File Nos. 33-39088
AS FILED APRIL 28, 1999
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No.
(Check appropriate box or boxes)
FRANKLIN STRATEGIC SERIES
(Exact Name of Registrant as Specified in Charter)
(650) 312-2000
(Area Code and Telephone Number)
777 MARINERS ISLAND BLVD.
SAN MATEO, CA 94403-7777
(Address of Principal Executive Offices
Number, Street, City, State, Zip Code)
DEBORAH R. GATZEK
777 MARINERS ISLAND BLVD.
SAN MATEO, CA 94403-7777
(Name and Address of Agent for Service,
Number, Street, City, State, Zip Code)
Copies to:
BRUCE G. LETO, ESQUIRE
STRADLEY, RONON, STEVENS & YOUNG, LLP
2600 ONE COMMERCE SQUARE
PHILADELPHIA, PA 19103
Approximate Date of Proposed Public Offering: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE
UNDER THE SECURITIES ACT OF 1933.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
TITLE OF THE SECURITIES BEING REGISTERED: SHARES OF BENEFICIAL INTEREST WITH
PAR VALUE OF $0.01. NO FILING FEE IS REQUIRED BECAUSE AN INDEFINITE NUMBER
OF SHARES HAVE PREVIOUSLY BEEN REGISTERED PURSUANT TO RULE 24F-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940. A RULE 24F-2 NOTICE FOR THE REGISTRANT'S
FISCAL YEAR ENDED APRIL 30, 1998 WAS FILED ON JULY 27, 1998.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE ON MAY 28, 1999,
PURSUANT TO RULE 488.
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
(Pursuant to rule 481(a) under the
Securities Act of 1933)
N-14 ITEM NO. AND CAPTION LOCATION IN PROSPECTUS
PART A
1. Beginning of Registration Statement Facing Page of Registration Statement;
and Outside Front Cover Page of Front Cover Page of Prospectus
Prospectus
2. Beginning and Outside Back Cover Table of Contents
Page of Prospectus
3. Synopsis Information and Risk Factors Summary; Comparisons of Some Important
Features
4. Information About the Transaction Summary; Reasons for the Transaction;
Information About the Transaction
5. Information About the Registrant Prospectus Cover Page; Summary;
Comparisons of Some Important
Features; Comparison of Investment
Goals and Policies; Information About
Strategic Income Fund; Information
About Investment Grade Fund
6. Information About the Company Being Prospectus Cover Page; Comparisons of
Acquired Some Important Features; Comparison of
Investment Goals and Policies;
Information About Strategic Income
Fund; Information About Investment
Grade Fund
7. Voting Information Prospectus Cover Page; Notice of
Special Shareholders Meeting; Voting
Information; Principal Holders of
Shares
8. Interest of Certain Persons and None
Experts
9. Additional Information Required for Not Applicable
Reoffering by Persons Deemed to be
Underwriters
PART B
10. Cover Page Cover Page of Statement of Additional
Information
11. Table of Contents Not Applicable
12. Additional Information about the Incorporation of Documents by
Registrant Reference in the Statement of
Additional Information
13. Additional Information about the Incorporation of Documents by
Company being Acquired Reference in the Statement of
Additional Information
14. Financial Statements Incorporation of Documents by
Reference in the Statement of
Additional Information; Projected
Financial Statements
PART C - OTHER INFORMATION
Part C contains the information required by Items 15-17 as set forth in the
form.
Dear Shareholder:
Enclosed is a Notice of Meeting for a Special Shareholders' Meeting of
the Franklin Investment Grade Income Fund (the "Investment Grade Fund"). The
Meeting has been called for July 26, 1999 at 3:00 p.m. Pacific time at the
offices of Franklin Managed Trust (the "Trust") at 777 Mariners Island
Boulevard., San Mateo, CA 94404. The accompanying Prospectus/Proxy Statement
describes a proposal being presented for your consideration and requests your
prompt attention and vote via the enclosed proxy card(s).
PLEASE TAKE A MOMENT TO FILL OUT, SIGN AND
RETURN THE ENCLOSED PROXY CARD
This meeting is critically important. The Trustees of your fund
unanimously recommend that you consider and approve an Agreement and Plan of
Reorganization that would result in your shares of the Investment Grade Fund
being exchanged for those of a fund called the Franklin Strategic Income Fund
(the "Strategic Income Fund"), which is a series of Franklin Strategic
Series. If the shareholders of Investment Grade Fund approve the proposal,
you will receive Class A Shares of Strategic Income Fund equal in value to
your investment in Class A Shares of Investment Grade Fund or Advisor Class
Shares of Strategic Income Fund equal in value to your investment in Advisor
Class Shares of Investment Grade Fund. You will no longer be a shareholder
of Investment Grade Fund, and you will instead be a shareholder of Strategic
Income Fund.
The proposed transaction is intended to be a tax-free reorganization
under the Internal Revenue Code of 1986, as amended, as further described in
the accompanying Prospectus/Proxy Statement.
The transaction is being proposed because the projected growth in
assets of Investment Grade Fund was not sufficient to continue to offer a
fund with competitive performance and high quality service to shareholders
over the long term. Strategic Income Fund has investment goals and investment
policies that are similar to those of Investment Grade Fund, as outlined in
the Prospectus/Proxy Statement. Investment Grade Fund is managed by Franklin
Advisory Services, LLC. ("Advisory Services") and Strategic Income Fund is
managed by Franklin Advisers, Inc. which is affiliated with Advisory
Services. Strategic Income Fund is a larger fund that should be better able
to obtain cost savings for shareholders.
Please take the time to review this document and vote now. THE TRUSTEES
OF YOUR FUND UNANIMOUSLY RECOMMEND THAT YOU VOTE IN FAVOR OF THIS PROPOSAL.
[ ] To ensure that your vote is counted, indicate your position on the
enclosed proxy card.
[ ] Sign and return your card promptly.
[ ] If you determine at a later date that you wish to attend this meeting,
you may revoke your proxy and vote in person.
Thank you for your attention to this matter.
Sincerely,
Deborah R. Gatzek
Secretary
PRELIMINARY COPY
FRANKLIN MANAGED TRUST
on behalf of
Franklin Investment Grade Income Fund
777 Mariners Island Boulevard
San Mateo, CA 94404
NOTICE OF SPECIAL SHAREHOLDERS' MEETING
To be held on July 26, 1999
To the Shareholders of Franklin Investment Grade Income Fund:
NOTICE IS HEREBY GIVEN that a Special Shareholders' Meeting of the
Franklin Investment Grade Income Fund ("Investment Grade Fund") will be held
at the offices of the Franklin Managed Trust ("Managed Trust"), 777 Mariners
Island Boulevard, San Mateo, CA 94404 on July 26, 1999 at 3:00 p.m. Pacific
time. The Meeting is being called for the following reasons:
1. To approve or disapprove an Agreement and Plan of Reorganization
between the Trust, on behalf of its Franklin Investment Grade Income Fund
series (the "Investment Grade Fund") and Franklin Strategic Series, on behalf
of its Franklin Strategic Income Fund series (the "Strategic Income Fund")
that provides for: (i) the acquisition of substantially all of the assets of
Investment Grade Fund in exchange for Class A and Advisor Class Shares of
Strategic Income Fund; (ii) the distribution of Class A Shares of Strategic
Income Fund to the shareholders of Class A Shares of Investment Grade Fund;
(iii) the distribution of Advisor Class Shares of Strategic Income Fund to
shareholders of Advisor Class Shares of Investment Grade Fund; and (iv) the
liquidation and dissolution of Investment Grade Fund.
2. To grant the proxyholders the authority to vote upon any other
business as may properly come before the Meeting or any adjournment thereof.
The transaction contemplated by the Agreement and Plan of
Reorganization is described in the attached Prospectus/Proxy Statement. A
copy of the form of Agreement and Plan of Reorganization is attached as
Exhibit A to the Prospectus/Proxy Statement.
Shareholders of record as of the close of business on May 28, 1999 are
entitled to notice of, and to vote at, the Meeting or any adjournment thereof.
By Order of the Board of Trustees,
Deborah R. Gatzek
Secretary
June 10, 1999
THE BOARD OF TRUSTEES URGES YOU TO COMPLETE, DATE, SIGN, AND RETURN THE
ENCLOSED PROXY CARD(S) IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE. IT IS
IMPORTANT THAT YOU RETURN YOUR SIGNED PROXY CARD(S) PROMPTLY SO THAT A QUORUM
MAY BE ENSURED.
PROSPECTUS AND PROXY STATEMENT
When reading this Prospectus/Proxy Statement, you will see certain terms
beginning with capital letters. This means the term is explained in our
glossary section.
TABLE OF CONTENTS
COVER PAGE PAGE
SUMMARY
On what proposal am I being asked to vote?
How will the shareholder voting be handled?
What are the general tax consequences of the Transaction?
COMPARISONS OF SOME IMPORTANT FEATURES
How do the investment goals and policies of the funds compare?
What are the risks of an investment in the funds?
Who manages the funds?
What are the fees and expenses of each fund and what might they be
after the Transaction?
Where can I find more financial information about the funds?
What are other key features of the funds?
Transfer Agency, Custody and Administrative Services
Distribution Services
Rule 12b-1 Plans
Purchases and Redemptions
Dividends and Distributions
REASONS FOR THE TRANSACTION
INFORMATION ABOUT THE TRANSACTION
How will the Transaction be carried out?
Who will pay the expenses of the Transaction?
What are the tax consequences of the Transaction?
What should I know about the Shares of the Strategic Income Fund?
What are the capitalizations of the funds and what might the
capitalization
be after the Transaction?
COMPARISON OF INVESTMENT GOALS AND POLICIES
Are there any significant differences between the investment goals and
strategies of the funds?
How do the investment policies of the funds compare?
What are the fundamental investment restrictions of the funds?
What are the risk factors associated with investments in the funds?
Credit Risk
Interest Rate Risk
Income Risk
Mortgage-backed Securities and Asset-backed Securities Risk
Non-diversification Risk
Foreign Securities Risk
Currency Risk
Derivative Securities Risk
Year 2000 Risk
VOTING INFORMATION
How many votes are necessary to approve the Agreement and Plan?
How do I ensure my vote is accurately recorded?
Can I revoke my proxy?
What other matters will be voted upon at the Meeting?
Who is entitled to vote?
What other solicitations will be made?
Are there dissenters' rights?
INFORMATION ABOUT STRATEGIC INCOME FUND
INFORMATION ABOUT INVESTMENT GRADE FUND
PRINCIPAL HOLDERS OF SHARES
GLOSSARY OF USEFUL TERMS AND DEFINITIONS
EXHIBITS TO PROSPECTUS AND PROXY STATEMENT
EXHIBIT A - FORM OF AGREEMENT AND PLAN OF REORGANIZATION
EXHIBIT B - ADDITIONAL INFORMATION REGARDING THE FRANKLIN STRATEGIC
INCOME FUND - ADVISOR CLASS
EXHIBIT C - PROSPECTUS OF FRANKLIN STRATEGIC INCOME FUND DATED
SEPTEMBER 1, 1998 AS AMENDED JANUARY 1, 1999
EXHIBIT D - ANNUAL REPORT TO SHAREHOLDERS OF FRANKLIN STRATEGIC SERIES
DATED APRIL 30, 1998
PRELIMINARY COPY
PROSPECTUS AND PROXY STATEMENT
Dated May 28, 1999
Acquisition of the Assets of
FRANKLIN INVESTMENT GRADE INCOME FUND,
a series of Franklin Managed Trust
By and in exchange for Class A Shares and Advisor Class Shares of
FRANKLIN STRATEGIC INCOME FUND,
a series of Franklin Strategic Series
This Prospectus/Proxy Statement solicits proxies to be voted at a
Special Shareholders' Meeting (the "Meeting") of the Franklin Investment
Grade Income Fund (the "Investment Grade Fund"), a series of Franklin Managed
Trust ("Managed Trust"), to approve or disapprove an Agreement and Plan of
Reorganization (the "Agreement and Plan"). If shareholders vote to approve
the Agreement and Plan, the net assets of the Investment Grade Fund will be
acquired by and in exchange for shares of Franklin Strategic Income Fund (the
"Strategic Income Fund"), a series of Franklin Strategic Series ("Strategic
Series").
The Meeting will be held at the principal offices of Managed Trust,
which are located at 777 Mariners Island Boulevard, San Mateo, CA 94404 on
July 26, 1999 at 3:00 p.m. Pacific time. The Board of Trustees of Managed
Trust, on behalf of Investment Grade Fund, is soliciting these proxies. This
Prospectus/Proxy Statement will first be sent to shareholders on or about
June 10, 1999.
If the shareholders vote to approve the Agreement and Plan, you will
receive Class A Shares of Strategic Income Fund equal in value to your
investment in Class A Shares of Investment Grade Fund, or Advisor Class
Shares of Strategic Income Fund equal in value to your investment in Advisor
Class Shares of Investment Grade Fund. Investment Grade Fund will then be
liquidated.
Strategic Income Fund's primary investment goal is to obtain a high
level of current income, with capital appreciation over the long term as a
secondary goal. Strategic Income Fund normally invests at least 65% of its
assets in U.S. and foreign debt securities, government securities, mortgage
securities, asset-backed securities, convertible securities and preferred
stock. Strategic Income Fund may invest up to 35% of its assets in common
stocks. Strategic Income Fund may invest in securities rated in any
category, including without limit in lower rated debt securities such as high
yield corporate securities. Strategic Income Fund generally invests in
securities that are rated at least Caa by Moody's or CCC by S&P, or in
unrated securities that it determines to be of comparable quality.
Investment Grade Fund's investment goal is to seek a maximum level of
income consistent with prudent exposure to risk. Investment Grade Fund
normally invests at least 75% of its total assets in investment grade debt
securities. At least 65% of its total assets will be invested in
intermediate-term debt securities with effective remaining maturities between
two and ten years at the time of purchase. Investment grade securities are
issues rated in one of the top four rating categories by independent rating
agencies such as S&P or, if unrated, issues determined by the fund's manager
to be comparable. Although Investment Grade Fund may invest up to 25% of its
total assets in non-investment grade debt securities, it will not invest in
securities rated lower than B by S&P or Moody's.
