redeemed ........................................................................ (517) (5,116)
Changes from exercise of exchange privilege:
Shares sold ........................................................................... 83,652 867,624
Shares redeemed ....................................................................... (21,598) (225,266)
------ ---------
Net increase ............................................................................ 361,934 $3,713,181
====== =========
***For the period June 5, 1995 (effective date) to October 31, 1995.
5. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the six months ended October 31, 1995, were as follows:
Franklin Franklin
Franklin Franklin Franklin Franklin Franklin Institutional Natural
California Strategic Global Small Cap Global Health MidCap Resources
Growth Fund Income FundUtilities Fund Growth Fund Care Fund Growth Fund Fund*
--------- -------- --------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Purchases ............ $26,466,454 $4,351,645 $21,183,866 $188,155,267 $9,249,030 $1,527,691 $3,794,802
========= ======== ========= ========== ======== ======== ========
Sales ................ $10,788,643 $3,071,491 $33,876,342 $ 70,173,862 $6,429,021 $1,445,293 $ 305,605
========= ======== ========= ========== ======== ======== ========
</TABLE>
*For the period June 5, 1995 (effective date) to October 31, 1995
6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Franklin Advisers, Inc., ("Advisers") under the terms of a management agreement,
provides investment advice, administrative services, office space and facilities
to each Fund, except for the Institutional MidCap Growth Fund and Strategic
Income Fund, and receives fees computed monthly based on the net assets of each
Fund, at an annualized rate of .625 of 1% of the average daily net assets up to
and including $100 million; .50 of 1% of the average daily net assets over $100
million, up to and including $250 million; .45 of 1% of the average daily net
assets over $250 million, up to and including $10 billion; .44 of 1% of the
average daily net assets over $10 billion, up to and including $12.5 billion;
.42 of 1% of the average daily net assets over $12.5 billion, up to and
including $15 billion; and .40 of 1% of the average net assets over $15 billion.
For the Strategic Income Fund, Advisers receives fees computed monthly based on
the net assets of the Fund, at an annual rate of .625 of 1% of the average daily
net assets up to and including $100 million; .50 of 1% of the daily average net
assets over $100 million, up to and including $250 million; .45 of 1% of the
average daily net assets over $250 million. Franklin Institutional Services
Corporation (FISCO) serves as the investment advisor for the Institutional
MidCap Growth Fund, and receives fees computed monthly at the annual rate of .65
of 1% the Fund's average daily net assets.
Under a subadvisory agreement with Advisers, Templeton Investment Council, Inc.
(TICI or the "Subadviser") provides services to the Strategic Income Fund, and
receives from Advisers fees computed monthly on the net assets at an annual rate
of 0.3125 of 1% of the Fund's average daily net assets up to and including $100
million; 0.25 of 1% of the value of the Fund's average daily net assets over
$100 million up to and including $250 million, and 0.225 of 1% of the value of
the Fund's average daily net assets over $250 million.
The terms of the management agreement provide that aggregate annual expenses of
the Trust be limited to the extent necessary to comply with the limitations set
forth in the laws, regulations and administrative interpretations of the states
in which the Trust's shares are registered. The Trust's expenses did not exceed
these limitations; however, for the period ended October 31, 1995, Advisers and
FISCO agreed in advance to waive the management fees, as indicated below, in an
effort to minimize the Funds' expenses. Additionally, Advisers made payments,
including waiver of repayment of organization costs advances, of $23,997,
$14,410, $47,239, $33,474, $8,688 and $49, for other expenses as shown in the
Statement of Operations for the California Growth Fund, the Strategic Income
Fund, the Small Cap Growth Fund, the Global Health Fund, the Institutional
MidCap Growth Fund, and the Natural Resources Fund, respectively.
<TABLE>
<CAPTION>
Franklin Advisers, Inc.
Franklin Franklin Franklin Franklin Franklin
California Strategic Global Small Cap Global HealthFranklin Natural
Growth Fund Income FundUtilities FundGrowth Fund Care Fund Resources Fund
-------- --------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Management fees before waiver ...... $ 80,606 $ 24,543 $368,765 $393,791 $ 50,218 $ 5,075
Fee waiver ......................... (80,606) (24,543) -- (56,129) (50,218) (5,075)
-------- --------- -------- -------- -------- ----------
Management fees paid .............. $-- $-- $368,765 $337,662 $-- $--
======== ========= ======== ======== ======== ==========
6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (cont.)
FISCO
--------
Franklin
Institutional
MidCap
Growth Fund
--------
<S> <C>
Management fees before waiver ........................................ $ 20,539
Fee waiver............................................................ (20,539)
--------
Management fees paid ................................................. $--
========
</TABLE>
Pursuant to a shareholder service agreement with Franklin/Templeton Investor
Services, Inc., ("Investor Services") the Trust pays costs on a per shareholder
account basis. Shareholder servicing costs of $176,898 were incurred for the
period ended October 31, 1995, of which $165,809 was for services provided by
Investor Services.
Under the terms of separate Distribution Plans pursuant to Rule 12b-1 of the
Investment Company Act of 1940, the California Growth Fund, the Strategic Income
Fund, and the Global Health Fund will reimburse Franklin/Templeton Distributors,
Inc. ("Distributors") in an amount up to .25% per annum of the average daily net
assets, while the Natural Resources Fund will reimburse up to .35% per annum of
the Fund's average daily net assets, for costs incurred in the promotion,
offering and marketing of the Funds' shares. The Global Utilities Fund and the
Small Cap Growth Fund will reimburse Distributors in an amount up to .25% per
annum for Class I, and 1% per annum for Class II's average daily net assets for
costs incurred in the promotion, offering and marketing of the Fund's shares.
Costs incurred by the Funds under the agreement aggregated $352,046 for the six
months ended October 31, 1995.
In its capacity as underwriter for the shares of the Funds, except for the
Institutional MidCap Growth Fund, Distributors receives commissions on sales of
the Funds' shares of beneficial interest. Commissions are deducted from the
gross proceeds received from the sale of the shares of the Funds, and as such
are not expenses of the Funds. Distributors may also make payments, out of its
own resources, to the dealers for certain sales of Class I and Class IIshares.
Commissions received by Distributors, and the amounts paid to other dealers for
the six months ended October 31, 1995, were as follows:
<TABLE>
<CAPTION>
Franklin
Franklin Franklin Franklin Franklin Franklin Natural
California Strategic Global Small Cap Global Health Resources
Class I Growth Fund Income Fund Utilities Fund Growth Fund Care Fund Fund
- ----------------------- -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Total commissions received .... $341,922 $32,195 $135,857 $2,444,307 $99,612 $35,390
======== ========= ======== ======== ======== ========
Paid to other dealers ......... $304,271 $30,101 $120,918 $2,182,717 $90,063 $36,294
======== ========= ======== ======== ======== ========
Class II
- -----------------------
<S> <C> <C>
Total commissions received .... $ 9,630 $ 8,285
======== ========
Paid to other dealers ......... $ 11,522 $ 16,602
======== ========
</TABLE>
Distributors also received contingent deferred sales charges relating to
transactions in the Small Cap Growth Fund of $9,607 and $10 for Class I and
Class II shares, respectively.
6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (cont.)
Certain officers and trustees of the Trust are also officers and/or directors of
Distributors, Advisers, FISCO, and Investors Services, all wholly-owned
subsidiaries of Resources.
At October 31, 1995, Resources owned 12% of the California Growth Fund, 66% of
the Strategic Income Fund, 7% of the Global Health Fund, 28% of the Natural
Resources Fund, and 100% of the Institutional MidCap Growth Fund.