This Prospectus/Proxy Statement gives the information about the
proposed reorganization and Class A Shares and Advisor Class Shares of
Strategic Income Fund that you should know before investing. You should
retain it for future reference. Additional information about the Strategic
Income Fund and the proposed reorganization can be found in the following
documents.
o The Prospectus of the Strategic Income Fund dated September 1, 1998, as
amended January 1, 1999 (the "Strategic Income Fund Prospectus") is
attached to and considered a part of this Prospectus/Proxy Statement.
o The Annual Report to Shareholders of Strategic Series dated April 30,
1998 contains financial and performance information for the Strategic
Income Fund and is attached to and considered a part of this
Prospectus/Proxy Statement.
o An Additional Information Statement Regarding Strategic Income Fund
Advisor Class contains more information about the fund's Advisor Class
shares and is attached to and considered a part of this
Prospectus/Proxy Statement.
o A Statement of Additional Information dated May 28, 1999 relating to
this Prospectus/Proxy Statement has been filed with the SEC and is
incorporated by reference into this Prospectus/Proxy Statement.
The Prospectus of Investment Grade Fund dated February 1, 1999 (the
"Investment Grade Fund Prospectus") and Managed Trust's Annual Report to
Shareholders dated September 30, 1998 are on file with the SEC (File nos.
33-9994 and 811-4894) and are incorporated by reference herein.
You may request a free copy of the SAI relating to this
Prospectus/Proxy Statement or any of the documents referred to above without
charge by calling 1-800/DIAL-BEN(R) or by writing to Strategic Series or
Managed Trust at 777 Mariners Island Boulevard, San Mateo, CA 94403-7777.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON
THE ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER U.S.
GOVERNMENT AGENCY. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL.
SUMMARY
This is only a summary of certain information contained in this
Prospectus/Proxy Statement. You should read the more complete information in
the rest of this Prospectus/Proxy Statement, including the Agreement and Plan
(attached as Exhibit A), additional information statement regarding Strategic
Income Fund Advisor Class (attached as Exhibit B), the Prospectus of
Strategic Income Fund Class A, B, & C (attached as Exhibit C), and the Annual
Report to Shareholders of Strategic Series (attached as Exhibit D).
ON WHAT PROPOSAL AM I BEING ASKED TO VOTE?
At a meeting held on March 25, 1999, the Board of Trustees of Managed
Trust approved an Agreement and Plan and recommends that shareholders of the
Investment Grade Fund vote to approve the Agreement and Plan. If shareholders
of the Investment Grade Fund vote to approve the Agreement and Plan, it will
result in the transfer of the net assets of Investment Grade Fund to
Strategic Income Fund, in exchange for an equal value of shares of Strategic
Income Fund. The shares of Strategic Income Fund will then be distributed to
Investment Grade Fund shareholders and Investment Grade Fund will be
liquidated. (The proposed transaction is referred to in this
Prospectus/Proxy Statement as the "Transaction.") As a result of the
Transaction, you will cease to be a shareholder of Investment Grade Fund and
will become a shareholder of Strategic Income Fund. This exchange will occur
on the closing date of the Transaction, which is the specific date on which
the Transaction takes place.
This means that your shares of Investment Grade Fund will be exchanged
for an equal value of shares of Strategic Income Fund. You will receive
Class A Shares of Strategic Income Fund equal in value to your investment in
Class A Shares of Investment Grade Fund or Advisor Class Shares of Strategic
Income Fund equal in value to your investment Advisor Class Shares of
Investment Grade Fund.
Investment Grade Fund is a series of Managed Trust, which is a mutual
fund in the Franklin Templeton Group of Funds. It is managed by Franklin
Advisory Services, LLC. ("Advisory Services"). It has an investment goal and
policies that are similar to those of Strategic Income Fund. For the reasons
set forth in the "Reasons for the Transaction" section, the Board of Trustees
of Managed Trust has determined that the Transaction is in the best interests
of the shareholders of Investment Grade Fund. The Boards of Trustees of
Managed Trust and Strategic Series also concluded that no dilution in value
would result to the shareholders of Investment Grade Fund or Strategic Income
Fund, respectively, as a result of the Transaction.
THE BOARD OF TRUSTEES RECOMMENDS THAT YOU
VOTE TO APPROVE THE AGREEMENT AND PLAN.
HOW WILL THE SHAREHOLDER VOTING BE HANDLED?
Shareholders who own shares of the Investment Grade Fund at the close
of business on May 28, 1999 will be entitled to vote at the Meeting, and will
be entitled to one vote for each full share and a fractional vote for each
fractional share that they hold. To approve the Transaction, a majority of
the outstanding shares of the Investment Grade Fund must be voted in favor of
the Agreement and Plan.
Please vote by proxy as soon as you receive this Prospectus/Proxy
Statement. You may place your vote by completing and signing the enclosed
proxy card. If you return your signed proxy card(s), your votes will be
officially cast at the Meeting by the persons appointed as proxies.
You can revoke your proxy or change your voting instructions at any
time until the vote is taken at the Meeting. For more details about
shareholder voting, see the "Voting Information" section of this
Prospectus/Proxy Statement.
WHAT ARE THE GENERAL TAX CONSEQUENCES OF THE TRANSACTION?
It is expected that shareholders of Investment Grade Fund will not
recognize any gain or loss for federal income tax purposes, as a result of
the exchange of their shares for shares of Strategic Income Fund. You
should, however, consult your tax advisor regarding the effect, if any, of
the Transaction in light of your individual circumstances. You also should
consult your tax advisor about state and local tax consequences. For more
information about the tax consequences of the Transaction, please see the
"Information About the Transaction - What are the tax consequences of the
Transaction?"
COMPARISONS OF SOME IMPORTANT FEATURES
HOW DO THE INVESTMENT GOALS AND POLICIES OF THE FUNDS COMPARE?
The investment goals of Strategic Income Fund and Investment Grade Fund
are similar. Strategic Income Fund's investment goals are to obtain a high
level of current income, with capital appreciation over the long term as a
secondary goal. Investment Grade Fund's investment goal is to seek a maximum
level of income consistent with prudent exposure to risk. The main
difference between the two investment goals is that Strategic Income Fund has
a secondary goal which permits the fund to invest in a broader range of
investments.
Investment Grade Fund is a diversified series of Managed Trust.
Investment Grade Fund will normally invest at least 75% of its total assets
in investment grade debt securities. At least 65% of its total assets will be
invested in intermediate-term debt securities with effective remaining
maturities between two and ten years at the time of purchase. Investment
grade securities are issues rated in one of the top four rating categories by
independent rating agencies such as S&P or Moody's or, if unrated, issues
determined by the fund's manager to be comparable. Although Investment Grade
Fund may invest up to 25% of its total assets in non-investment grade debt
securities, it will not invest in securities rated lower than B by S&P or
Moody's.
Investment Grade Fund also invests in "putable" bonds, when available
on an attractive basis. A putable bond is redeemable at face value (par) at
the holder's option on a specific date or dates before the final stated
maturity. Investment Grade Fund generally invests up to 25% of its assets in
debt securities issued by foreign corporations and governments, their
instrumentalities, and supranational entities using the criteria set forth
above.
The manager may take a temporary defensive position when it believes
the markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist. Under these
circumstances, Investment Grade Fund may be unable to pursue its investment
goal because it may not invest or may invest substantially less in investment
grade debt securities
Strategic Income Fund is a non-diversified series of Strategic Series.
Strategic Income Fund normally invests at least 65% of its assets in U.S. and
foreign debt securities, government securities, mortgage securities,
asset-backed securities, convertible securities and preferred stock.
Strategic Income Fund may invest up to 35% of its assets in common stocks.
Strategic Income Fund may invest in securities rated in any category,
including without limit in lower-rated debt securities, such as high yield
corporate securities. Strategic Income Fund generally invests in securities
that are rated at least Caa by Moody's or CCC by S&P, or unrated securities
that it determines to be of comparable quality. When the manager believes
that the securities trading markets or the economy is experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist,
it may invest Strategic Income Fund's portfolio in a temporary defensive
manner. Under such circumstances, Strategic Income Fund may invest up to
100% of its assets in short-term debt instruments, including U.S. government
securities, high-grade commercial paper, repurchase agreements and other
money market equivalents.
For more information about the investment goals and policies of the
funds, please see "Comparison of Investment Goals and Policies."
WHAT ARE THE RISKS OF AN INVESTMENT IN THE FUNDS?
As with most investments, investments in Strategic Income Fund and
Investment Grade Fund involve risks. There can be no guarantee against
losses resulting from an investment in either fund, nor can there be any
assurance that either fund will achieve its investment objective. The risks
associated with an investment in each fund are similar and include risks
associated with debt investments generally, such as interest rate, credit and
other risks applicable to fixed income securities, and Year 2000 risks.
There are, however, some distinctions in the investment programs of Strategic
Income Fund and Investment Grade Fund, such as the variety of permitted
investments and risks associated with lower rated, high yield investments.
For more information about the risks of the funds, see "What are the
risk factors associated with investments in the funds?" under the heading
"Comparison of Investment Goals and Policies."
WHO MANAGES THE FUNDS?
The management of the business and affairs of each fund is the
responsibility of each fund's respective Board of Trustees. Both funds are
open-end series funds of a registered management investment company, commonly
referred to as "mutual funds." Strategic Income Fund is a series fund of
Strategic Series. Strategic Series was organized as a Delaware business trust
on January 25, 1991, and is registered with the SEC. Investment Grade Fund
is a series fund of Managed Trust. Managed Trust was organized as a
Massachusetts business trust on July 15, 1986, and is also registered with
the SEC.
Franklin Advisers, Inc. ("Advisers") manages the assets of Strategic
Income Fund and makes the fund's investment decisions. Franklin Advisory
Services, LLC ("Advisory Services") manages the assets of Investment Grade
Fund and makes the fund's investment decisions. Advisers is a wholly-owned
subsidiary of Franklin Resources, Inc. ("Resources"); Advisory Services is an
indirect wholly-owned subsidiary of Resources.
Resources is a publicly owned company engaged in various aspects of the
financial services industry through its subsidiaries. Together, Advisers and
its affiliates serve as investment manager or administrator to 54 registered
investment companies, with approximately 163 U.S.-based funds or series.
They have over$216 billion in combined assets under management for
approximately 7 million U.S.-based mutual fund shareholder and other
accounts. The principal shareholders of Resources are Charles B. Johnson and
Rupert H. Johnson, Jr.
Under an agreement with Advisers, Templeton Investment Counsel, Inc.
("Investment Counsel") serves as sub-adviser to Strategic Income Fund. The
sub-adviser provides Advisers with investment management advice and
assistance. The sub-adviser's activities are subject to the Board of
Trustees' review and control, as well as the investment adviser's instruction
and supervision.
The team responsible for the day-to-day management of Strategic Income
Fund's portfolio is: Mr. Molumphy since inception, Mr. Dickson since 1995,
and Mr. Takaha since 1997.
CHRISTOPHER MOLUMPHY, SENIOR VICE PRESIDENT OF ADVISERS. Mr. Molumphy
is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of Chicago. He earned his Bachelor
of Arts degree in Economics from Stanford University. He has been with the
Franklin Templeton Group since 1988. Mr. Molumphy is a member of several
securities industry-related associations.
THOMAS J. DICKSON, PORTFOLIO MANAGER OF INVESTMENT COUNSEL. Mr.
Dickson is currently a portfolio manager for several Franklin Templeton
mutual funds. He holds a BS in managerial economics from the University of
California at Davis. Prior to joining the Templeton organization in 1994, Mr.
Dickson worked as a fixed-income analyst and trader for Franklin Advisers,
Inc. Mr. Dickson currently manages fixed income and currency trading for the
Templeton organization and has country responsibilities for Australia,
Canada, Japan and New Zealand.
ERIC G. TAKAHA, VICE PRESIDENT OF ADVISERS. Mr. Takaha is a Chartered
Financial Analyst and holds a Master of Business Administration degree from
Stanford University. He earned his Bachelor of Science degree in Business
Administration from the University of California at Berkeley. Mr. Takaha
joined the Franklin Templeton Group in July of 1989. He is a member of
several securities industry-related associations.
The team responsible for the day-to-day management of Investment Grade
Fund is: William J. Lippman, Philip H.W. Smith and Margaret McGee. Messrs.
Lippman and Smith have managed the Fund since its inception and Ms. McGee
since 1988.
Strategic Income Fund has a management agreement with Advisers under
which Advisers receives a management fee equal to an annual rate of 0.625 of
1% of the value of its average daily net assets up to and including $100
million; 0.50 of 1% of the value of its average daily net assets over $100
million and not over $250 million; and 0.45 of 1% of the value of its average
daily net assets in excess of $250 million. Under the sub-advisory agreement,
Advisers pays Investment Counsel a sub-advisory fee equal to an annual rate
of 0.3125 of 1% of Strategic Income Fund's average daily net assets up to an
including $100 million; 0.25 of 1% of the value of Strategic Income Fund's
average daily net asset over $100 million and not over $250 million; and
0.225 of 1% of the value of Strategic Income Fund's average daily net assets
in excess of $250 million. This fee is not a separate expense of Strategic
Income Fund but is paid by Advisers from the management fees it receives from
Strategic Income Fund.
Investment Grade Fund has a management agreement with Advisory Services
under which Advisory Services receives a management fee equal to an annual
rate of 0.50% of the value of assets up to and including $500 million, 0.45%
on the value of net assets over $500 million and not including $1 billion and
0.40% of the value of net assets in excess of $1 billion. Investment Grade
Fund's management agreement also provides for the payment of $40,000 per year
by the fund to the manager for the provision of certain accounting,
bookkeeping and recordkeeping functions for the fund.