7. RESTRICTED SECURITIES
A restricted security is a security which has not been registered with the
Securities Exchange Commission pursuant to the Securities Act of 1933. The Trust
may purchase restricted securities through a private offering and they cannot be
sold without prior registration under the Securities Act of 1933 unless such
sale is pursuant to an exemption therefrom. Subsequent costs of registration of
such securities are borne by the issuer. A secondary market exists for certain
privately placed securities. The Trust values these restricted securities as
disclosed in Note 1. At October 31, 1995, the California Growth Fund held the
following restricted security:
<TABLE>
<CAPTION>
Shares Security Acquisition Date Cost Value
- ----- ----------------------------------------------------- ----------- ---- ----
<S> <C> <C> <C> <C>
486 Lynx Therapeutics, Inc. ............................................... 10/19/92 $328 $--
</TABLE>
8. RULE 144A SECURITIES
Rule 144A provides a non-exclusive safe harbor exemption from the registration
requirements of the Securities Act of 1933 for specified resales of restricted
securities to qualified institutional investors. The Trust values these
securities as disclosed in Note 1(a). At October 31, 1995, 144A securities were
as follows:
<TABLE>
<CAPTION>
Franklin
Franklin Franklin Franklin Natural
California Strategic Global Resources
Growth Fund Income Fund Utilities Fund Fund
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Value...................................................... $570,275 $1,044,538 $2,618,070 $179,908
======== ======== ======== =======
Ratio of value to net assets............................... 1.55% 11.65% 2.13% 5.03%
======== ======== ======== =======
</TABLE>
See the accompanying Statement of Investments in Securities and Net Assets for
specific information of such securities.
9. LOANS OF PORTFOLIO SECURITIES
During the period ended October 31, 1995, the California Growth Fund and the
Small Cap Growth Fund loaned securities to certain brokers for which it received
cash collateral against the loaned securities in an amount equal to at least
102% of the market value of the loaned securities The cash collateral received
is invested by the Funds in short-term instruments and any interest income in
excess of a predetermined rebate to the brokers is kept by the Funds as interest
income. Interest income from this source amounted to $920 for the California
Growth Fund and $19,198 for the Small Cap Growth Fund for the six months ended
October 31, 1995.
At October 31, 1995, the value of the loaned securities amounted to $409,375 in
the California Growth Fund and $3,013,000 in the Small Cap Growth Fund. The
Funds have received sufficient cash collateral to meet these commitments.
10. FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout the
period by Fund are as follows:
10. FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout the
period by Fund are as follows:
<TABLE>
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data
------------------------------------------------ ------------------------
Net Ratio of Net
Realized & Distri- Distributions Net Net Ratio of Investment
Net Asset Net Unrealized butions From Asset Assets Expenses Income to
Value at Invest-Gain(Loss)Total From From Net Realized Value at End to Average Average Portfolio
Year Beginning ment on Investment Investment Capital Total at End Total of Year Net Net Assets Turnover
Ended of Year IncomeSecuritiesOperations Income Gains Distributionsof Year Return* (in 000's)Assets***(See Note 6) Rate
Franklin California Growth Fund:
Class I Shares:
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19921 $10.04 $0.07$ (.168) $ (.098) $(.072) $ -- $ (.072) $ 9.87 (1.77)%**$ 3,091 --% 1.27%** 13.73%
1993 9.87 .12 .340 .460 (.120) -- (.120) 10.21 4.72 3,412 -- 1.23 38.28
1994 10.21 .14 2.425 2.565 (.145) (.580) (.725) 12.05 25.55 4,646 .09 1.16 135.12
1995 12.05 .16 3.043 3.203 (.124) (1.099) (1.223) 14.03 29.09 13,844 .25 1.63 79.52
19957 14.03 .12 3.499 3.619 (.099) (.430) (.529) 17.12 26.42 36,743 .24** 1.93** 50.64
Franklin Strategic Income Fund:
Class I Shares:
19955 10.00 .70 .154 .854 (.674) -- (.674) 10.18 8.94 6,736 .25** 7.93** 68.43
19957 10.18 .41 .392 .802 (.402) -- (.402) 10.58 8.03 8,964 .25** 8.36** 46.75
Franklin Global Utilities Fund:
Class I Shares:
19932 10.00 .22 1.270 1.490 (.130) -- (.130) 11.36 18.08** 14,227 -- 3.89** --
1994 11.36 .30 1.280 1.580 (.299) (.042) (.341) 12.60 14.04 124,188 .84 2.95 16.28
1995 12.60 .42 (.067) .353 (.365) (.358) (.723) 12.23 3.17 119,250 1.12 3.47 16.65
19957 12.23 .19 1.146 1.336 (.189) (.137) (.326) 13.24 11.09 121,775 1.10** 2.89** 18.66
Class II Shares:
19957 12.23 .08 1.21 1.290 (.183) (.137) (.320) 13.20 10.71 972 1.87** 2.18** 18.66
Franklin Small Cap Growth Fund:
Class I Shares:
19923 10.00 .04 (.460) (.420) -- -- -- 9.58 (19.96)** 1,268 -- 2.45** 2.41
1993 9.58 .07 .657 .727 (.087) -- (.087) 10.22 7.66 6,026 -- 0.84 63.15
1994 10.22 .03 2.944 2.974 (.043) (.401) (.444) 12.75 29.26 23,915 .30 0.24 89.60
1995 12.75 .03 3.138 3.168 (.021) (.997) (1.018) 14.90 27.05 63,010 .69 0.25 104.84
19957 14.90 .01 2.756 2.766 (.014) (.412) (.426) 17.24 18.83 195,284 .92** 0.12** 57.10
Class II Shares:
1995+ 17.94 -- (.720) (.720) -- -- -- 17.22 (4.01) 1,099 1.70** (.36)** 57.10
Franklin Global Health Care Fund:
Class I Shares:
19923 10.00 .02 (1.180) (1.160) -- -- -- 8.84 (55.14)** 1,368 -- 1.68** 41.01
1993 8.84 .09 .037 .127 (.087) -- (.087) 8.88 1.41 3,422 -- 1.13 62.74
1994 8.88 .07 1.856 1.926 (.078) (.298) (.376) 10.43 21.93 5,795 .10 .68 110.82
1995 10.43 .08 1.560 1.640 (.061) (.559) (.620) 11.45 16.33 12,906 .25 .80 93.79
19957 11.45 .06 3.272 3.332 (.082) -- (.082) 14.70 29.26 22,466 .25** .90** 46.09
Franklin Institutional MidCap Growth Fund:
Class I Shares:
19944 10.00 .15 .014 .164 (.079) (.035) (.114) 10.05 1.62 5,079 -- 2.21** 70.53
1995 10.05 .21 .769 .979 (.204) (.015) (.219) 10.81 10.06 5,591 -- 2.12 163.54
19957 10.81 .10 1.880 1.980 (.110) -- (.110) 12.68 18.44 6,623 -- 1.61** 23.46
10. FINANCIAL HIGHLIGHTS (cont.)
Per Share Operating Performance Ratios/Supplemental Data
------------------------------------------------ ------------------------
Net Ratio of Net
Realized & Distri- Distributions Net Net Ratio of Investment
Net Asset Net Unrealized butions From Asset Assets Expenses Income to
Value at Invest-Gain(Loss)Total From From Net Realized Value at End to Average Average Portfolio
Year Beginning ment on Investment Investment Capital Total at End Total of Year Net Net Assets Turnover
Ended of Year IncomeSecuritiesOperations Income Gains Distributionsof Year Return* (in 000's)Assets***(See Note 6) Rate
Franklin Natural Resources Fund:
Class I Shares:
19956 $10.00 $.04 $(.150) $ (.110) $ -- $ -- $ -- $ 9.89 (1.10)% $ 3,578 .98%** 1.58%** 16.54%
</TABLE>
1For the period October 18, 1991 (effective date) to April 30, 1992.
2For the period July 2, 1992 (effective date) to April 30, 1993.
3For the period February 14, 1992 (effective date) to April 30, 1992.
4For the period August 17, 1993 (effective date) to April 30, 1994.
5For the period May 24, 1994 (effective date) to April 30, 1995.
6For the period June 5, 1995 (effective date) to October 31, 1995.
7For the six months ended October 31, 1995.
+For the period October 1, 1995 to October 31, 1995.
*Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum front-end sales
charge or the deferred contingent sales charge, if applicable. The total return
for the Funds also assumes reinvestment of dividends and capital gains, if any,
at net asset value.
**Annualized.
***During the periods indicated, Advisers and FISCO agreed to waive in advance a
portion or all of their management fees and made payments of other expenses
incurred by a Fund. Had such action not been taken, the ratios of operating
expenses to average net assets would have been as follows:
Ratio of expenses
to average net assets
Franklin California Growth Fund
19921............................. 1.61%**
1993.............................. 1.99
1994.............................. 1.89
1995.............................. 1.27
19957............................. .98**
Franklin Strategic Income Fund
1995.............................. 1.38**
19957............................. 1.23
Franklin Global Utilities Fund
19932............................. 1.51%**
1994.............................. 1.28
Franklin Natural Resources Fund
19956............................. 1.62%**
Ratio of expenses
to average net assets
Franklin Small Cap Growth Fund
19923............................. 1.74%**
1993.............................. 1.95
1994.............................. 1.58
1995.............................. 1.16
19957............................. 1.00**
Franklin Global Health Care Fund
19923............................. 1.62%**
1993.............................. 2.16
1994.............................. 1.74
1995.............................. 1.37
19957............................. 1.14**
Franklin Institutional MidCap Growth Fund
19944............................. 0.91%**
1995.............................. 0.98
19957............................. 0.93**
Combined Pro Forma Statement of Investments (unaudited)
October 31, 1995
<TABLE>
<CAPTION>
Shares/Face** Value
FSS Templeton FSS Templeton
Global Global Pro Forma Global Global Pro Forma
Country*UtilitiesUtilities Combined Utilities Utilities Combined
Common Stocks 86.6%
Electric & Gas Utilities 61.8%
<S> <C> <C> <C> <C> <C> <C> <C>
US 166,000 166,000 a AES Corp. $3,278,500 $ $3,278,500
US 57,200 18,000 75,200 American Electric Power Co., Inc. 2,180,750 686,250 2,867,000
AU 278,873 278,873 Australian Gas & Light Co. 966,561 966,561
GB 150,000 150,000 British Gas, Plc. 571,496 571,496
US 49,500 49,500 Central & South West Corp. 1,324,125 1,324,125
US 17,000 17,000 b Central Costanera SA, ADR 463,250 463,250
US 11,700 11,700 b Chilectra SA, ADS 503,100 503,100
HK 227,400 227,400 China Light & Power, Ltd. 1,211,748 1,211,748
US 20,000 20,000 Cia Energetica de Minas Gerais, 428,386 428,386
ADR
US 150,000 150,000 CINergy Corp. 4,256,250 4,256,250
BO 14,900 14,900 Compania Boliviana de Energia 433,963 433,963
Electricas, SA
US 49,700 49,700 Dominion Resources, Inc. 1,975,575 1,975,575
US 22,300 22,300 DPL, Inc. 529,625 529,625
US 60,950 60,950 Duke Power Co. 2,727,513 2,727,513
BE 3,200 3,200 Electrabel, SA 718,728 718,728
VE 398,076 398,076 Electricidad de Caracas 263,110 263,110
US 62,900 62,900 Empresa Nacional de 3,160,725 3,160,725
Electricidad, ADR
US 20,000 20,000 Endesa - Empresa Nacional de 1,005,000 1,005,000
Electricidad, SA, ADR
US 127,000 127,000 Enron Corp. 4,365,625 4,365,625
US 107,700 107,700 Enron Global Power & Pipelines 2,598,263 2,598,263
US 110,000 24,000 134,000 Entergy Corp. 3,135,000 684,000 3,819,000
US 195,000 195,000 b Espoon Sahko Oy 2,618,070 2,618,070
AU 2,800 2,800 Evn Energie-Versorgung 342,170 342,170
Niederoesterreich AG
US 39,000 39,000 FPL Group, Inc. 1,633,125 1,633,125
US 49,600 49,600 General Public Utilities Corp. 1,550,000 1,550,000
HK 1,180,000 195,000 1,375,000 Hong Kong Electric Holdings, 4,013,865 663,308 4,677,173
Ltd.
US 62,000 62,000 a Huaneng Power International, 1,030,750 1,030,750
Inc., ADR
ES 143,000 143,000 Iberdola 1,078,316 1,078,316
US 40,500 40,500 Illinova CP Holdings Co. 1,149,188 1,149,188
US 14,600 14,600 Kansas City Power and Light Co. 363,175 363,175
Common Stocks (cont.)
Electric & Gas Utilities (cont.)
KR 33,700 8,000 41,700 Korea Electric Power Corp. 1,526,113 $362,282 $1,888,395
US 54,000 54,000 Long Island Lighting Co. 918,000 918,000
US 109,000 109,000 National Fuel Gas Co. 3,242,750 3,242,750
US 6,900 6,900 New England Electric System 269,100 269,100
US 43,000 43,000 New York State Electric & Gas 1,085,750 1,085,750
Corp.
US 29,100 16,800 45,900 NIPSCO Industries, Inc. 1,062,150 613,200 1,675,350
US 126,000 126,000 Pacific Enterprises 3,118,500 3,118,500
US 20,200 20,200 Pacific Gas & Electric Co. 593,375 593,375
US 176,700 176,700 PacifiCorp 3,335,213 3,335,213
US 133,500 133,500 Panhandle Eastern Corp. 3,370,875 3,370,875
US 21,600 21,600 Peco Energy Co. 634,500 634,500
US 59,000 38,000 97,000 Pinnacle West Capital Corp. 1,622,500 1,045,000 2,667,500
GB 102,000 102,000 Powergen, Plc. 915,912 915,912
US 50,000 50,000 Public Service Co. of Colorado 1,706,250 1,706,250
GB 360,000 360,000 Scottish Power, Plc. 1,986,246 1,986,246
CN 45,600 45,600 Shandong Huaneng Power 364,800 364,800
US 50,000 50,000 Sithe Energies, Inc. 356,250 356,250
GB 25,000 25,000 South Wales Electricity 360,841 360,841
US 208,000 27,900 235,900 Southern Co. 4,966,000 666,113 5,632,113
US 41,200 41,200 Southern Indiana Gas & Electric 1,390,500 1,390,500
Co.
US 183,900 183,900 TECO Energy, Inc. 4,344,638 4,344,638
US 51,500 25,000 76,500 Texas Utilities Co. 1,892,625 918,750 2,811,375
GB 50,500 50,500 Thames Water Group, Plc. 420,734 420,734
US 146,000 146,000 TransCanada Pipelines, Ltd. 1,952,750 1,952,750
US 160,000 160,000 Transportadora Gas Sur, ADR 1,640,000 1,640,000
US 11,000 11,000 Unicom Corp. 360,250
360,250
DD 25,000 25,000 VEBA AG 1,024,024 1,024,024
US 4,600 4,600 Wicor, Inc. 136,275 136,275
US 53,400 53,400 Williams Cos., Inc. 2,062,575 2,062,575
Common Stocks (cont.)
Electric & Gas Utilities (cont.)
HK 340,000 340,000 Wing Shan International, Ltd. $40,017 $40,017
--------------------------------
81,807,944 20,406,424 102,214,368
--------------------------------
Electrical and Electronics .6%
FR 5,000 5,000 Alcatel Alsthom, SA 427,562 427,562
CH 500 500 BBC Brown Boveri, Ltd., br. 579,717 579,717
--------------------------------
- 1,007,279 1,007,279
--------------------------------
Energy Sources .8%
US 18,000 18,000 Coastal Corp. 582,750 582,750
US 28,000 28,000 Enron Global Power & Pipeline 675,500 675,500
US 7,600 7,600 Transportadora de Gas del Sur, 77,900 77,900
SA, ADR, B
--------------------------------
- 1,336,150 1,336,150
--------------------------------
Telecommunications Services
23.4%
US 20,150 20,150 a AirTouch Communications, Inc. 574,275 574,275
US 30,000 30,000 Ameritech Corp. 1,620,000 1,620,000
US 59,300 59,300 AT&T Corp. 3,795,200 3,795,200
CA 24,000 24,000 BCE, Inc. 808,511 808,511
GB 300,000 49,000 349,000 Cable & Wireless, Plc. 1,963,481 320,702 2,284,183
US 19,700 19,700 a Comcast GB Cable Partners, Ltd. 253,638 253,638
US 6,000 6,000 Compania de Telecomunicaciones 432,000 432,000
de Chile SA, ADR
MX 44,400 44,400 a Grupo Iusacell, SA, Series D 39,826 39,826
US 100,560 100,560 a Grupo Iusacell, SA, Series L, 1,194,150 1,194,150
ADR
US 55,300 55,300 GTE Corp. 2,281,125 2,281,125
US 38,500 38,500 MCI Communications Corp. 960,094 960,094
US 124,000 124,000 a Nynex Cablecomms Group, ADR 2,526,500 2,526,500
PK 3,127 3,127 Pakistan Telecom Corp., PTC 298,629 298,629
US 9,400 9,400 b Philippine Long Distance 303,150 303,150
Telephone Co., GDR
US 130,000 130,000 Portugal Telecom SA, ADR 2,437,500 2,437,500
US 21,200 21,200 PT Indosat, ADR 702,250 702,250
Common Stocks (cont.)