WHAT ARE THE FEES AND EXPENSES OF EACH FUND AND WHAT MIGHT THEY BE AFTER THE
TRANSACTION?
FEE TABLE FOR
INVESTMENT GRADE FUND AND STRATEGIC INCOME FUND+
ACTUAL
PROJECTED
INVESTMENT STRATEGIC CLASS A
GRADE FUND INCOME FUND AFTER
CLASS A1 CLASS A1 TRANSACTION)
SHAREHOLDER TRANSACTION EXPENSES*
Maximum Sales Charge (as a
percentage of Offering Price)... 4.25% 4.25% 4.25%
Paid at time of purchase1...... 4.25% 4.25% 4.25%
Paid at redemption2............ None None None
Exchange Fee (per transaction)3. $5.00 $5.00 $5.00
ANNUAL FUND OPERATING EXPENSES
(as percentage of average net
assets)
Management and
Administration Fees4........... 0.50% 0.61% 0.55%
Rule 12b-1 Fees5............... 0.25% 0.25% 0.25%
Other Expenses................. 0.32% 0.18% 0.21%
----- ----- -----
Total Fund Operating Expenses.. 1.07% 1.04% 1.01%
===== ===== =====
ACTUAL ESTIMATED PROJECTED
STRATEGIC PROJECTED
INVESTMENT INCOME FUND ADVISOR CLASS
GRADE FUND ADVISOR AFTER
ADVISOR CLASS CLASS+ TRANSACTION
SHAREHOLDER TRANSACTION EXPENSES*
Maximum Sales Charge (as a
percentage of Offering Price)... None None None
Paid at time of purchase....... None None None
Paid at tine of redemption..... None None None
Exchange Fee (per transaction)3. None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets):
Management and
Administration Fees6....... 0.50% 0.61% 0.55%
Rule 12b-1 Fees............ None None None
Other Expenses............. 0.32% 0.18 0.21%
----- ---- -----
Total Fund Operating Expenses 0.82% 0.79 0.76%
===== ==== =====
+ INFORMATION PROVIDED IS FOR INVESTMENT GRADE FUND SHARES FOR THE FISCAL
YEAR ENDED SEPTEMBER 30, 1998. INFORMATION FOR STRATEGIC INCOME FUND- CLASS
A SHARES IS PROVIDED FOR THE FISCAL YEAR ENDED APRIL 30, 1998. INFORMATION
FOR STRATEGIC INCOME FUND -ADVISOR CLASS SHARES IS BASED ON CLASS A EXPENSES
FOR THE FISCAL YEAR ENDED APRIL 30, 1998.
* IF YOUR TRANSACTION IS PROCESSED THROUGH YOUR SECURITIES DEALER, YOU MAY BE
CHARGED A FEE BY YOUR SECURITIES DEALER FOR THIS SERVICE. THESE EXPENSES
ARE REFLECTED FOR CLASS A SHARES.
1 THERE IS NO FRONT-END SALES CHARGE IF YOU INVEST $1 MILLION OR MORE.
2 A CONTINGENT DEFERRED SALES CHARGE MAY APPLY TO ANY PURCHASE OF $1 MILLION
OR MORE IF YOU SELL THE SHARES WITHIN ONE YEAR. A CDSC MAY ALSO APPLY TO
PURCHASES BY CERTAIN RETIREMENT PLANS THAT QUALIFY TO BUY SHARES WITHOUT A
FRONT-END SALES CHARGE. THE CHARGE IS 1% OF THE VALUE OF THE SHARES SOLD
OR THE NET ASSET VALUE AT THE TIME OF PURCHASE, WHICHEVER IS LESS. SEE
"HOW DO I SELL SHARES? - CONTINGENT DEFERRED SALES CHARGE" IN THE FUNDS'
PROSPECTUS FOR DETAILS.
3 $5.00 FEE FOR BOTH FUNDS IS ONLY FOR MARKET TIMERS. WE PROCESS ALL OTHER
EXCHANGES WITHOUT A FEE.
4 THE ADVISER OF STRATEGIC INCOME FUND HAD AGREED IN ADVANCE TO WAIVE ITS
MANAGEMENT FEES AND TO ASSUME AS ITS OWN EXPENSE CERTAIN EXPENSES OTHERWISE
PAYABLE BY STRATEGIC INCOME FUND. WITH THIS REDUCTION, STRATEGIC INCOME
FUND - CLASS A PAID NO MANAGEMENT FEES AND TOTAL FUND OPERATING EXPENSES
WERE 0.24% FOR CLASS A SHARES. CLASS A TOTAL FUND OPERATING EXPENSES ARE
DIFFERENT THAN THE RATIO OF EXPENSES TO AVERAGE NET ASSETS SHOWN UNDER
"FINANCIAL HIGHLIGHTS" DUE TO A TIMING DIFFERENCE BETWEEN THE END OF THE
12B-1 PLAN YEAR AND THE FUND'S FISCAL YEAR END.
5 For both the Investment Grade and Strategic Income Fund these fees may not
EXCEED 0.25%. THE COMBINATION OF FRONT-END SALES CHARGES AND RULE 12B-1
FEES COULD CAUSE LONG-TERM SHAREHOLDERS TO PAY MORE THAN THE ECONOMIC
EQUIVALENT OF THE MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE
NASD'S RULES.
6 THE ADVISER OF STRATEGIC INCOME FUND HAD AGREED IN ADVANCE TO WAIVE ITS
MANAGEMENT FEES AND TO ASSUME AS ITS OWN EXPENSE CERTAIN EXPENSES OTHERWISE
PAYABLE BY STRATEGIC INCOME FUND. WITH THIS REDUCTION, STRATEGIC INCOME
FUND - ADVISOR CLASS WOULD HAVE PAID NO MANAGEMENT FEES AND TOTAL FUND
OPERATING EXPENSES WOULD HAVE BEEN 0% FOR ADVISOR CLASS SHARES.
EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $10,000 that you invest in a fund.
CLASS A 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
Investment Grade Fund $529* $751 $990 $1,675
Strategic Income Fund $527* $742 $975 $1,642
Projected Strategic Income Fund
(after transaction) $524 $733 $971 $1,582
ADVISOR CLASS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
Investment Grade Fund $ 84 $262 $455 $1,014
Strategic Income Fund $ 81 $252 $439 $ 978
Projected Strategic Income Fund
(after transaction) $ 78 $243 $422 $ 942
* Assumes a Contingent Deferred Sales Charge will not apply.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
Each fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.
WHERE CAN I FIND MORE FINANCIAL INFORMATION ABOUT THE FUNDS?
For the Strategic Income Fund, per share income information for the
past four fiscal years (and the most recent six month semiannual period) is
shown immediately below under the heading "Financial Highlights." Also, the
current Annual Report to Shareholders of Strategic Series, which is attached,
includes a discussion of Strategic Income Fund's performance during the
fiscal year ended April 30, 1998.
The Investment Grade Fund's Prospectus as well as the Annual and
SemiAnnual Reports for the Investment Grade Fund contain more financial
information. These documents are available free of charge upon request (see
"Information About Investment Grade Fund").
FINANCIAL HIGHLIGHTS
STRATEGIC INCOME FUND - - CLASS A+
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
OCTOBER
31, 1998 YEAR ENDED APRIL 30,
(UNAUDITED) 1998 1997 1996 19951
----------- ---- ---- ---- -----
Per Share Operating Performance
(for a share outstanding
throughout the period)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of $11.24 $10.86 $10.77 $10.18 $10.00
period
-----------------------------------------------
Income from investment operations:
Net investment income .43 .87 .93 .85 .70
Net realized and unrealized (.78) .50 .39 .67 .15
gains (losses)
-----------------------------------------------
Total from investment operations (.35) 1.37 1.32 1.52 .85
Less distributions from net (.42) (.90) (.96) (.82) (.67)
investment income
Less distributions from net - (.09) (.27) (.11) -
realized gains
---------------------------------------------
Net asset value, end of period $10.47 $11.24 $10.86 $10.77 $10.18
-----------------------------------------------
Total Return* (3.11%) 13.10% 12.64% 15.59% 8.94%
Ratios/Supplemental Data
Net assets, end of period (000's)
$218,226 $166,633 $34,864 $13,022 $6,736
Ratios to average net assets:
Expenses .50%** .25% .23% .25% .25%**
Expenses excluding waiver
and payments by
affiliate 1.04%** 1.05% 1.05% 1.08% 1.38%**
Net investment income 7.92%** 7.65% 8.60% 8.53% 7.93%**
Portfolio turnover rate 23.89% 47.47% 114.26% 73.95% 68.43%
</TABLE>
+ Advisor Class shares of the fund are a new class that have not been offered
in the past. Before January 1, 1999, Class A shares were designated Class
I.
1 For the period May 24, 1994 (effective date) to April 30, 1995.
* Total return does not reflect sales commissions or the Contingent
Deferred Sales Charge, and is not annualized.
**Annualized.
WHAT ARE OTHER KEY FEATURES OF THE FUNDS?
TRANSFER AGENCY AND CUSTODY SERVICES. Investor Services, a wholly owned
subsidiary of Resources, is the shareholder servicing agent and acts as the
transfer agent and dividend-paying agent for the funds.
Bank of New York acts as the custodian of the securities and other
assets of the funds. The main office of the Bank of New York is 90
Washington Street, New York, New York 10286.
DISTRIBUTION SERVICES. Pursuant to underwriting agreements with each
fund, Distributors acts as principal underwriter in a continuous public
offering of the funds' shares. Distributors pays the expenses of the
distribution of fund shares, including advertising expenses and the costs of
printing sales materials and prospectuses used to offer shares to the public.
RULE 12B-1 PLANS. Investment Grade Fund Class A and each class of
Strategic Income Fund has a separate distribution or "Rule 12b-1" plan under
which it shall pay or may reimburse Distributors or others for the expenses
of activities that are primarily intended to sell shares of the fund. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by Strategic Income Fund under its Class A plan may not exceed
0.25% per year of Class A's average daily net assets and payments by
Investment Grade Fund under its plan similarly may not exceed 0.25% per year
of Class A's average daily net assets. All distribution expenses over these
amounts will be borne by those who have incurred them. During the first year
after certain Class A purchases made without a sales charge, Securities
Dealers may not be eligible to receive the Rule 12b-1 fees associated with
the purchase.
In the case of Strategic Income Fund, which has four classes of shares,
the Rule 12b-1 fees charged to Class A are based only on the fees
attributable to that class. For more information, please see "The Fund's
Underwriter" in the SAI for Strategic Income Fund.
Advisor Class shares of the funds do not impose a Rule 12b-1 fee. For
detailed information regarding Strategic Income Fund Advisor Class, please
refer to Exhibit C.
PURCHASES AND REDEMPTIONS. The maximum front-end sales charge for
Class A shares of Strategic Income Fund and Investment Grade Fund is 4.25%
with reduced charges for purchases of $100,000 or more and no front-end sales
charges for purchases of $1 million or more. Each fund generally requires a
minimum initial investment of $1,000 and subsequent investments of at least
$50 for Class A shares.
You may sell (redeem) your shares at any time. Shares of each fund also
may be exchanged for shares of other Franklin Templeton Funds, subject to
certain limitations, as provided in the prospectuses of the respective
Franklin Templeton Fund. Because it is technically a sale and a purchase of
shares, an exchange is a taxable transaction.
Shares of each fund may be redeemed at their respective Net Asset Value
per share. However, redemptions of Class A shares of each fund which were
purchased in amounts of $1,000,000 or more generally are subject to a
Contingent Deferred Sales Charge. Strategic Income Fund shares acquired by
Investment Grade Fund shareholders as a result of this Transaction are
subject to a Contingent Deferred Sales Charge to the same extent that the
Investment Grade Fund shares were subject to a Contingent Deferred Sales
Charge. Advisor Class shares for each fund may be purchased by certain
qualified investors only, as described in a current prospectus of each fund.
Advisor Class shares do not have a front-end sales charge and are not subject
to a Contingent Deferred Sales Charge. For detailed information regarding
Strategic Income Fund Advisor Class, please refer to Exhibit C.
Additional information and specific instructions explaining how to buy,
sell, and exchange shares of Strategic Income Fund are outlined in the
current prospectus under the heading "About Your Account." Similar
information is outlined for Investment Grade Fund in the current prospectus
under the heading "Your Account." The accompanying prospectus of Strategic
Income Fund also lists phone numbers for you to call if you have any
questions about your account under the heading "What If I Have Questions
About My Account?" These phone numbers are the same for both funds.
DIVIDENDS AND DISTRIBUTIONS. Strategic Income Fund and Investment
Grade Fund intend to pay a dividend from their respective net investment
income at least monthly, on or about the 15th day of the month. The amount of
these dividends will vary depending on changes in the funds' net investment
income. Neither fund pays "interest" nor guarantees any amount of dividends
or return on an investment in its shares.
Capital gains, if any, may be distributed annually by each fund,
usually in December.
Each fund automatically reinvests distributions in additional shares of
that fund unless you select a different option. Specific instructions
explaining how to select a different option are outlined in the attached
prospectus of Strategic Income Fund under the heading "What Distributions
Might I Receive From the Fund?" and in the current prospectus of Investment
Grade Fund under the heading "Distribution Options."
Distributions from the funds, whether you receive them in cash or in
additional shares, are generally subject to income tax. Each fund will send
you a statement in January of the current year that reflects the amount of
ordinary dividends, capital gain distributions and non-taxable distributions
you received from the fund in the prior year.
Ordinary dividends and capital gain distributions that you receive from
the fund, and gains arising from redemptions or exchanges of your fund shares
will generally be subject to state and local income tax. The holding of fund
shares may also be subject to state and local intangibles taxes.
For more information about the tax implications of investments in the
funds, see the attached prospectus of Strategic Income Fund under the heading
"How Taxation Affects the Fund and Its Shareholders" or the current
prospectus of Investment Grade Fund under the heading "Tax Considerations."