Telecommunications Services
(cont.)
US 40,000 40,000 SBC Communications, Inc. 2,235,000 $ $2,235,000
IT 550,000 160,000 710,000 STET-Societa Finanziaria 1,556,040 349,217 1,905,257
Telefonica
NZ 105,000 105,000 Telecom Corp. of New Zealand, 435,964 435,964
Ltd.
US 62,750 62,750 Telecom de Argentina, SA, ADR 2,408,030 2,408,030
IT 217,000 217,000 Telecom Italia Mobile, di Risp 239,197 239,197
IT 265,000 265,000 Telecom Italia Spa, di Risp 311,236 311,236
US 120,000 13,540 133,540 Teledanmark, AS, ADS 3,135,000 353,733 3,488,733
DK 7,830 7,830 Teledanmark, AS, B 408,559 408,559
US 20,400 20,400 Telefonica de Argentina, ADS 423,300 423,300
US 65,950 15,000 80,950 Telefonica de Espana, ADR 2,481,369 564,375 3,045,744
US 45,700 45,700 Telefonos de Mexico, ADR 1,256,750 1,256,750
US 57,500 57,500 a Telewest Communications, Plc., 1,595,625 1,595,625
ADR
US 12,400 12,400 Telmex - Telefonos de Mexico, 341,000 341,000
--------------------------------
SA, L, ADR
31,776,809 6,828,617 38,605,426
--------------------------------
--------------------------------
Total Common Stocks (Cost 113,584,753 29,578,470 143,163,223
$133,756,979) --------------------------------
Preferred Stocks 1.0%
AR 6,900 6,900 b Cia Inversiones 296,700 296,700
Telecommunicaciones, SA, pfd., conv.
IT 457,000 457,000 Concessioni e Costruzioni 484,525 484,525
Autostrade SPA, B, pfd.
MX 12,400 12,400 Nacional Financiera, SA, 11.25%, 359,600 359,600
conv., pfd., 05/15/98
BR 13,216,481 13,216,481 Telebras - Telecomunicacoes 535,805 535,805
--------------------------------
Brasileiras, SA, pfd.
Total Preferred Stocks - 1,676,630 1,676,630
(Cost $1,607,511)
--------------------------------
Face Amount**
Bonds 6.3%
US 570,000 570,000 Bellsouth, 6.75%, 10/15/33 537,225 537,225
NZ 2,000,000 2,000,000 Electricity Corp. of New 1,334,196 1,334,196
Zealand, Ltd., 10.00%, 06/15/96
Bonds (cont.)
US 500,000 500,000 GTE Corp., 10.25%, 11/01/20 $588,055 $588,055
US 500,000 500,000 Korea Electric Power Co., 7.75%, 515,150 515,150
04/01/13
US 500,000 500,000 Korea Telecom, 7.40%, 12/01/99 509,185 509,185
US 1,000,000 1,000,000 b National Power Corp., 7.625%, 980,000 980,000
11/15/00
GB 333,000 333,000 National Power PLC, 6.25%, 601,458 601,458
09/23/08
US 400,000 400,000 New York State Electric & Gas, 462,736 462,736
9.875%, 05/01/20
US 500,000 500,000 Pennsylvania Power & Light Co., 541,945 541,945
9.25%, 10/01/19
US 500,000 500,000 RGS I&M Funding Corp., 9.81%, 631,775 631,775
12/07/22
US 500,000 500,000 San Diego Gas & Electric Co., 595,100 595,100
9.625%,04/15/20
IT 725,000,000 725,000,00 b Softe, SA, 4.25%, conv., 07/30/98 526,780 526,780
BR 500,000 500,000 Telebras - Telecomunicacoes 506,875 506,875
Brasileiras, 10.00%, 06/16/97
US 1,000,0001,000,000 U.S. West Communications, 936,350 936,350
6.875%, 09/15/33
DD 330,000 330,000 Veba International, 6.00%, 589,050 589,050
04/06/00
US 600,000 600,000 Virginia Electric Power, 7.00%, 584,538 584,538
01/01/24
--------------------------------
Total Bonds - 10,440,418 10,440,418
(Cost $9,682,258)
--------------------------------
Total Long Term Investments 113,584,753 41,695,518 155,280,271
(Cost $145,046,748)
Short Term Obligations 1.3%
US Federal Farm Credit Banks, 1,457,941 1,457,941
1,460,000 1,460,000 5.60%, 11/10/95
US 25,000 25,000 Federal Home Loan Mortgage 24,981 24,981
Corp., 5.65%, 11/06/95
US 25,000 25,000 Federal National Mortgage Assn., 24,897 24,897
5.55%, 11/27/95
US 620,000 620,000 U.S. Treasury Bills, 5.10% -
5.20%, with maturities
to 11/24/95 619,272 619,272
--------------------------------
Total Short Term - 2,127,091 2,127,091
Obligations (Cost $2,126,716)
--------------------------------
c Receivables from Repurchase
Agreements 3.5%
US 5,707,700 5,707,700 Joint Repurchase Agreement,
5.887%, 11/01/95 (Cost
$5,798,095)
Daiwa Securities America,
Inc., (Maturity Value $1,275,790)
Collateral: U.S. Treasury
Bills, 04/25/96
U.S.
Treasury Notes, 6.125%, 09/30/00
Donaldson, Lufkin & Jenrette,
(Maturity Value $1,507,751)
Collateral: U.S. Treasury
Notes, 5.125% - 8.25%, 07/31/96
- 03/31/00
Swiss Bank Corp., (Maturity
Value $1,507,751)
Collateral: U.S. Treasury
Notes, 6.875%, 03/31/00
UBS Securities, Inc.,
(Maturity Value $1,507,751)
Collateral: U.S. Treasury
Notes, 5.125% - 8.50%,
11/15/95 - 01/31/00 5,798,095 - 5,798,095
--------------------------------
Total Investments (Cost 119,382,848 43,822,609 163,205,4
$152,971,559) 98.7%
Other Assets and 3,364,637 -1,185,792 2,178,845
--------------------------------
Liabilities, Net 1.3%
Net Assets 100.0% 122,747,485 $42,636,817$165,384,302
--------------------------------
Argentina
Australia
Belgium
Bolivia
Brazil
Canada
Switzerland
China
Germany
Denmark
Spain
France
United Kingdom
Hong Kong
Italy
South Korea
Mexico
New Zealand
Pakistan
United States of America
Venezuela
Securities traded in currency of country indicated.
Non-income producing.
Rule 144A securities.
Face amount for repurchase agreements is for the underlying collateral.
At October 31, 1995, the net
unrealized appreciation based
on the cost of
investments for income tax
purposes of $152,971,559 was as
follows:
Aggregate gross unrealized
appreciation for all
investments in
which there was an excess of $ 0
value over tax cost
Aggregate gross unrealized
depreciation for all
investments in
which there was an excess of 0
tax cost over value
Net unrealized appreciation 0
</TABLE>
STATEMENT OF ASSETS AND LIABILITIES
AS OF OCTOBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
FSS Templeton
Franklin Global Global Pro Forma Pro Forma
ASSETS: Utilities Fund Utilities, Adjustments Combined
Inc.
Investments in securities:
<S> <C> <C> <C> <C>
At identified cost $ 109,638,643 $ 37,534,821 $ - $ 147,173,464
At value 113,584,753 43,822,609 - 157,407,362
Rec.from repurch.agreemts., at value and cost 5,798,095 - - 5,798,095
Cash - 27,181 - 27,181
Receivables:
Capital shares sold 104,190 - - 104,190
Interest and dividends 321,769 349,762 - 671,531
Investment securities sold 3,391,238 - - 3,391,238
Unamortized organizational expense 5,284 - - 5,284
Total assets 123,205,329 44,199,552 - 167,404,881
LIABILITIES:
Payables:
Investment securities purchased 189,750 25,270 - 215,020
Capital shares repurchased 90,865 - - 90,865
Dividends to shareholders - 1,403,380 - 1,403,380
Management and administrative fees 61,851 28,051 - 89,902
Distribution/12b-1 fees 75,825 - - 75,825
Payables to manager for organization 5,284 - - 5,284
costs
Accounts payable and accrued expenses 34,269 106,034 - 140,303
Total liabilities 457,844 1,562,735 - 2,020,579
0
Net assets - Fund Level $ 122,747,485 $ 42,636,817 $ - $ 165,384,302
NET ASSETS:
Undistributed net investment income $ 1,423,871 $ 207,202 $ (143,942)** $ 1,487,131
Unrealized appreciation on investments and
transalation of assets and liabilities denom. in
foreign curr. 3,941,683 6,287,788 - 10,229,471
Accumulated net realized gain from investments
and foreign curr. tran. 1,737,539 944,879 - 2,682,418
Class I capital shares 91,949 32,203* 124,152
Class II capital shares 737 - 737
Additional paid in capital 115,551,706 35,196,948 111,739* 150,860,393
Net Assets, at value $ 122,747,485 $ 42,636,817 $ 0 $ 165,384,302
Net Assets - Class I $ 121,774,956 $ 42,636,817 $ 164,411,773
Shares outstanding - Class I 9,194,912 3,153,664 66,639 * 12,415,215
Net Assets - Class II $ 972,529 $ N/A $ 972,529
Shares outstanding - Class II 73,657 N/A 73,657
NAV per share - Class I $ 13.24 $ 13.52 $ 13.24
NAV per share - Class II $ 13.20 $ N/A $ 13.20
*Reflects adjustment for new shares issued-See Notes 1 and 3
**Reflects adjustment to operating expenses due to the combination of two
entities-See Note 4.
See Notes Accompanying Financial
Statements
STATEMENT OF OPERATIONS
FOR THE 12 MONTHS ENDED OCTOBER 31, 1995
(UNAUDITED)
FSS
Franklin Global Templeton Pro Forma Pro Forma
Utilities Fund Global Utilities, Adjustments Combined
Inc.
Investment income:
Dividends $ 4,855,328 $ 966,294 $- $ 5,821,622
Interest 508,758 1,247,801 - 1,756,559
Total investment income 5,364,086 2,214,095 - 7,578,181
Expenses:
Management fees 728,979 250,227 (35,385) 943,821
Administrative fees - 62,559 (62,559) -
Distribution/12b-1 fees-class I 274,810 - 108,098 382,908
Distribution/12b-1 fees-class II 2,664 - - 2,664
Shareholder servicing costs 113,688 43,651 (34,078) 123,261
Custodian fees 28,621 12,812 (1,770) 39,663
Reports to shareholders 96,831 84,226 (76,073) 104,984
Professional fees 17,623 21,629 (19,504) 19,748
Directors fees and expenses - 12,808 (12,808) -
Amortization of organization costs 3,168 4,914 (4,914) 3,168
Registration and filing fees 84,138 8,172 - 92,310
Other 8,567 4,949 (4,949) 8,567
Total expenses 1,359,089 505,947 (143,942) 1,721,094
Net investment income 4,004,997 1,708,148 143,942 5,857,087
Realized and unrealized gain (loss) on
investments:
Net realized gain from investments 3,017,831 2,484,496 - 5,502,327
Net realized loss from foreign curr. (38,290) (3,547) - (41,837)
trans.
Realized gain from investments & 2,979,541 2,480,949 - 5,460,490
foreign curr. tran.
Net unrealized appreciation
(depreciation)
on investments during the period 6,759,473 (1,026,354) - 5,733,119
Net unrealized depreciation on trans-
lation of assets & liabilities (6,987) - - (6,987)
denominated in foreign curr.
Net unrealized appr(depr) on
investments & translation
of assets and liabilities denominated 6,752,486 (1,026,354) - 5,726,132
in foreign curr.
Net realized & unrealized gain from
investments
and foreign curr. trans. 9,732,027 1,454,595 - 11,186,622
Net increase in net assets from 13,737,024 3,162,743 143,942 17,043,709
operations
See Notes Accompanying Financial
Statements
</TABLE>
FRANKLIN STRATEGIC SERIES, FRANKLIN GLOBAL UTILITIES FUND
PROPOSED MERGER WITH
TEMPLETON GLOBAL UTILITIES FUND, INC.
OCTOBER 31, 1995 (UNAUDITED)
NOTES TO PRO FORMA COMBINING FINANCIAL STATEMENTS
1. GENERAL
Subject to approval of the proposed Agreement and Plan of Reorganization
(the "Agreement and Plan") by the shareholders of the Templeton Global Utilities
Fund, Inc. (the "Templeton Utilities"), the Franklin Strategic Series, Franklin
Global Utilities Fund (the "Franklin Utilities") will acquire substantially all
of the assets of the Templeton Utilities in exchange for shares of the Franklin
Utilities. The merger will be accounted for by the method of accounting for tax
free business combinations of investment companies. The pro forma combining
Statement of Assets and Liabilities reflects the financial position of the
Franklin Utilities and the Templeton Utilities at October 31, 1995 as though the
merger occurred as of that date. The pro forma combining Statement of Operations
reflects the results of operations of the Franklin Utilities and the Templeton
Utilities for the twelve months ended October 31, 1995 as though the merger
occurred at the beginning of the period presented. Both the Statement of Assets
and Liabilities and the Statement of Operations are presented for the
information of the reader, and may not necessarily be representative of what the
combined statements would have been had the acquisition occurred on October 31,
1995.
The accompanying pro forma financial statements should be read in
conjunction with the financial statements and Statement of Investments and Net
Assets of the Franklin Utilities semi-annual report dated October 31, 1995 and
the Templeton Utilities annual report dated August 31, 1995.
The following notes refer to the accompanying pro forma financial
statements as if the above merger of the Templeton Utilities and Franklin
Utilities had taken place as of November 1, 1994.
2. SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (the Trust) is an open-end, management
investment company (mutual fund), registered under the Investment Company Act of
1940, as amended. The Trust currently consists of eight separate series (the
Funds). One of the Funds is the Franklin Utilities which is a separate,
non-diversified fund. Each of the Funds issues a separate series of shares and
maintains a totally separate investment portfolio.
The Franklin Utilities offers two classes of shares, Class I and II. Class
I shares are sold with a higher front-end sales charge than Class II shares.
Each class of shares may be subject to a contingent deferred sales charge and
has the same rights, except with respect to the effect of the respective sales
charges, the distribution fees borne by each class, voting rights on matters
affecting a single class and the exchange privilege of each class. The offering
of Class II shares for the Franklin Utilities began on May 1, 1995.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
FRANKLIN STRATEGIC SERIES, FRANKLIN GLOBAL UTILITIES FUND
PROPOSED MERGER WITH
TEMPLETON GLOBAL UTILITIES FUND, INC.
OCTOBER 31, 1995
NOTES TO PRO FORMA COMBINING FINANCIAL STATEMENTS, CONT.