REASONS FOR THE TRANSACTION
The Board of Trustees of Managed Trust, on behalf of Investment Grade
Fund, has recommended the Transaction for purposes of combining the
Investment Grade Fund with a larger fund. Because of the relatively low
demand for Investment Grade Fund, Advisory Services recommended to the Board
of Trustees of Managed Trust that the assets of Investment Grade Fund be
merged into a larger fund that has similar investment goals and policies. A
larger fund should be better able to diversify its investments and to obtain
certain savings in costs for Investment Grade Fund and its shareholders. The
Transaction was also recommended to combine similar funds within the Franklin
Templeton Group to eliminate duplication of expenses and internal competition.
The Agreement and Plan was presented to Managed Trust's Board of
Trustees at a meeting held on March 25, 1999. At the meeting, the Board
questioned management about the potential benefits and costs to shareholders
of the Investment Grade Fund. In deciding whether to recommend approval of
the Transaction to shareholders, the Board of Trustees considered, among
other things: the expense ratios of the Strategic Income Fund and Investment
Grade Fund; the comparative investment performance of the Strategic Income
Fund and Investment Grade Fund, the compatibility of the investment goals,
policies, restrictions and investments of the Investment Grade Fund with
those of Strategic Income Fund; the tax consequences of the Transaction; and
the significant experience of Advisers. During the course of its
deliberations, the Board of Trustees also considered that the expenses of the
Transaction will be shared one-quarter by Strategic Income Fund, one-quarter
by Investment Grade Fund, one-quarter by Advisers and one-quarter by Advisory
Services.
The Board of Trustees concluded that the Transaction is in the best
interests of the shareholders of Investment Grade Fund and that no dilution
of value would result to the shareholders of Investment Grade Fund from the
Transaction. It then decided to approve the Agreement and Plan and to
recommend that shareholders of Investment Grade Fund vote to approve the
Transaction. As required by law, the Board members approving the Agreement
and Plan included a majority of the trustees who are not interested persons
of Investment Grade Fund.
The Board of Trustees' conclusion was based on a number of factors,
including that the Transaction would permit shareholders to pursue their
investment goals in a larger fund. A larger fund should have an enhanced
ability to effect portfolio transactions on more favorable terms and should
have greater investment flexibility. A fund with higher aggregate net assets
may also be able to reduce or eliminate certain duplicative costs and
expenses. This may result in lower overall expense ratios through the
spreading of fixed costs of fund operations over a larger asset base.
However, variable expenses that are based on the value of assets or the
number of shareholder accounts, such as custody and transfer agent fees,
would be largely unaffected by the Transaction.
The Board of Trustees of Strategic Series, on behalf of Strategic
Income Fund, also determined that the Transaction was in the best interests
of Strategic Income Fund and its shareholders and that no dilution would
result to those shareholders.
FOR THE REASONS DISCUSSED ABOVE, THE BOARD OF TRUSTEES OF MANAGED
TRUST, ON BEHALF OF THE INVESTMENT GRADE FUND RECOMMENDS THAT YOU VOTE
FOR THE AGREEMENT AND PLAN.
If shareholders of the Investment Grade Fund do not approve the
Agreement and Plan, the Board of Trustees will consider other possible
courses of action for the Investment Grade Fund, including dissolution and
liquidation.
INFORMATION ABOUT THE TRANSACTION
This is only a summary of the Agreement and Plan. You should read the
actual Agreement and Plan. It is attached as Exhibit A.
HOW WILL THE TRANSACTION BE CARRIED OUT?
If the shareholders of Investment Grade Fund approve the Agreement and
Plan, the Transaction will take place after various conditions are satisfied
by Managed Trust on behalf of the Investment Grade Fund, and by Strategic
Series on behalf of the Strategic Income Fund, including the delivery of
certain documents. Managed Trust and Strategic Series will agree on a
specific date for the actual Transaction to take place. This is called the
closing date. If the shareholders of Investment Grade Fund do not approve
the Agreement and Plan, the Transaction will not take place.
If shareholders of the Investment Grade Fund do approve the Agreement
and Plan on July 26, 1999, shares of the Investment Grade Fund will no longer
be offered for sale. Until the close of business on July 26, 1999, you may
continue to add to your existing account subject to your applicable minimum
additional investment amount or buy additional shares through the
reinvestment of dividend and capital gain distributions.
If the shareholders approve the Agreement and Plan, Investment Grade
Fund will deliver to Strategic Income Fund substantially all of its assets on
the closing date. In exchange, Investment Grade Fund will receive Class A
and Advisor Class Shares of Strategic Income Fund which have a value equal to
the dollar value of the assets delivered to Strategic Income Fund. The stock
transfer books of Investment Grade Fund will be permanently closed as of 1:00
p.m. Pacific time on the closing date. Investment Grade Fund will only
accept requests for redemption received in proper form before 1:00 p.m. on
the closing date. Requests received after that time will be considered
requests to redeem shares of Strategic Income Fund.
To the extent permitted by law, the funds may agree to amend the
Agreement and Plan without shareholder approval. They may also agree to
terminate and abandon the Transaction at any time before or, to the extent
permitted by law, after the approval of shareholders of Investment Grade Fund.
WHO WILL PAY THE EXPENSES OF THE TRANSACTION?
The expenses resulting from the Transaction will be paid one-quarter by
Strategic Income Fund, one-quarter by Investment Grade Fund, one-quarter by
Advisers, the investment adviser for the Strategic Income Fund, and
one-quarter by Advisory Services, the investment adviser for the Investment
Grade Fund.
WHAT ARE THE TAX CONSEQUENCES OF THE TRANSACTION?
The Transaction is intended to qualify as a tax-free reorganization for
federal income tax purposes under Section 368(a)(1) of the Internal Revenue
Code of 1986, as amended. Based on certain assumptions and representations
received from Investment Grade Fund and Strategic Income Fund, it is the
opinion of Stradley, Ronon, Stevens & Young, LLP, counsel to the funds, that
shareholders of Investment Grade Fund will not recognize any gain or loss for
federal income tax purposes as a result of the exchange of their shares of
Investment Grade Fund for shares of Strategic Income Fund or that Strategic
Income Fund will recognize any gain or loss upon receipt of the assets of the
Investment Grade Fund.
You will continue to be responsible for tracking the purchase cost and
holding period of your shares and should consult your tax advisor regarding
the effect, if any, of the Transaction in light of your individual
circumstances. You should also consult your tax adviser as to state and
local tax consequences, if any, of the Transaction, because this discussion
only relates to the federal income tax consequences.
WHAT SHOULD I KNOW ABOUT THE SHARES OF STRATEGIC INCOME FUND?
Class A and Advisor Class Shares of Strategic Income Fund will be
distributed to shareholders of the Investment Grade Fund's Class A and
Advisor Class Shares, respectively. Each share will be fully paid and
nonassessable when issued with no personal liability attaching to the
ownership thereof, will have no preemptive or conversion rights and will be
transferable upon the books of Strategic Income Fund. The shares of
Strategic Income Fund will be recorded electronically in each shareholder's
account. Strategic Income Fund will then send a confirmation to each
shareholder. As described in its prospectus, Strategic Income Fund does not
issue share certificates unless requested. Former shareholders of Investment
Grade Fund whose shares are represented by outstanding share certificates
will not be allowed to redeem shares of Strategic Income Fund until the
certificates have been returned.
Both Strategic Income Fund and Investment Grade Fund have
non-cumulative voting rights. This gives the holders of more than 50% of the
shares voting the ability to elect 100% of the Trustees. In addition,
neither fund routinely holds annual shareholder meetings.
WHAT ARE THE CAPITALIZATIONS OF THE FUNDS AND WHAT MIGHT THE CAPITALIZATION
BE AFTER THE TRANSACTION?
The following table sets forth as of March 31, 1999 (i) the
capitalization of Investment Grade Fund;(ii) the capitalization of Strategic
Income Fund;and (iii) the projected capitalization of Strategic Income Fund
as adjusted to give effect to the proposed Transaction. The capitalization
of Strategic Income Fund is likely to be different when the Transaction is
consummated.
Strategic
Income
Fund -
Strategic Projected
Investment Income after
GRADE Fund Reorganization
FUND (UNAUDITED) (UNAUDITED)
----------- ------------- --------------
Net assets.................... $53,881,924 $276,722,529 $330,604,453
Total shares outstanding...... 5,955,003 26,061,770 31,135,397
Class A net assets............ $53,796,038 $240,608,631 $294,404,669
Class A net asset value per $9.05 $10.62 $10.62
share.........................
Class A shares outstanding.... 5,945,510 22,661,084 27,726,624
Advisor Class net assets...... $85,886 $0 $85,886
Advisor Class net asset value $9.05 n/a $10.62
per share.....................
Advisor Class shares outstanding 9,493 0 8,087
COMPARISON OF INVESTMENT GOALS AND POLICIES
Strategic Income Fund is a non-diversified series of Strategic Series.
Strategic Income Fund normally invests at least 65% of its assets in U.S. and
foreign debt securities, government securities, mortgage securities,
asset-backed securities, convertible securities and preferred stock.
Strategic Income Fund may invest up to 35% of its assets in common stocks.
Strategic Income Fund may invest in securities rated in any category,
including without limit in lower-rated debt securities, such as high yield
corporate securities. Strategic Income Fund generally invests in securities
that are rated at least Caa by Moody's or CCC by S&P, or unrated securities
that it determines to be of comparable quality. When the manager believes
that the securities trading markets or the economy is experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist,
it may invest Strategic Income Fund's portfolio in a temporary defensive
manner. Under such circumstances, Strategic Income Fund may invest up to
100% of its assets in short-term debt instruments, including U.S. government
securities, high-grade commercial paper, repurchase agreements and other
money market equivalents.
This section describes key investment policies of Strategic Income Fund
and Investment Grade Fund, and certain noteworthy differences between the
investment goals and policies of the two funds. For a complete description
of Strategic Income Fund's investment policies and risks, you should read the
Strategic Income Fund prospectus, which is attached to this Prospectus/Proxy
Statement as Exhibit C.
ARE THERE ANY SIGNIFICANT DIFFERENCES BETWEEN THE INVESTMENT GOALS AND
STRATEGIES OF THE FUNDS?
The investment goals of Strategic Income Fund and Investment Grade Fund
are similar. Strategic Income Fund's investment goals are to obtain a high
level of current income, with capital appreciation over the long term as a
secondary goal. Investment Grade Fund's investment goal is to seek a maximum
level of income consistent with prudent exposure to risk. The main
difference between the two investment goals is that Strategic Income Fund has
a secondary goal which permits the fund to invest in a broader range of
investments than Investment Grade Fund. The main difference in the investment
strategies of the funds relates to the difference in the credit quality of
their investments. Strategic Income Fund invests a substantial portion of
its assets in non-investment grade securities, which are subject to greater
credit and other risks than investment grade securities, while Investment
Grade Fund invests primarily in investment grade securities.
Policies or restrictions that are deemed fundamental may not be changed
without the approval of the lesser of (i) a majority of the outstanding
shares of the fund, or (ii) 67% or more of the shares represented at a
shareholders' meeting at which the holders of more than 50% of the
outstanding shares are represented ("Majority Vote").
Investment Grade Fund is a diversified series of Managed Trust.
Investment Grade Fund will normally invest at least 75% of its total assets
in investment grade debt securities. At least 65% of its total assets will be
invested in intermediate-term debt securities with effective remaining
maturities between two and ten years at the time of purchase. Investment
grade securities are issues rated in one of the top four rating categories by
independent rating agencies such as S&P or Moody's or, if unrated, issues
determined by the fund's manager to be comparable. Although Investment Grade
Fund may invest up to 25% of its total assets in non-investment grade debt
securities, it will not invest in securities rated lower than B by S&P or
Moody's.
Investment Grade Fund also invests in "putable" bonds, when available
on an attractive basis. A putable bond is redeemable at face value (par) at
the holder's option on a specific date or dates before the final stated
maturity. Investment Grade Fund generally invests up to 25% of its assets in
debt securities issued by foreign corporations and governments, their
instrumentalities, and supranational entities using the criteria set forth
above.
Investment Grade Fund's manager may take a temporary defensive position
when it believes the markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, Investment Grade Fund may be unable to pursue its
investment goal because it may not invest or may invest substantially less in
investment grade debt securities.
Strategic Income Fund normally invests at least 65% of its assets in
U.S. and foreign debt securities, government securities, mortgage securities,
asset-backed securities, convertible securities, and preferred stock.
Strategic Income Fund may invest up to 35% of its assets in common stock.
Strategic Income Fund may buy both rated and unrated securities. Independent
rating organizations rate debt and other fixed-income securities based upon
their assessment of the financial soundness of the issuer. Generally, a
lower rating indicates a higher risk. Non-investment grade securities are
those rated lower than BBB by S&P or Baa by Moody's. Strategic Income Fund
may invest in securities rated in any category, including without limit in
lower rated debt securities such as high yield corporate securities.
Strategic Income Fund generally invests in securities that are rated at least
Caa by Moody's or CCC by S&P, or unrated securities that it determines to be
of comparable quality.
For temporary defensive purposes, Strategic Income Fund may invest up
to 100% of its assets in short-term debt instruments, including U.S.
government securities, high-grade commercial paper, repurchase agreements and
other money market equivalents.
Strategic Income Fund is a non-diversified series of Strategic Series.
This means it may invest a greater portion of its assets in the securities of
one issuer than a diversified fund. Economic, business, political or other
changes can affect all securities of a similar type. Accordingly, Strategic
Income Fund as a non-diversified fund may be more sensitive to these changes,
which may result in greater fluctuation in the value of the fund's portfolio
and its net asset value.
HOW DO THE INVESTMENT POLICIES OF THE FUNDS COMPARE?
U.S. GOVERNMENT SECURITIES.