2. SIGNIFICANT ACCOUNTING POLICIES, (CONT.)
(a) 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 asked prices. Other
securities for which market quotations are readily available are valued at the
current market values, obtained from pricing services, which are based on a
variety of factors. Securities for which market quotations are not available, if
any, are valued in accordance with procedures established by the Board of
Trustees. 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 New York Stock Exchange, if that is earlier, and that value is
then converted into its U.S. dollar equivalent at the foreign exchange rate in
effect at noon (EST). The fair values of securities restricted as to resale, if
any, are determined following procedures established by the Board of Trustees.
(b) the Franklin Utilities intends to continue to qualify for the tax
treatment applicable to regulated investment companies under the Internal
Revenue Code and to make the requisite distributions to its shareholders which
will be sufficient to relieve it from income and excise taxes. Therefore, no
income provision is required.
(c) Security transactions are accounted for on the date the securities are
purchase or sold (trade date). Realized gains and losses on security
transactions are determined on the basis of specific identification for both
financial statement and income tax purposes.
(d) Dividend income and distributions to shareholders are recorded on
ex-dividend date. Estimated expenses are accrued daily.
(e) Common expenses incurred by the Franklin Utilities is allocated based
on the ratio of net assets of the fund to the combined net assets. In all other
respects, expenses are charged to the Franklin Utilities as incurred on a
specific identification basis.
(f) The accounting records of the Franklin Utilities are maintained in U.S.
dollars. All assets and liabilities denominated in foreign currencies are
translated into U.S. dollars at the rate of exchange of such currencies against
U.S. dollars on the date of the valuation. Purchases and sales of securities,
income and expenses are translated at the rate of exchange quoted on the
respective date that such transactions are recorded. Differences between income
and expense amounts recorded and collected or paid are recognized when reported
by the custodian bank.
The Franklin Utilities does not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on investments from
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss from
investments.
FRANKLIN STRATEGIC SERIES, FRANKLIN GLOBAL UTILITIES FUND
PROPOSED MERGER WITH
TEMPLETON GLOBAL UTILITIES FUND, INC.
OCTOBER 31, 1995 (UNAUDITED)
NOTES TO PRO FORMA COMBINING FINANCIAL STATEMENTS,CONT.
2. SIGNIFICANT ACCOUNTING POLICIES, (CONT.)
Reported net realized foreign exchange gains or losses arise from sales
and maturities of short-term securities, sales of foreign currencies, currency
gains or losses realized between the trade date and settlement dates on
securities transactions, the difference between the amounts of dividends and
interest, and foreign withholding taxes recorded on the Franklin Utilities'
books and the U.S. dollar equivalent of the amounts actually received or paid.
Net unrealized appreciation/depreciation on translation of assets and
liabilities denominated in foreign currencies arise from changes in the value of
assets and liabilities other than investments in securities at fiscal year end,
resulting from changes in exchange rates.
(g) The Franklin Utilities may enter into a Joint Repurchase Agreement
where by its uninvested cash balance is deposited into a joint cash account to
be used to invest in one or more repurchase agreements with government
securities dealers recognized by the Federal Reserve Board and/or member banks
of the Federal Reserve System. The value and face amount of the Joint Repurchase
Agreements are allocated to the Franklin Utilities based on its pro-rata
interest. In a repurchase agreement, the Franklin Utilities purchases a U.S.
government security from a dealer or bank subject to an agreement to resell it
at a mutually agreed upon price and date. Such a transaction is accounted for as
a loan by the Franklin Utilities to the seller, collaterized by the underlying
security. The transaction requires the initial collateralization of the seller's
obligation by U.S. government securities with market value, including accrued
interest, of at least 102% of the dollar amount invested by the Franklin
Utilities, with the value of the underlying security marked to market daily to
maintain coverage of at least 100%. The collateral is delivered to the Franklin
Utilities' custodian bank and held until resold to the dealer or bank. At
October 31, 1995, all outstanding repurchase agreements held by the Franklin
Utilities had been entered into on that date.
3. CAPITAL SHARES
The number of shares issued was calculated by dividing the net assets of
the Templeton Utilities at October 31, 1995 by $ 13.24, the net asset value per
share for Class I of the Franklin Utilities at October 31, 1995. The pro forma
combined number of Class I shares outstanding of 12,415,215 consists of the
3,220,303 shares issuable to the Templeton Utilities in the merger and 9,194,912
shares of the Franklin Utilities outstanding at October 31, 1995.
4. PRO FORMA COMBINING OPERATING EXPENSES
Certain expenses have been adjusted in the pro forma Statement of
Operations to reflect the expenses of the combined entity more closely.
Pro forma operating expenses include the actual expenses of the Templeton
Utilities and the Franklin Utilities adjusted as follows:
(a) Additional management fees due to the combined net assets of the two
entities. Fees are computed monthly based on the net assets of the Franklin
Utilities, at an annualized rate of .625 of 1% of the average daily net assets
up to $100 million; .50 of 1% of the average daily net assets over $100 million
up to and including $250 million. The rate of fee for the Franklin Utilities is
reduced further on net assets over $250 million.
FRANKLIN STRATEGIC SERIES, FRANKLIN GLOBAL UTILITIES FUND
PROPOSED MERGER WITH
TEMPLETON GLOBAL UTILITIES FUND, INC.
OCTOBER 31, 1995 (UNAUDITED)
NOTES TO PRO FORMA COMBINING FINANCIAL STATEMENTS, CONT.
4. PRO FORMA COMBINING OPERATING EXPENSES, (CONT.)
(b) Additional Class I distribution fees due to the combined net assets of
the two entities.
(c) Additional shareholder servicing costs due to the increase in
shareholder accounts from the combination of the two entities.
(d) Additional custodian fees due to the combined portfolios of the two
entities.
(e) Additional legal, auditing, printing and mailing expenses due to an
increase in the percentage asset allocation within the Franklin Strategic
Series.
(f) The Franklin Strategic Series Board of Trustees has not authorized
charging Trustee fees for the Trust.
(g) No additional miscellaneous expenses are included in the pro forma
Statement of Operations as they are considered to be deminimus.
Non-recurring expenses related to the Agreement and Plan have not been
included in the pro forma Combining Statement of Operations. Such expenses, if
any, shall be borne as follows: Franklin Advisers, Inc., Templeton, Galbraith &
Hansberger Ltd., Templeton Utilities and Franklin Utilities shall each pay one
fourth of the total expenses incurred in connection with the proposed merger.
5. DISTRIBUTIONS AND CAPITAL GAINS
At April 30 , 1995, for tax purposes, the Franklin Utilities had
accumulated undistributed net realized gains of $1,315,465.
For tax purposes, the aggregate cost of securities is higher (and
unrealized appreciation is lower) than for financial reporting purposes at
October 31, 1995 by $1,818 in the Franklin Utilities.
PART C
OTHER INFORMATION
Item 15. INDEMNIFICATION
The information required by this item is incorporated
by reference to the Registrant's Bylaws, filed as Exhibit (2) to Registrant's
Registration Statement on Form N-1A under the Securities Act of 1933 and the
Investment Company Act of 1940 (File No. 33-39088).
Item 16. EXHIBITS
(1) Trust Instrument.1
(2) By-laws.1/
(3) Not applicable.
(4) Agreement and Plan of Reorganization.2
(5) Specimen copy of share certificate for
Registrant's Shares of common stock.1/
(6) Form of Investment Advisory Agreement between
Franklin Advisers, Inc. and the Registrant.1/
(7) Form of Underwriting Agreement between
Franklin/Templeton Distributors, Inc. and the
Registrant.1/
(8) Not applicable.
(9) Custodian Agreement between the Registrant and
Bank of America NT&SA.1/
(10) Not applicable.
- --------
1 Previously filed with Registration Statement No. 33-39088
and incorporated by reference herein.
2 Filed herewith as Exhibit "A" to the Proxy
Statement/Prospectus.
= Part C-1 =
<PAGE>
(11) Opinion of Stradley, Ronon, Stevens & Young as to
legality of the securities being offered
(including consent of such firm).3
(12) Opinion of Dechert Price & Rhoads as to tax
consequences (including consent of such firm).
(13) Not applicable.
(14) (a) Consent of Coopers & Lybrand, LLP.
(b) Consent of McGladrey & Pullen, LLP.
(15) Not applicable.
(16) Power of Attorney.
(17) (a) Copy of Declaration pursuant to Rule 24f-2
under the Investment Company Act of 1940 of
the Registrant.
(b) Form of Proxy.
Item 17. UNDERTAKINGS
(1) The undersigned Registrant agrees that prior to
any public reoffering of the securities
registered through the use of a prospectus which
is part of this registration statement by any
person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of
the Securities Act of 1933, as amended, the
reoffering prospectus will contain the
information called for by the applicable
registration form for reofferings by persons who
may be deemed underwriters, in addition to the
information called for by the other items of the
applicable form.
(2) The undersigned Registrant agrees that every
prospectus that is filed under paragraph (1)
above will be filed as part of an amendment to
the registration statement and will not be used
until the amendment is effective, and that, in
determining any liability under the Securities
Act of 1933, as amended, each post-effective
amendment
- --------
3 Previously filed in connection with Registrant's
Rule 24f-2 Notice for the fiscal year ended
April 30, 1995 and incorporated by
reference herein.
= Part C-2 =
<PAGE>
shall be deemed to be a new registration
statement for the securities offered therein, and
the offering of the securities at that time shall
be deemed to be the initial bona fide offering of
them.
= Part C-3 =
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed on behalf of the Registrant, in the
City of San Mateo, and the State of California, on the 14th day of December,
1995.
FRANKLIN STRATEGIC SERIES
(Registrant)
By:
Rupert H. Johnson, Jr.*
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
Trustee and December 14, 1995
Rupert H. Johnson, Jr.* President (Chief
Executive Officer)
Trustee December 14, 1995
Frank H. Abbott, III*
Trustee December 14, 1995
Harris J. Ashton*
Trustee December 14, 1995
Harmon E. Burns*
Trustee December 14, 1995
S. Joseph Fortunato*
Trustee December 14, 1995
David W. Garbellano*
Trustee December 14, 1995
Charles B. Johnson*
Trustee December 14, 1995
Frank W.T. LaHaye*
<PAGE>
Trustee December 14, 1995
Gordon S. Macklin*
Chief Financial December 14, 1995
Martin L. Flanagan* Officer
Treasurer and December 14, 1995
Diomedes Loo-Tam* Chief Accounting
Officer
</TABLE>
* By: /S/ LARRY L. GREENE
Larry L. Greene
Attorney-in-fact
* Pursuant to Powers of Attorney filed herewith.
- 2 -
Securities and Exchange Commission
Washington, D.C. 20549
EXHIBITS
TO
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FRANKLIN STRATEGIC SERIES
Registrant
INDEX TO EXHIBITS
(12) Opinion of Dechert Price & Rhoads as to tax consequences
(including consent of such firm).
(14) (a) Consent of Coopers & Lybrand, LLP.
(b) Consent of McGladrey & Pullen, LLP.
(16) Power of Attorney.
(17) (a) Copy of Registrant's Declaration pursuant to Rule 24f-2
under the Investment Company Act of 1940, as amended.
(b) Form of Proxy.
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005-1208
December 15, 1995
Board of Trustees
Franklin Strategic Series
777 Mariners Island Blvd.
San Mateo, CA 94404
Board of Directors
Templeton Global Utilities, Inc.
700 Central Avenue
St. Petersburg, Florida 33701-3628
Gentlemen:
You have requested our opinion regarding certain Federal
income tax consequences to Templeton Global Utilities, Inc. (the
"Fund"), to Franklin Global Utilities Fund, a series of Franklin
Strategic Series ("Franklin Utilities"), and to the holders of
the shares of common stock of the Fund, in connection with the
proposed transfer of substantially all of the properties of the
Fund to Franklin Utilities, in exchange solely for Class I shares
of beneficial interest of Franklin Utilities ("Franklin Utilities
Shares") and the assumption by Franklin Utilities of certain
liabilities of the Fund followed by the distribution of such
Franklin Utilities Shares received by the Fund in complete
liquidation and termination of the Fund, all pursuant to the
Agreement and Plan of Reorganization (the "Agreement") to be
executed by the Fund and Franklin Utilities and included as an
exhibit to Form N-14.
For purposes of this opinion, we have examined and rely upon
(1) the Agreement, (2) the Form N-14, dated December 15, 1993,
and filed by Franklin Utilities on said date with the Securities
and Exchange Commission, and (3) such other documents and
instruments as we have deemed necessary or appropriate for
purposes of rendering this opinion. We assume that the
transaction that is the subject of this letter (the
"Reorganization") will be carried out in accordance with the
terms of the Agreement and as described in the documents we have
examined.
This opinion is based upon the Internal Revenue Code of
1986, as amended (the "Code"), United States Treasury
regulations, judicial decisions, and administrative rulings and
pronouncements of the Internal Revenue Service, all as in effect
on the date hereof. This opinion is conditioned upon (a) the
Board of Trustees
Franklin Strategic Series
Board of Directors
Templeton Global Utilities, Inc.
December 15, 1995
Page 2
Reorganization taking place in the manner described in the
Agreement and the Form N-14 to which reference is made above, and
(b) there being no change in the Code, United States Treasury
regulations, judicial decisions, or administrative rulings and
pronouncements of the Internal Revenue Service between the date
hereof and the closing date of the Reorganization.
This opinion is further conditioned upon our receiving such
executed letters of representation from the Fund and Franklin
Utilities as we shall request. This opinion shall be effective
only at such time as we receive those letters and confirm our
opinion in writing on the closing date of the Reorganization and,
in the absence of such confirmation, will be deemed to have been
withdrawn.
Based upon the foregoing, it is our opinion that, for
Federal income tax purposes:
(1) The acquisition by Franklin Utilities of substantially
all of the properties of the Fund in exchange solely for Franklin
Utilities Shares and the assumption by Franklin Utilities of
certain liabilities of the Fund followed by the distribution of
Franklin Utilities Shares to the shareholders of the Fund in
exchange for their Fund shares in complete liquidation and
termination of the Fund, will constitute a reorganization within
the meaning of Section 368 of the Code. The Fund and Franklin
Utilities will each be "a party to a reorganization" within the
meaning of Section 368(b) of the Code.
(2) The Fund will recognize no gain or loss upon
transferring its properties to Franklin Utilities in exchange
solely for Franklin Utilities Shares and the assumption by
Franklin Utilities of certain liabilities of the Fund or upon
distributing to its shareholders the Franklin Utilities Shares
received by the Fund in the transaction pursuant to the
Agreement.
(3) Franklin Utilities will recognize no gain or loss upon
receiving the properties of the Fund in exchange for Franklin
Utilities Shares and the assumption by Franklin Utilities of
certain liabilities of the Fund.
Board of Trustees
Franklin Strategic Series
Board of Directors
Templeton Global Utilities, Inc.
December 15, 1995
Page 3
(4) The aggregate adjusted basis to Franklin Utilities of
the properties of the Fund will be the same as the aggregate
adjusted basis of those properties in the hands of the Fund
immediately before the exchange.
(5) Franklin Utilities' holding periods with respect to the
properties of the Fund that Franklin Utilities acquires in the
transaction will include the respective periods for which those
properties were held by the Fund (except where investment
activities of Franklin Utilities have the effect of reducing or
eliminating a holding period with respect to an asset).
(6) The shareholders of the Fund will recognize no gain or
loss upon receiving Franklin Utilities Shares solely in exchange
for Fund shares.
(7) The aggregate basis of the Franklin Utilities Shares
received by a shareholder of the Fund in the transaction will be
the same as the aggregate basis of the Fund shares surrendered by
the shareholder in exchange therefor.
(8) A Fund shareholder's holding period for the Franklin
Utilities Shares received by the shareholder in the transaction
will include the holding period during which the shareholder held
the Fund shares surrendered in exchange therefor, provided that
the shareholder held such shares as a capital asset on the date
of Reorganization.