Both funds may invest in all types of U.S. government securities
including: (1) U.S. Treasury obligations with varying interest rates,
maturities and dates of issuance, such as U.S. Treasury bills (maturities of
one year or less), U.S. Treasury notes (original maturities of one to ten
years) and U.S. Treasury bonds (generally original maturities of greater then
ten years); and (2) obligations issued or guaranteed by U.S. government
agencies and instrumentalities such as the Government National Mortgage
Association ("GNMA"), the Export-Import Bank and the Farmers Home
Administration. Some of Investment Grade Fund's investments will include
obligations that are supported by the full faith and credit of the U.S.
government. In the case of U.S. government obligations that are not backed
by the full faith and credit of the U.S. government, Investment Grade Fund
must look principally to the agency issuing or guaranteeing the obligation
for ultimate repayment and may not be able to assert a claim against the
United States itself in the event the agency or instrumentality does not meet
its commitments.
MORTGAGE SECURITIES.
Strategic Income Fund may invest in mortgage securities. Mortgage
securities represent an ownership interest in mortgage loans made by banks
and other financial institutions to finance purchases of homes, commercial
buildings or other real estate. These mortgage loans may have either fixed
or adjustable interest rates. The individual mortgage loans are packaged or
"pooled" together for sale to investors. As the underlying mortgage loans
are paid off, investors receive principal and interest payments.
Strategic Income Fund may invest in mortgage-backed securities that are
issued by U.S. government agencies and private institutions. The primary
issuers or guarantors of mortgage securities are GNMA, the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"). The payment of interest and principal on securities issued by
U.S. government agencies generally is guaranteed either by the full faith and
credit of the U.S. government or by the credit of the agency. The guarantee
applies only to the timely repayment of principal and interest and not to the
market prices and yields of the securities or to the Net Asset Value or
performance of the fund, which will vary with changes in interest rates and
other market conditions. The U.S. government and its agencies do not
guarantee mortgage-backed securities issued by private institutions.
Most mortgage securities are pass-through securities, which means that
they provide investors with monthly payments of regular interest and
principal payments, as well as unscheduled prepayments, on the underlying
mortgages.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS").
Strategic Income Fund may invest in ARMS. ARMS are interests in pools
of mortgages with interest rates that reset periodically. Investing in ARMS
allows the fund to participate in increases in interest rates, resulting in
both higher current yields and lower price fluctuations. During periods of
declining interest rates, the interest rates on the underlying mortgages may
readjust downward, resulting in lower current yields.
STRIPPED MORTGAGE-BACKED SECURITIES.
Strategic Income Fund may invest in stripped mortgage-backed securities
to achieve a higher yield than may be available from fixed-rate mortgage
securities. The stripped mortgage securities in which Strategic Income Fund
may invest will not be limited to those issued or guaranteed by agencies or
instrumentalities of the U.S. government, although such securities are more
liquid than privately issued stripped mortgage securities. Stripped
mortgage-backed securities are usually structured with two classes, each
receiving different proportions of the interest and principal distributions
on a pool of mortgage assets. Typically, one class will receive some of the
interest and most of the principal from the mortgage assets, while the other
class will receive most of the interest and the remainder of the principal.
In the most extreme case, one class will receive all of the interest (the
interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). The yield to maturity of an IO
or PO class is extremely sensitive not only to changes in prevailing interest
rates but also to the rate of principal payments (including prepayments) on
the related underlying mortgage assets.
Stripped mortgage securities are purchased and sold by institutional
investors through several investment banking firms acting as brokers or
dealers. These securities were only recently developed and traditional
trading markets have not yet been established for all stripped mortgage
securities. Accordingly, some of these securities may be illiquid and such
investments will, together with any other illiquid investments, not exceed
10% of Strategic Income Fund's net assets.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"), REAL ESTATE MORTGAGE
INVESTMENT CONDUITS ("REMICS") AND MULTI-CLASS PASS-THROUGHS.
Strategic Income Fund may invest in certain debt obligations that are
collateralized by mortgage loans or mortgage pass-through securities. These
obligations may be issued or guaranteed by U.S. government agencies or issued
by certain financial institutions and other mortgage lenders. CMOS and REMICs
are debt instruments issued by special purpose entities and are secured by
pools of mortgages backed by residential and various types of commercial
properties. Multi-class pass-through securities are equity interest in a
trust composed of mortgage loans or other mortgage-backed securities.
Payments of principal and interest on the underlying collateral provides the
funds to pay debt service on the CMO or REMIC or make scheduled distributions
on the multi-class pass-through securities.
CMOs are fixed-income securities that are collateralized by pools of
mortgage loans created by commercial banks, savings and loan institutions,
private mortgage insurance companies, mortgage bankers and other issuers in
the U.S. The underlying mortgages are backed by residential and various
types of commercial properties. Timely payment of interest and principal
(but not the market value) of some of these pools is supported by various
forms of insurance or guarantees issued by private issuers, those who pool
the mortgage asset and, in some cases, by U.S. government agencies.
Prepayments of the mortgages underlying a CMO, which usually increase when
interest decrease, will generally reduce the life of the mortgage pool, thus
impacting the CMOs yield. Under these circumstances, the reinvestment of
prepayments will generally be at a rate lower than the rate applicable to the
original CMO.
Investment Grade Fund may invest in collateralized obligations (such as
collateralized automobile receivables and CMOs) either issued or guaranteed
by a U.S. government agency or instrumentality rated AAA by a nationally
recognized statistical rating agency. Strategic Income Fund may buy CMOs
that are rated in any category by the rating agencies without insurance or
guarantee if, in the opinion of Advisers, the sponsor is creditworthy.
ASSET-BACKED SECURITIES.
Strategic Income Fund may invest in asset-backed securities rated in
any category by the rating agencies. Asset-backed securities are securities
backed by home equity loan receivables; credit card receivables; automobile,
mobile home and recreational vehicle loans and leases; and other
receivables. Asset-backed securities are issued in either a pass-through
structure (similar to a mortgage pass-through structure) or in a pay-through
structure (similar to a CMO structure). In general, asset-backed securities
contain shorter maturities than bonds or mortgage loans and historically have
been less likely to experience substantial prepayment. Investment Grade Fund
does not invest in asset-backed securities.
FOREIGN SECURITIES.
Investment Grade Fund generally may invest up to 25% of its assets in
debt securities issued by foreign corporations and governments, their
instrumentalities, and supranational entities. Strategic Income Fund may buy
foreign securities that are traded in the U.S. or directly in foreign markets
and may buy securities denominated in foreign currencies. Strategic Income
Fund may also invest in securities issued or guaranteed by foreign
governments and their agencies.
AMERICAN DEPOSITARY RECEIPTS.
Strategic Income Fund may invest in American Depositary Receipts
("ADRs"). ADRs are certificates that give their holders the right to receive
securities of a foreign issuer deposited in a U.S. bank or trust company.
Strategic Income Fund may invest in sponsored and unsponsored ADRs. Prices
of ADRs are quoted in U.S. dollars. They are traded in the U.S. on exchanges
or over-the-counter and are sponsored and issued by domestic banks. ADRs do
not eliminate all of the risk inherent in investing in the securities of
foreign issuers. To the extent that Strategic Income Fund acquires ADRs
through banks that do not have a contractual relationship with the foreign
issuer of the security underlying the ADR to issue and service the ADRs,
there may be an increased possibility that the fund would not become aware of
and be able to respond to corporate actions such as stock splits or rights
offerings involving the foreign issuer in a timely manner. In addition, the
lack of information may result in inefficiencies in the valuation of such
instruments. To the extent Strategic Income Fund invests in ADRs rather than
directly in the stock of foreign issuers, it will avoid currency risks during
the settlement period for either purchases or sales.
CONVERTIBLE SECURITIES.
Strategic Income Fund may invest in convertible securities. A
convertible security is generally a debt obligation or preferred stock that
may be converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security
provides a fixed-income stream and the opportunity, through the conversion
feature, to participate in the capital appreciation resulting from a market
price advance in its underlying common stock. As with a straight
fixed-income security, a convertible security tends to increase in market
value when interest rates decline and decrease in value when interest rates
rise. Like a common stock, the value of a convertible security also tends to
increase as the market value of the underlying stock rises, and it tends to
decrease as the market value of the underlying stock declines. Because both
interest rate and market movements can influence its value, a convertible
security is not as sensitive to interest rates as a similar fixed-income
security, nor is it as sensitive to changes in share prices as its underlying
stock.
SECURITIES LENDING.
Strategic Income Fund and Investment Grade Fund may lend their
portfolio securities to qualified securities dealers or other institutional
investors. For Strategic Income Fund, such loans may not exceed 33 1/3% of
the value of its total assets measured at the time of the most recent loan.
Strategic Income Fund does not intend to exceed 10% of the value of its total
assets at the time of the most recent loan. Investment Grade Fund may lend
up to 30% of its total assets to qualified securities dealers or other
institutional investors. Investment Grade Fund currently intends to limit
its lending of securities to no more than 5% of its total assets. For each
loan the borrower must maintain collateral with Each fund's custodian with a
value at least equal to 100% of the current market value of the loaned
securities. Both funds will continue to receive any interest or dividends
paid on the loaned securities and will continue to have voting rights with
respect to the securities.
REPURCHASE AGREEMENTS.
Strategic Income Fund and Investment Grade Fund may engage in
repurchase agreement transactions. In a repurchase agreement the fund agrees
to buy a U.S. government security from a bank or broker-dealer at one price
and agrees to sell them back to the bank or broker-dealer at a higher price
on a specified date. The bank or broker-dealer must transfer to the fund's
custodian securities with an initial value of at least 102% of the dollar
amount invested by the fund in each repurchase agreement. If the bank or
broker-dealer does not repurchase the securities as agreed, the funds may
experience a loss or delay in the liquidation of the securities underlying
the repurchase agreement and may also incur liquidation costs.
OPTIONS.
Strategic Income Fund may buy and sell options on securities,
securities indices, and futures contracts. Strategic Income Fund may also
buy and sell options on foreign currencies to protect its portfolio against
exchange rate movements. Although Investment Grade Fund has no present
intention of doing so, the fund has the authority to enter into options on
securities and options on futures. An option on a security or futures
contract is a contract that allows the buyer of the option the right to buy
of sell a specified security or futures contract from or to the seller at a
specified price during the term of the option. An option on a securities
index is a contract that allows the buyer of the option the right to receive
from the seller cash, in an amount equal to the difference between the
index's closing price and the option's exercise price.
Strategic Income Fund may only sell covered options. This means that,
with respect to any call option written, the fund will own the underlying
securities or comparable securities satisfying the cover requirements of the
securities exchanges. Although Strategic Income Fund has no current intention
of writing covered puts, it reserves the right to do so.
Strategic Income Fund may only buy options on securities and securities
indices if the total premiums it paid for such options is 5% or less of its
total assets.
FUTURES CONTRACTS.
Strategic Income Fund may enter into contracts for the purchase or sale
for future delivery of securities or contracts based upon financial or
securities indices ("financial futures") and options on these contracts. A
financial futures contract is an agreement to buy or sell a specific security
or commodity at a specified future date and price. Strategic Income Fund may
also buy and sell foreign currency futures contracts and options on these
contracts. A futures contract on a foreign currency is an agreement to buy
or sell a specific amount of a currency for a set price on a future date.
The fund may not commit more than 5% of its total assets to initial margin
deposits on futures contracts. Additionally, 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 it intends to buy. Investment Grade Fund is not
permitted to engage in futures contracts.
FOREIGN CURRENCY EXCHANGE CONTRACTS.
Strategic Income Fund may enter into forward foreign currency
contracts, which are agreements to buy or sell a specific currency at a set
price on a future date.
INTEREST RATE AND CURRENCY SWAPS.
Strategic Income Fund may enter into interest rate and currency swaps.
Swap agreements typically are individually negotiated agreements that are
structured to enable the parties to shift ("swap") investment exposure from
one type of investment to another. Interest rate swaps involve an exchange
between the parties of their respective commitments to pay or receive
interest, such as an exchange of fixed rate payments for floating rate
payments. Currency swaps involve the exchange of the parties' respective
rights to make or receive payments in specified currencies.
Strategic Income Fund will only enter into interest rate swaps on a net
basis, which means that the two payment streams are netted out, with the fund
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rates swaps doe not involve the delivery of securities,
other underlying assets or principal. Accordingly, the risk of loss with
respect to interest rate swaps is limited to the net amount of interest
payments that the fund is contractually obligated to make. If the other
party to an interest rate swap defaults, the fund's risk of loss consists of
the net amount of interest payments that the fund is contractually entitled
to receive. In contrast, currency swaps usually involve the delivery of the
entire principal value of one designated currency. Therefore, the entire
principal value of a currency swap is subject to the risk that the other
party to the swap will default on its contractual delivery obligations.
INVERSE FLOATERS.
Strategic Income Fund may invest up to 5% of its total assets in
inverse floaters. Inverse floaters are instruments with floating or variable
interest rates that move in the opposite direction, usually at an accelerated
speed, to short-term interest rates or interest rate indices. Investment
Grade Fund is not permitted to invest in inverse floaters.
MORTGAGE DOLLAR ROLLS.
Unlike Investment Grade Fund, Strategic Income Fund may enter into
mortgage dollar rolls, in which it sells mortgage-backed securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar securities on a specified future date. During the
period between the sale and repurchase, the fund forgoes principal and
interest paid on the mortgage-backed securities. The fund is compensated by
the difference between the current sales price and lower price for the future
purchase (often referred to as the "drop"), as well as by the interest earned
on the cash proceeds of the initial sale. Strategic Income Fund intends to
enter into mortgage dollar rolls only with government securities dealers
recognized by the Federal Reserve Board or with member banks of the Federal
Reserve System.
U.S. TREASURY ROLLS.
Investment Grade Fund and Strategic Income Fund may enter into U.S.
Treasury rolls, in which the fund sells outstanding U.S. Treasury securities
and buys back "when-issued" U.S. Treasury securities of slightly longer
maturity for simultaneous settlement on the settlement date of the
"when-issued" U.S. Treasury security. During the period prior to the
settlement date, a fund continues to earn interest on the securities it is
selling. It does not earn interest on the securities that it is purchasing
until after the settlement date. A fund could suffer an opportunity loss if
the counterparty to the roll failed to perform its obligations on the
settlement date, and if market conditions changed adversely. Each fund
intends, however, to enter into U.S. Treasury rolls only with government
securities dealers recognized by the Federal Reserve Board or with member
banks of the Federal Reserve System.
LOAN PARTICIPATIONS AND DEFAULTED DEBT SECURITIES.
Strategic Income Fund may invest in loan participations and defaulted
debt securities. Loan participations are interests in floating or variable
rate senior loans to U.S. corporations, partnerships and other entities. The
fund will acquire loan participations selling at a discount to par value
because of the borrower's credit problems. To the extent the borrower's
credit problems are resolved, the loan participation may appreciate in
value. An investment in these securities, however, carries substantially the
same risks associated with an investment in defaulted debt securities and may
result in the loss of the fund's entire investment.
BORROWING.
Strategic Income Fund and Investment Grade Fund may borrow money for
temporary or emergency purposes. Strategic Income Fund may only borrow in an
amount not to exceed 5% of its total assets. Investment Grade Fund may
borrow from banks in amounts not to exceed 15% of its total assets, however,
additional investments may not be made while any amounts borrowed are in
excess of 5% of Investment Grade Fund's total assets.
ILLIQUID INVESTMENTS.
Strategic Income Fund and Investment Grade Fund may not invest more
than 10% of their respective net assets in illiquid securities. Illiquid
securities are generally securities that cannot be sold within seven days in
the normal course of business at approximately the amount at which the fund
has valued them
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS.
Strategic Income Fund may buy U.S. government obligations on a "when
issued" or "delayed delivery" basis. These transactions are arrangements
under which the fund buys securities that have been authorized but not yet
issued with payment for and delivery of the security scheduled for a future
time, generally in 30 to 60 days. Purchases of U.S. government securities on
a when issued or delayed delivery basis are subject to the risk that the
value or yields at delivery may be more or less than the purchase price of
the yields available when the transaction was entered into. Although
Strategic Income Fund will generally buy U.S. government securities on a when
issued basis with the intention of holding the securities, it may sell the
securities before the settlement date if it is deemed advisable. When
Strategic Income Fund is the buyer in this type of transaction, it will
maintain, in a segregated account with its custodian bank, cash or other
high-grade marketable securities having an aggregate value equal to the
amount of the fund's purchase commitments until payment is made.
To the extent Strategic Income 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 goals and policies, and
not for the purpose of investment leverage. In when-issued and delayed
delivery transactions, Strategic Income Fund relies on the seller to complete
the transaction. The seller's failure to do so may cause the fund to miss a
price or yield considered advantageous. In addition, securities purchased on
a when-issued or delayed delivery basis generally doe not earn interest until
their scheduled delivery date.
WHAT ARE THE FUNDAMENTAL INVESTMENT RESTRICTIONS OF THE FUNDS?
As described below, the funds have adopted similar restrictions as
fundamental policies, which may not be changed without the approval of a
Majority Vote.
Although the funds may not invest more than 25% of the value of each of
their total assets in one particular industry; except that, to the extent
this restriction is applicable, all or substantially all of the assets of
Strategic Income Fund may be invested in another registered investment
company having the same investment goal and policies of Strategic Income Fund.
Strategic Income Fund may not underwrite securities of other issuers,
except insofar as the fund may be technically deemed an underwriter in
connection with the disposition of securities in its portfolio; except that
all or substantially all of the assets of the fund may be invested in another
registered investment company having the same investment goals and policies
as the fund.
Both funds may not make loans to other persons except on a temporary
basis in connection with the delivery or receipt of portfolio securities
which have been bought or sold, or by the purchase of bonds, debentures or
similar obligations which have been 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.
Strategic Income Fund may not borrow money in excess of 5% of the value
of the fund's total assets, and then only as a temporary measure for
extraordinary or emergency purposes. Investment Grade Fund may not borrow
money, except temporarily for extraordinary or emergency purposes from a bank
and then not in excess of 15% of its total assets (at the lower of cost or
fair market value); or (b) mortgage, pledge or hypothecate any of its assets
except in connection with any such borrowings. Investment Grade Fund is also
subject to the restriction that no additional investments may be made while
any such borrowings are in excess of 5% of total assets.
Strategic Income Fund may not sell securities short or buy on margin
nor pledge or hypothecate any of the fund's assets; except that the fund may
enter into financial futures and options on financial futures as discussed.
Investment Grade Fund may not purchase securities on margin, sell
securities short, participate on a joint or joint and several basis in any
securities trading account, or underwrite securities.
Both funds may not buy or sell real estate (other than interests in
real estate investment trusts, in the case of Strategic Income Fund),
commodity contracts; except that the funds may invest in financial futures
and related options on futures with respect to securities, securities indices
and currencies. With respect to Investment Grade Fund, the restriction
concerning real estate does not preclude investments in marketable securities
of companies engaged in such activities.
Both funds may not 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 retain securities of any issuer if, to the
knowledge of Managed Trust or Strategic Series, if applicable, one or more of
its officers, trustees, or investment advisor own beneficially more than 1/2 of
1% of the securities of such issuer and all such officers and trustees
together own beneficially more than 5% of such securities.
Strategic Income Fund and Investment Grade Fund may not invest in the
securities of other investment companies, except as they may be acquired as
part of a merger, consolidation or acquisition of assets. In the case of
Strategic Income Fund, it may invest where there is no commission other than
the customary brokerage commission or sales charge, provided that all or
substantially all of the assets of the fund may be invested in another
registered investment company having the same investment goal and policies as
the fund. To the extent permitted by exemptions granted under the 1940 Act,
Strategic Income Fund may invest in shares of one or more money market funds
managed by Advisers or its affiliates.
Neither Strategic Income Fund nor Investment Grade Fund may invest in
securities for the purpose of exercising management or control of the issuer,
except that, with respect to Strategic Income Fund only, to the extent this
restriction is applicable, all or substantially all of the assets of
Strategic Income Fund may be invested in another registered investment
company having the same investment goal and policies as the fund.
Investment Grade Fund may not invest in the securities of any one
issuer (other than the U.S. government and its agencies and
instrumentalities), if immediately after and as a result of such investment
(a) more than 5% of the total assets of the fund would be invested in such
issuer; or (b) more than 10% of the outstanding voting securities of such
issuer would be owned by the fund.
Investment Grade Fund may not buy or sell interest in oil, gas or
mineral exploration or development programs, however, this does not preclude
investments in marketable securities of companies engages in such activities.
Investment Grade Fund may not invest more than 10% of its assets in
securities with legal or contractual restrictions on resale, securities which
are not readily marketable, and repurchase agreements with more than seven
days to maturity.
Investment Grade Fund has also established certain investment
restrictions that may be changed without shareholder approval. First,
Investment Grade Fund may not invest more than 5% of the value of its total
assets in securities of any issuer which has not had a record, together with
predecessors, of at least three years of continuous operation. Second,
Investment Grade Fund may not issue senior securities, as defined in the 1940
Act, except that this restriction shall not be deemed to prohibit it from
making any permitted borrowings, mortgages or pledges, or entering into
repurchase agreements.
WHAT ARE THE RISK FACTORS ASSOCIATED WITH INVESTMENTS IN THE FUNDS?
Like all investments, an investment in both of the funds involves
risk. There is no assurance that the funds will meet their investment
goals. The achievement of the funds' goals depends upon market conditions,
generally, and on the investment managers' analytical and portfolio
management skills. The risks of the funds are basically the same as those of
other investments in fixed income securities of similar quality.
CREDIT RISK.
The funds' investments in fixed-income securities involve credit risk.
Credit risk is the possibility that the issuer of a debt security or the
borrower on an underlying mortgage or debt obligation will be unable to make
interest payments or repay principal. Changes in an issuer's or borrower's
financial strength or in a security's credit rating may affect its value.
Even securities supported by credit enhancements have the credit risk of the
entity providing the credit support. Credit support provided by a foreign
entity may be less certain because of the possibility of adverse foreign
economic, political or legal developments that may affect the ability of that
foreign entity to meet its obligations. Changes in the credit quality of the
credit provider could affect the value of the security and a fund's share
price.
Securities rated below investment grade, sometimes called "junk bonds,"
generally have more credit risk than higher-rated securities. The risk of
default or price changes due to changes in the issuer's credit quality is
greater. Issuers of lower-rated securities are typically in weaker financial
health than issuers of higher-rated securities, and their ability to make
interest payments or repay principal is less certain. These issuers are also
more likely to encounter financial difficulties and to be materially affected
by these difficulties when they do encounter them. The market price of
lower-rated securities may fluctuate more than higher-rated securities and
may decline significantly in periods of economic difficulty. Lower-rated
securities may also be less liquid than higher-rated securities.
INTEREST RATE RISK.
When interest rates rise, fixed-income securities prices fall. The
opposite is also true: fixed-income securities prices rise when interest
rates fall. Generally, interest rates rise during times of inflation or a
growing economy, and will fall during an economic slowdown or recession.
Securities with longer maturities usually are more sensitive to interest rate
changes than securities with shorter maturities.
INCOME RISK.
Since a fund can only distribute what it earns, a fund's distributions
to its shareholders may decline when interest rates fall.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES RISK.
Both funds are subject to risks particular to mortgage-backed and/or
asset-backed securities. Mortgage-backed securities differ from conventional
debt securities because principal is paid back over the life of the security
rather than at maturity. As a result, the holder of the mortgage securities
receives unscheduled principal payments representing prepayments on the
underlying mortgages. When the holder reinvests the payments and any
unscheduled prepayments of principal it receives, it may receive a rate of
interest that is lower than the rate on the existing mortgage securities. A
reduction in the anticipated rate of principal prepayments, especially during
periods of rising interest rates, may increase the effective maturity of
mortgage-backed securities, making them more susceptible than other debt
securities to a decline in market value when interest rates rise. This could
increase the volatility of each fund's returns and share price depending on
their level of investment in these securities.
Some adjustable rate mortgage securities in which the funds invest in
are backed by mortgages having limits on the amount the loan rate can
fluctuate. During periods of extreme fluctuations in market interest rates,
the interest rates on the underlying mortgages will not adjust beyond the
limits, and the securities will behave more like long-term, fixed-rate debt
securities.
Stripped mortgage-backed securities have greater market volatility than
other types of mortgage securities in which Strategic Income Fund invests.
The value of these securities is extremely sensitive to changes in interest
rates and the rate of principal payments and prepayments on the underlying
mortgage assets. Investment Grade Fund is not subject to these risks because
it may not invest in stripped mortgage-backed securities.
Issuers of asset-backed securities may have limited ability to enforce
the security interest in the underlying assets, and credit enhancements
provided to support these securities, if any, may be inadequate to protect
investors in the event of a default. Like mortgage-backed securities,
asset-backed securities are also subject to prepayment risk. To varying
degrees, the funds are subject to these risks.
NON-DIVERSIFICATION RISK
A potential difference in risks associated with investment in the funds
arises because Strategic Income Fund, unlike Investment Grade Fund, is
non-diversified. To the extent that a fund's investments are not
diversified, the fund may be more susceptible than a fully diversified fund
to adverse economic, political, business or regulatory developments affecting
a single issuer or industry. This, in turn, can affect the fund's share
price.
FOREIGN SECURITIES RISK.
Securities of companies and governments located outside the U.S. may
involve risks that can increase the potential for losses in
the fund.
COUNTRY. General securities market movements in any country where the
fund has investments are likely to affect the value of the securities the
fund owns that trade in that country. These movements will affect the fund's
share price and fund performance.
The political, economic and social structures of some countries the
fund invests in may be less stable and more volatile than those in the U.S.
The risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY RISK.
To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of currency by a country's government or banking authority also
has a significant impact on the value of any securities denominated in that
currency.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced
a new single currency, the euro, which will replace the national currency for
the eleven participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on the value of fund shares and fund performance.
To the extent the fund holds non-U.S. dollar (euro or other) denominated
securities, it will still be exposed to currency risk due to fluctuations in
those currencies versus the U.S. dollar.
DERIVATIVE SECURITIES RISK.
Derivative investments are those whose values are dependent upon the
performance of one or more other securities or investments or indices; in
contrast to common stock, for example, whose value is dependent upon the
operations of the issuer. Option transactions, foreign currency exchange
transactions, futures contracts, and swap agreements are considered
derivative investments. To the extent the fund enters into these
transactions, their success will depend upon the manager's ability to predict
pertinent market movements. These securities are subject to the risk that the
other party to the transaction may fail to perform, resulting in losses to
the fund.
YEAR 2000 RISK.
When evaluating current and potential portfolio positions, Year 2000 is
one of the factors each fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S. may not be required to make the same level of disclosure about Year 2000
readiness as is required in the U.S. The manager, of course, cannot audit any
company and its major suppliers to verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by
Year 2000 problems, it is likely that the price of its security will also be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the price of the fund's
shares and the fund's performance.
Each fund's business operations depend on a worldwide network of
computer systems that contain date fields, including securities trading
systems, securities transfer agent operations and stock market links. Many of
the systems currently use a two digit date field to represent the date, and
unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a
non-standard leap year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely
affected if the computer systems used by the manager, its service providers
and other third parties it does business with are not Year 2000 ready. For
example, the fund's portfolio and operational areas could be impacted,
including securities trade processing, interest and dividend payments,
securities pricing, shareholder account services, reporting, custody
functions and others. The fund could experience difficulties in effecting
transactions if any of its foreign subcustodians, or if foreign
broker-dealers or foreign markets are not ready for Year 2000.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
VOTING INFORMATION
HOW MANY VOTES ARE NECESSARY TO APPROVE THE AGREEMENT AND PLAN?