We express no opinion as to the tax consequences of the
Reorganization except as expressly set forth above, or as to any
transaction except those consummated in accordance with the
Agreement and the representations to be made to us.
We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement on Form N-14 filed by
Franklin Strategic Series with the Securities and Exchange
Commission.
Very truly yours,
/s/ Dechert Price & Rhoads
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in the Registration Statement of the
Franklin Strategic Series on Form N-14, File No. 811-6243 of our
report dated June 2, 1995 on our audit of the financial
statements and financial highlights of the Funds for the year
ended April 30, 1995. We also consent to the reference to our
firm included under Item No. 14.
/s/ Coopers & Lybrand, L.L.P.
San Francisco, California
December 15, 1995
McGLADREY & PULLEN, LLP
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated September 29,
1995, on the financial statements of Templeton Global Utilities,
Inc. referred to therein, in the Registration Statement on Form
N-14 of Franklin Strategic Series, File no. 811-6243 being filed
with the Securities and Exchange Commission.
We also consent to the reference to our Firm in the
Prospectus/Proxy Statement under the Caption "Financial
Highlights".
McGladrey & Pullen, LLP
New York, New York
December 15, 1995
POWER OF ATTORNEY
The undersigned officers and trustees of FRANKLIN STRATEGIC SERIES
hereby appoint MARK H. PLAFKER, HARMON E. BURNS, DEBORAH R. GATZEK, KAREN L.
SKIDMORE AND LARRY L. GREENE (with full power to each of them to act alone) his
attorney-in-fact and agent, in all capacities, to execute, and to file any of
the documents relating to the Company's Registration Statement on Form N-14
under the Securities Act of 1933, or any amendment to such Registration
Statement, covering the sale of shares by the Company under a prospectus
becoming effective after this date, with all exhibits and any and all documents
required to be filed with respect thereto with any regulatory authority. Each of
the undersigned grants to each of said attorneys full authority to do every act
necessary to be done in order to effectuate the same as fully, to all intents
and purposes as he could do if personally present, thereby ratifying all that
said attorneys-in-fact and agents may lawfully do or cause to be done by virtue
hereof.
The undersigned officers and trustees hereby execute this Power of
Attorney as of this 14th day of December, 1995.
/S/ RUPERT H. JOHNSON, JR. /S/ CHARLES B. JOHNSON
Principal Executive Officer Trustee
and Trustee
/S/ FRANK H. ABBOTT, III /S/ HARRIS J. ASHTON
Trustee Trustee
/S/ S. JOSEPH FORTUNATO /S/ DAVID W. GARBELLANO
Trustee Trustee
/S/ HARMON E. BURNS /S/ FRANK W. T. LAHAYE
Trustee Trustee
/S/ GORDON S. MACKLIN /S/ MARTIN L. FLANAGAN
Trustee Principal Financial Officer
/S/ DIOMEDES LOO-TAM
Principal Accounting Officer
FRANKLIN/TEMPLETON GROUP OF FUNDS
777 Mariners Island Boulevard
San Mateo, California 94404
June 27, 1995
Filed Via EDGAR (CIK #0000872625)
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Rule 24f-2 Notice for Franklin Strategic Series
File No. 33-39088
Gentlemen:
Pursuant to Rule 24f-2 under the Investment Company Act of 1940,
Franklin Strategic Series (the "Fund") hereby files its Rule 24f-
2 Notice for the fiscal year ended April 30, 1995 (the "Fiscal
Year"). The registration fee, shown in the attached calculation,
has been transmitted via wire transfer to the Mellon Bank.
At the beginning of the Fiscal Year, the Fund did not have any
shares of beneficial interest which had been registered under the
Securities Act of 1933 other than pursuant to Rule 24f-2, but
which remained unsold.
During the Fiscal Year, the Fund did not register shares of
beneficial interest other than pursuant to Rule 24f-2 and sold a
total of 9,131,947 shares. 1/ All of the Fund shares sold during
the Fiscal Year were sold in reliance upon the registration
pursuant to Rule 24f-2. Attached is an opinion of counsel
indicating that these securities were legally issued, fully paid
and non-assessable.
Sincerely yours,
FRANKLIN STRATEGIC SERIES
/s/ Larry L. Greene
Larry L. Greene
Assistant Secretary
1/Footnote to Rule 24f-2 Notice for Franklin Strategic Series
The calculation pursuant to subsection (c) of Rule 24f-2 of the fee
in connection with the shares sold in reliance upon Rule 24f-2 is
as follows:
Aggregate sales price of securities sold in
reliance upon Rule 24f-2 during Fiscal Year $113,643,051
Less: the difference between:
(1) the aggregate redemption/
repurchase price of Fund
shares redeemed or repur-
chased during the Fiscal
Year and $72,197,329
(2) the aggregate redemption/
repurchase price of Fund
shares redeemed or repur-
chased during the Fiscal
year and previously applied
pursuant to Rule 24e-2(a) in
filings made pursuant to
Section 24(e)(1) of the
Investment Company Act of -0- $72,197,329
Aggregate sales price on which fee
will be based $41,445,722
Divided by:
Rate of fee pursuant to Section
6(b) of Securities Act of 1933 2900
Fee payable $14,292
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1 THROUGH 3:
Item 1-Approval of an Agreement and Plan of Reorganization providing for the
acquisition of all of the assets of the Fund by Franklin Global Utilities Fund
("Franklin Utilities") in exchange for shares of Franklin Utilities, the
distribution of such Franklin Utilities shares to shareholders of the Fund, and
the subsequent dissolution of the Fund.
FOR AGAINST ABSTAIN
- - -
| | | | | |
- - -
<TABLE>
<CAPTION>
Item 2-Election of Directors
<S> <C>
Withhold Nominees: Betty P. Krahmer, Harris J. Ashton,
For All Nominees Authority S. Joseph Fortunato,
listed (except to Vote for Gordon S. Macklin, Charles B.
as marked below) Nominees listed Johnson, and John Wm. Gailbraith
To
withhold
authority
to vote
for any
individual
nominee
write
that
nominee's
name
below.
- -
| | | |
- -
Item 2 - Ratification of the selection of McGladrey & Pullen as independent
public accountants of the Fund for the fiscal year ending August 31, 1996.
FOR AGAINST ABSTAIN
- - -
| | | | | |
- - -
P [ ] AND WITH DISCRETIONARY AUTHORITY TO
R VOTE ON ALL OTHER MATTERS THAT MAY
O PROPERTY COME BEFORE THE MEETING.
X
Y [ ]
(CONTINUED, AND TO BE SIGNED, ON THE OTHER SIDE)
</TABLE>
TEMPLETON GLOBAL UTILITIES, INC.
ANNUAL MEETING OF SHAREHOLDERS, FEBRUARY 20, 1996
PLEASE VOTE PROMPTLY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints _______________, _________________, and
___________________, and each of them, with full power of substitution, as
proxies to vote for and in the name, place and stead of the undersigned at the
Annual Meeting of Shareholders of Templeton Global Utilities, Inc. (the "Fund")
to be held at 700 Central Avenue, St. Petersburg, Florida 33701-3628, on
Tuesday, February 20. 1996 at 10:00 A.M. EST, and at any adjournment thereof,
according to the number of votes and as fully as if personally present.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER (OR NOT
VOTED) AS SPECIFIED. IF NO SPECIFICATION IS MADE, THE PROXY WILL BE VOTED FOR
ALL NOMINEES FOR DIRECTOR IN ITEM 2 AND IN FAVOR OF ITEMS 1 AND 3.
,1990
Signature (s) Date
PLEASE DATE THIS PROXY AND SIGN EXACTLY AS YOUR NAME OR NAMES APPEAR HEREON. IF
MORE THAN ONE OWNER IS REGISTERED AS SUCH, ALL MUST SIGN. IF SIGNING AS
ATTORNEY, EXECUTOR, TRUSTEE OR ANY OTHER REPRESENTATIVE CAPACITY, OR AS A
CORPORATE OFFICER, PLEASE GIVE FULL TITLE.
(CONTINUED ON OTHER SIDE)