The affirmative vote of the holders of a majority of the total number
of shares of Investment Grade Fund outstanding and entitled to vote is
necessary to approve the Agreement and Plan. Each shareholder will be
entitled to one vote for each full share, and a fractional vote for each
fractional share of Investment Grade Fund held at the close of business on
July 26, 1999 (the "Record Date"). If sufficient votes to approve the
Agreement and Plan are not received by the date of the Meeting, the Meeting
may be adjourned to permit further solicitations of proxies. The holders of
a majority of shares entitled to vote at the Meeting and present in person or
by proxy (whether or not sufficient to constitute a quorum) may adjourn the
Meeting.
Under relevant state law and Managed Trust's charter documents,
abstentions and broker non-votes will be included for purposes of determining
whether a quorum is present at the Meeting, but will be treated as votes not
cast and, therefore, will not be counted for purposes of determining whether
the matters to be voted upon at the Meeting have been approved, and will have
the same effect as a vote against the Agreement and Plan.
HOW DO I ENSURE MY VOTE IS ACCURATELY RECORDED?
You can vote in any one of three ways:
o By mail, with the enclosed proxy card.
o In person at the Meeting.
o Through Shareholder Communications Corporation ("SCC"), a proxy
solicitor, by calling toll-free 1-800/[ ].
A proxy card is, in essence, a ballot. IF YOU SIMPLY SIGN AND DATE THE PROXY
BUT GIVE NO VOTING INSTRUCTIONS, YOUR SHARES WILL BE VOTED IN FAVOR OF THE
AGREEMENT AND PLAN AND IN ACCORDANCE WITH THE VIEWS OF MANAGEMENT UPON ANY
UNEXPECTED MATTERS THAT COME BEFORE THE MEETING OR ADJOURNMENT OF THE
MEETING.
CAN I REVOKE MY PROXY?
You may revoke your proxy at any time before it is voted by sending a
written notice to Managed Trust expressly revoking your proxy, by signing and
forwarding to Managed Trust a later-dated proxy, or by attending the Meeting
and voting in person.
WHAT OTHER MATTERS WILL BE VOTED UPON AT THE MEETING?
The Board of Trustees of Managed Trust does not intend to bring any
matters before the Meeting other than those described in this proxy. It is
not aware of any other matters to be brought before the Meeting by others.
If any other matter legally comes before the Meeting, proxies for which
discretion has been granted will be voted in accordance with the views of
management.
WHO IS ENTITLED TO VOTE?
Shareholders of record of Investment Grade Fund on the Record Date will
be entitled to vote at the meeting. On the Record Date, there were
______________ outstanding shares of Investment Grade Fund.
WHAT OTHER SOLICITATIONS WILL BE MADE?
Investment Grade Fund will request broker-dealer firms, custodians,
nominees and fiduciaries to forward proxy material to the beneficial owners
of the shares of record. Investment Grade Fund may reimburse broker-dealer
firms, custodians, nominees and fiduciaries for their reasonable expenses
incurred in connection with such proxy solicitation. In addition to
solicitations by mail, officers and employees of Investment Grade Fund and
Strategic Income Fund, without extra pay, may conduct additional
solicitations by telephone, telegraph and personal interviews. Managed
Trust, on behalf of Investment Grade Fund, has engaged SCC to solicit proxies
from brokers, banks, other institutional holders and individual shareholders
for an approximate fee, including out-of-pocket expenses ranging between
$8,758 and $11,032. The costs of any such additional solicitation and of any
adjourned session will be shared one-quarter by Investment Grade Fund,
one-quarter by Strategic Income Fund, one-quarter by Advisers, and
one-quarter by Advisory Services.
ARE THERE DISSENTERS' RIGHTS?
Shareholders of Investment Grade Fund will not be entitled to any
"dissenters' rights" since the proposed Transaction involves two open-end
investment companies registered under the 1940 Act (commonly called mutual
funds). Although no dissenters' rights may be available, you have the right
to redeem your shares at Net Asset Value until the closing date. After the
closing date, you may redeem your Strategic Income Fund shares or exchange
them for shares of certain other funds in the Franklin Templeton Funds,
subject to the terms in the Strategic Income Fund Prospectus.
INFORMATION ABOUT STRATEGIC INCOME FUND
Information about Strategic Income Fund is included in the Strategic
Income Fund Prospectus, which is attached to and considered a part of this
Prospectus/Proxy Statement. Detailed information regarding the Advisor Class
for Strategic Income Fund is attached as Exhibit B to this Prospectus/Proxy
Statement. Additional information about Strategic Income Fund is included in
its SAI, which has been filed with the SEC and is incorporated by reference
into the SAI relating to this Prospectus/Proxy Statement.. You may request a
free copy of Strategic Income Fund's SAI and other information by calling
1-800/DIAL-BEN(R) or by writing to the Strategic Income Fund at 777 Mariners
Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. The Strategic
Income Fund's Annual Report to Shareholders for the fiscal year ended April
30, 1998, is attached to and considered a part of this Prospectus/Proxy
Statement.
The Strategic Income Fund files proxy materials, reports and other
information with the SEC in accordance with the informational requirements of
the Securities Exchange Act of 1934 and the 1940 Act. These materials can be
inspected and copied at: the SEC's Public Reference Room at 450 Fifth Street
NW, Washington, DC 20549, and at the Regional Offices of the SEC located in
New York City at 7 World Trade Center, Suite 1300, New York, NY 10048 and in
Chicago at 500 West Madison Street, Suite 1400, Chicago, IL 60661. Also,
copies of such material can be obtained from the SEC's Public Reference
Section, Washington, DC 20549-6009, at prescribed rates, or from the SEC's
internet address at http://www.sec.gov.
INFORMATION ABOUT INVESTMENT GRADE FUND
Information about Investment Grade Fund is included in the current
Investment Grade Fund Prospectus, as well as the Investment Grade Fund's SAI
dated February 1, 1999, as supplemented April 1, 1999, and in the Investment
Grade Fund's Annual Report to Shareholders dated September 30, 1999. These
documents have been filed with the SEC and the Investment Grade Fund
Prospectus and Annual Report are incorporated by reference herein. You may
request free copies of these documents and other information relating to
Investment Grade Fund by calling 1-800/DIAL BEN(R) or by writing to 777
Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. Reports and
other information filed by the Investment Grade Fund can be inspected and
copied at: the SEC's Public Reference Room at 450 Fifth Street NW,
Washington, DC 20549, and at the Regional Offices of the SEC located in New
York City at 7 World Trade Center, Suite 1300, New York, NY 10048 and in
Chicago at 500 West Madison Street, Suite 1400, Chicago, IL 60661. Also,
copies of such material can be obtained from the SEC's Public Reference
Section, Washington, DC 20549-6009, at prescribed rates, or from the SEC's
internet address at http://www.sec.gov.
PRINCIPAL HOLDERS OF SHARES
As of the Record Date, the officers and Trustees of the Managed Trust,
as a group, owned less than 1% of the outstanding voting shares of the
Investment Grade Fund. In addition, as of the Record Date, the officers and
Trustees of Strategic Series, as a group, owned less than 1% of the
outstanding voting shares of Investment Grade Fund. No person owned
(beneficially or of record) 5% or more of the outstanding shares of either
of Investment Grade Fund and Strategic Income Fund.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 ACT -- Investment Company Act of 1940, as amended
ADVISERS -- Franklin Advisers, Inc., 777 Mariners Island Boulevard, San Mateo,
CA 94404, the investment manager for Strategic Income Fund
ADVISORY SERVICES -- Franklin Advisory Services, LLC, the investment manager
for Investment Grade Income Fund
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply
if you sell your shares within 12 months of purchase.
DISTRIBUTORS -- Franklin/Templeton Distributors, Inc., 777 Mariners Island
Boulevard, San Mateo, CA 94404, the principal underwriter for the funds
FRANKLIN TEMPLETON FUNDS -- The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds,except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable
Products Series Fund
FRANKLIN TEMPLETON GROUP -- Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS -- All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
INVESTOR SERVICES -- Franklin/Templeton Investor Services, Inc., 777 Mariners
Island Boulevard, San Mateo, CA 94404, the shareholder servicing and transfer
agent to the funds
MARKET TIMERS -- Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange
shares based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S -- Moody's Investors Service, Inc.
NASD -- National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) -- The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
OFFERING PRICE -- The public offering price is based on the Net Asset Value
per share of the class and includes the front-end sales charge, if
applicable. The maximum front-end sales charge for Class A of each fund is
4.25%.
RESOURCES -- Franklin Resources, Inc.
SAI -- Statement of Additional Information
S&P -- Standard & Poor's Corporation
SEC -- U.S. Securities and Exchange Commission
SECURITIES DEALER -- A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the funds This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. -- United States
WE/OUR/US -- Unless the context indicates a different meaning, these terms
refer to the funds and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.
EXHIBITS TO COMBINED PROSPECTUS
AND PROXY STATEMENT
EXHIBIT
A Form of Agreement and Plan of Reorganization between Franklin
Managed Trust on behalf of Franklin Investment Grade Income Fund
and Franklin Strategic Series on behalf of Franklin Strategic
Income Fund.
B Additional information regarding the Franklin Strategic Income
Fund - Advisor Class
C Prospectus of Franklin Strategic Income Fund dated September 1,
1998, as amended January 1, 1999
D Annual Report to Shareholders of Franklin Strategic Series dated
April 30, 1998.
EXHIBIT A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement and Plan"), made
as of this ____ day of May, 1999, by and between FRANKLIN MANAGED TRUST
("Managed Trust"), a business trust created under the laws of the
Commonwealth of Massachusetts in 1986, with its principal place of business
at 777 Mariners Island Boulevard, San Mateo, California 94404, on behalf of
its series FRANKLIN INVESTMENT GRADE FUND (the "Investment Grade Fund"), and
FRANKLIN STRATEGIC SERIES ("Strategic Series"), a business trust created
under the laws of the State of Delaware in 1991, with its principal place of
business at 777 Mariners Island Boulevard, San Mateo, California 94404, on
behalf of its series FRANKLIN STRATEGIC INCOME FUND ("Strategic Income Fund").
PLAN OF REORGANIZATION
The reorganization (hereinafter referred to as the "Plan of
Reorganization") will consist of (i) the acquisition by Strategic Series on
behalf of Strategic Income Fund of substantially all of the property, assets
and goodwill of Investment Grade Fund in exchange solely for shares of
beneficial interest, par value of $0.01 per share, of Strategic Income Fund -
Class A ("Strategic Income Fund Class A Shares") and shares of beneficial
interest, par value of $.01 per share, of Strategic Income Fund - Advisor
Class ("Strategic Income Fund Advisor Class Shares"); (ii) the distribution
of (a) Strategic Income Fund Class A Shares to the shareholders of Class A
shares of Investment Grade Fund; and (b) Strategic Income Fund Advisor Class
Shares to the shareholders of Advisor Class shares of Investment Grade Fund
according to their respective interests; and (iii) the subsequent dissolution
of Investment Grade Fund as soon as practicable after the closing (as defined
in Section 3, hereinafter called the "Closing"), all upon and subject to the
terms and conditions of this Agreement and Plan hereinafter set forth.
AGREEMENT
In order to consummate the Plan of Reorganization and in consideration
of the promises and of the covenants and agreements hereinafter set forth,
and intending to be legally bound, the parties hereto covenant and agree as
follows:
1. SALE AND TRANSFER OF ASSETS, LIQUIDATION AND DISSOLUTION OF INVESTMENT
GRADE FUND.
(a) Subject to the terms and conditions of this Agreement and Plan,
and in reliance on the representations and warranties of the Strategic Series
herein contained, and in consideration of the delivery by Strategic Series of
the number of its Strategic Income Fund Class A Shares and Strategic Income
Fund Advisor Class Shares hereinafter provided, Managed Trust, agrees that it
will convey, transfer and deliver to Strategic Series at the Closing all of
Investment Grade Fund's then existing assets, free and clear of all liens,
encumbrances, and claims whatsoever (other than shareholders' rights of
redemption), except for cash, bank deposits, or cash equivalent securities in
an estimated amount necessary to: (i) pay the costs and expenses of carrying
out this Agreement and Plan (including, but not limited to, fees of counsel
and accountants, and expenses of its liquidation and dissolution contemplated
hereunder), which costs and expenses shall be established on Investment Grade
Fund's books as liability reserves; (ii) discharge its unpaid liabilities on
its books at the closing date (as defined in Section 3, hereinafter called
the "Closing Date"), including, but not limited to, its income dividends and
capital gains distributions, if any, payable for the period prior to, and
through, the Closing Date; and (iii) pay such contingent liabilities as the
Board of Trustees shall reasonably deem to exist against Investment Grade
Fund, if any, at the Closing Date, for which contingent and other appropriate
liabilities reserves shall be established on Investment Grade Fund's books
(hereinafter "Net Assets"). Investment Grade Fund shall also retain any and
all rights that it may have over and against any person that may have accrued
up to and including the close of business on the Closing Date.
(b) Subject to the terms and conditions of this Agreement and Plan,
and in reliance on the representations and warranties of Managed Trust herein
contained, and in consideration of such sale, conveyance, transfer, and
delivery, Strategic Series agrees at the Closing to deliver to Managed Trust:
(i) the number of Strategic Income Fund Class A Shares determined by dividing
the net asset value per share of Investment Grade Fund Class A Shares by the
net asset value per share of Strategic Income Fund Class A Shares, and
multiplying the result thereof by the number of outstanding Investment Grade
Fund Class A Shares, as of 1:00 p.m. Pacific time on the Closing Date; and
(ii) the number of Strategic Income Fund Advisor Class Shares determined by
dividing the net asset value per share of Investment Grade Fund Advisor Class
Shares by the net asset value per share of Strategic Income Fund Advisor
Class Shares, and multiplying the result thereof by the number of outstanding
Investment Grade Fund Advisor Class Shares as of 1:00 p.m. Pacific time on
the Closing Date. All such values shall be determined in the manner and as
of the time set forth in Section 2 hereof.
(c) Immediately following the Closing, Managed Trust shall dissolve
Investment Grade Fund and distribute pro rata to the shareholders of
Investment Grade Fund of record as of the close of business on the Closing
Date, the Strategic Income Fund Class A Shares and Strategic Income Fund
Advisor Class Shares to be delivered to Managed Trust pursuant to this
Section 1. Such liquidation and distribution shall be accomplished by the
establishment of accounts on the share records of Strategic Series relating
to Strategic Income Fund and noting in such accounts of the type and amounts
of such Strategic Income Fund shares which such former Investment Grade Fund
shareholders are due based on their respective holdings of Investment Grade
Fund as of the close of business on the Closing Date. Fractional Strategic
Income Fund shares shall be carried to the third decimal place. As promptly
as practicable after the Closing, each holder of any outstanding certificate
or certificates representing shares of beneficial interest of Investment
Grade Fund shall be entitled to surrender the same to the transfer agent for
Strategic Income Fund in exchange for the number of Strategic Income Fund
Class A Shares or Strategic Income Fund Advisor Class Shares into which the
shares of the Investment Grade Fund theretofore represented by the
certificate or certificates so surrendered shall have been converted.
Certificates for Strategic Income Fund Class A Shares or Strategic Income
Fund Advisor Class Shares shall not be issued, unless specifically requested
by the shareholders. Until so surrendered, each outstanding certificate
which, prior to the Closing, represented shares of beneficial interest of
Investment Grade Fund shall be deemed for all Strategic Income Fund's
purposes to evidence ownership of the number of Strategic Income Fund Class A
Shares or Strategic Income Fund Advisor Class Shares into which the shares of
beneficial interest of Investment Grade Fund (which prior to the Closing were
represented thereby) have been converted.
2. VALUATION.
(a) The value of Investment Grade Fund's Net Assets to be acquired by
Strategic Income Fund hereunder shall be computed as of 1:00 p.m. Pacific
time on the Closing Date using the valuation procedures set forth in
Investment Grade Fund's currently effective prospectus.
(b) The net asset value of a share of beneficial interest of
Strategic Income Fund Class A or Strategic Income Fund Advisor Class shall be
determined to the nearest full cent as of 1:00 p.m. Pacific time on the
Closing Date using the valuation procedures set forth in Strategic Income
Fund's currently effective prospectus.
(c) The net asset value of a share of beneficial interest of
Investment Grade Fund Class A Shares and Investment Grade Fund Advisor Class
Shares shall be determined to the fourth decimal place as of 1:00 p.m.
Pacific time on the Closing Date using the valuation procedures set forth in
Investment Grade Fund's currently effective prospectus.
3. CLOSING AND CLOSING DATE.
The Closing Date shall be August 12, 1999, or such later date as the
parties may mutually agree. The Closing shall take place at the principal
office of Strategic Series at 2:00 p.m. Pacific time on the Closing Date.
Managed Trust shall have provided for delivery as of the Closing those net
assets of Investment Grade Fund to be transferred to Strategic Income Fund's
Custodian, Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286. Also, Managed Trust shall deliver at the Closing a list of
names and addresses of the shareholders of record of Investment Grade Fund
Class A Shares and Investment Grade Fund Advisor Class Shares and the number
of shares of beneficial interest owned by each such shareholder, indicating
thereon which such shares are represented by outstanding certificates and
which by book-entry accounts, all as of 1:00 p.m. Pacific time on the Closing
Date, certified by its transfer agent or by its President to the best of its
or his knowledge and belief. Strategic Income Fund shall issue and deliver a
certificate or certificates evidencing the shares of beneficial interest of
Strategic Income Fund to be delivered to said transfer agent registered in
such manner as Managed Trust may request, or provide evidence satisfactory to
Managed Trust that such Strategic Income Fund Shares have been registered in
an account on the books of Strategic Income Fund in such manner as Managed
Trust may request.
4. REPRESENTATIONS AND WARRANTIES BY MANAGED TRUST ON BEHALF OF INVESTMENT
GRADE TRUST.
Managed Trust on behalf of Investment Grade Fund represents and
warrants to Strategic Series that:
(a) Managed Trust is a business trust created under the laws of the
Commonwealth of Massachusetts on July 15, 1986, and is validly existing and
in good standing under the laws of that commonwealth. Managed Trust is duly
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as an open-end, management investment company and all of Investment
Grade Fund's shares sold were sold pursuant to an effective registration
statement filed under the Securities Act of 1933, as amended (the "1933
Act"), except for those shares sold, if any, pursuant to the private offering
exemption for the purpose of raising the required initial capital.
(b) Managed Trust is authorized to issue an unlimited number of
shares of beneficial interest, par value of $0.01 per share, each outstanding
share of which is fully paid, non-assessable, fully transferable and has full
voting rights. The Trust currently issues shares of two (2) series, which
are offered in Classes A, B, C and/or Advisor Class, depending on the
particular series. Investment Grade Fund offers two classes of shares, Class
A and Advisor Class. Managed Trust is authorized to issue an unlimited
number of shares of beneficial interest of each series.
(c) The financial statements appearing in Managed Trust's Annual
Report to Shareholders for the fiscal year ended September 30, 1998, audited
by Tait, Weller & Baker, copies of which have been delivered to Strategic
Series, fairly present the financial position of Investment Grade Fund as of
such date and the results of its operations for the periods indicated in
conformity with generally accepted accounting principles applied on a
consistent basis.
(d) The books and records of Investment Grade Fund made available to
Strategic Income Fund and/or its counsel accurately summarize the accounting
data represented and contain no material omissions with respect to the
business and operations of Investment Grade Fund.
(e) Managed Trust has the necessary power and authority to conduct
Investment Grade Fund's business as such business is now being conducted.
(f) Managed Trust is not a party to or obligated under any provision
of the Trust's Amended and Restated Agreement and Declaration of Trust or
By-laws, or any contract or any other commitment or obligation, and is not
subject to any order or decree that would be violated by the Trust's
execution of or performance under this Agreement and Plan.
(g) Managed Trust has elected to treat Investment Grade Fund as a
regulated investment company ("RIC") for federal income tax purposes under
Part I of Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), and Investment Grade Fund has qualified as a RIC for each taxable
year since its inception and will qualify as a RIC as of the Closing Date.
5. REPRESENTATIONS AND WARRANTIES BY STRATEGIC SERIES ON BEHALF OF
STRATEGIC INCOME FUND.
Strategic Series on behalf of Strategic Income Fund represents and
warrants to the Managed Trust that:
(a) Strategic Series is a business trust created under the laws of
the State of Delaware on January 25, 1991, and is validly existing and in
good standing under the laws of that state. Strategic Series is duly
registered under the 1940 Act as an open-end, management investment company
and all of Strategic Income Fund's shares sold have been sold pursuant to an
effective registration statement filed under the 1933 Act, except for those
shares sold, if any, pursuant to the private offering exemption for the
purpose of raising the required initial capital.
(b) Strategic Series is authorized to issue an unlimited number of
shares of beneficial interest, par value of $0.01 per share, and each
outstanding share of which is fully paid, non-assessable, fully transferable,
and has full voting rights. Strategic Series currently issues shares of nine
(9) series, which are offered in Classes A, B, C and/or Advisor Class,
depending on the particular series. Strategic Income Fund offers four
classes of shares, Class A, B, C and Advisor Class. Strategic Income Fund
shares to be issued pursuant to this Agreement and Plan will be fully paid,
non-assessable, freely transferable and have full voting rights.
(c) At the Closing, Strategic Income Fund shares will be eligible for
offering to the public in those states of the United States and jurisdictions
in which the shares of Investment Grade Fund are presently eligible for
offering to the public, and there are a sufficient number of Strategic Income
Fund shares registered under the 1933 Act to permit the transfers
contemplated by this Agreement and Plan to be consummated.
(d) The financial statements appearing in Strategic Series' Annual
Report to Shareholders for the fiscal year ended April 30, 1998, audited by
Coopers & Lybrand L.L.P., and the Semi-Annual Report to Shareholders for the
periods ended October 31, 1998, copies of which have been delivered to
Managed Trust, fairly present the financial position of Strategic Income Fund
as of such date and the results of its operations for the periods indicated
in conformity with generally accepted accounting principles applied on a
consistent basis.
(e) Strategic Series has the necessary power and authority to conduct
Strategic Income Fund's business as such business is now being conducted.
(f) Strategic Series is not a party to or obligated under any
provision of the Trust's Agreement and Declaration of Trust or By-Laws, or
any contract or any other commitment or obligation, and is not subject to any
order or decree, that would be violated by the Trust's execution of or
performance under this Agreement and Plan.
(g) Strategic Series has elected to treat Strategic Income Fund as a
RIC for federal income tax purposes under Part I of Subchapter M of the Code,
and Strategic Income Fund has qualified as a RIC for each taxable year since
its inception, and will qualify as a RIC as of the Closing Date.
6. REPRESENTATIONS AND WARRANTIES BY MANAGED TRUST AND STRATEGIC SERIES ON
BEHALF OF THEIR RESPECTIVE FUNDS.
Managed Trust and Strategic Series each represents and warrants to the
other that:
(a) The statement of assets and liabilities to be furnished by each
of Managed Trust and Strategic Series as of 1:00 p.m. Pacific time on the
Closing Date for the purpose of determining the number of Strategic Income
Fund Class A Shares and Strategic Income Fund Advisor Class Shares to be
issued pursuant to Section 1 of this Agreement and Plan will accurately
reflect the net assets in the case of Investment Grade Fund and the net
assets in the case of Strategic Income Fund, and outstanding shares, as of
such date, in conformity with generally accepted accounting principles
applied on a consistent basis.
(b) At the Closing, Investment Grade Fund and Strategic Income Fund
each will have good and marketable title to all of the securities and other
assets shown on the statement of assets and liabilities referred to in "(a)"
above, free and clear of all liens or encumbrances of any nature whatsoever,
except such imperfections of title or encumbrances as do not materially
detract from the value or use of the assets subject thereto, or materially
affect title thereto.
(c) Except as disclosed in its currently effective prospectus, there
is no material suit, judicial action, or legal or administrative proceeding
pending or threatened against the funds.
(d) There are no known actual or proposed deficiency assessments with
respect to any taxes payable by the funds.
(e) The execution, delivery, and performance of this Agreement and
Plan have been duly authorized by all necessary action of each Trust's Board
of Trustees, and this Agreement and Plan constitutes a valid and binding
obligation enforceable in accordance with its terms.
(f) Each fund, respectively, anticipates that consummation of this
Agreement and Plan will not cause Investment Grade Fund, in the case of
Managed Trust, and Strategic Income Fund, in the case of Strategic Series, to
fail to conform to the requirements of Subchapter M of the Code for federal
income taxation as a RIC at the end of its fiscal year.
(g) Each fund has the necessary power and authority to conduct its
business as such business is now being conducted.
7. COVENANTS OF MANAGED TRUST AND STRATEGIC SERIES.
(a) Managed Trust, on behalf of Investment Grade Fund, and Strategic
Series on behalf of Strategic Income Fund, each covenant to operate their
respective businesses as presently conducted between the date hereof and the
Closing.
(b) Managed Trust undertakes that it will not acquire Investment
Grade Fund shares for the purpose of making distributions thereof to anyone
other than Investment Grade Fund shareholders.
(c) Managed Trust undertakes that, if this Agreement and Plan is
consummated, it will dissolve Investment Grade Fund and rescind the
establishment of Investment Grade Fund as a series of Managed Trust.
(d) Managed Trust and Investment Grade Fund each agree that, by the
Closing, all of their federal and other tax returns and reports required by
law to be filed on or before such date shall have been filed, and all federal
and other taxes shown as due on said returns shall have either been paid or
adequate liability reserves shall have been provided for the payment of such
taxes.
(e) At the Closing, Managed Trust will provide Strategic Series Fund
with a copy of the shareholder ledger accounts of Investment Grade Fund,
certified by its transfer agent or its President to the best of its or his
knowledge and belief, for all the shareholders of record of Investment Grade
Fund's shares as of 1:00 p.m. Pacific time on the Closing Date who are to
become shareholders of Strategic Income Fund as a result of the transfer of
assets that is the subject of this Agreement and Plan.
(f) Managed Trust agrees to mail to each shareholder of record
entitled to vote at the meeting of Investment Grade Fund's shareholders at
which action on this Agreement and Plan is to be considered, in sufficient
time to comply with requirements as to notice thereof, a Combined Prospectus
and Proxy Statement that complies in all material respects with the
applicable provisions of Section 14(a) of the Securities Exchange Act of
1934, as amended, and Section 20(a) of the 1940 Act, and the rules and
regulations, respectively, thereunder.
(g) Strategic Series will file with the U.S. Securities and Exchange
Commission a registration statement on Form N-14 under the 1933 Act relating
to the Strategic Income Fund Shares issuable hereunder ("Registration
Statement"), and will use its best efforts to provide that the Registration
Statement becomes effective as promptly as practicable. At the time it
becomes effective, the Registration Statement will (i) comply in all material
respects with the applicable provisions of the 1933 Act, and the rules and
regulations promulgated thereunder; and (ii) not contain any untrue statement
of material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading. At the
time the Registration Statement becomes effective, at the time of Investment
Grade Fund's shareholders' meeting, and at the Closing Date, the prospectus
and statement of additional information included in the Registration
Statement will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
8. CONDITIONS PRECEDENT TO BE FULFILLED BY MANAGED TRUST AND STRATEGIC
SERIES.
The obligations of Managed Trust and Strategic Series to effectuate
this Agreement and Plan and the Plan of Reorganization hereunder shall be
subject to the following respective conditions:
(a) That: (i) all the representations and warranties of the other
party contained herein shall be true and correct as of the Closing with the
same effect as though made as of and at such date; (ii) the other party shall
have performed all obligations required by this Agreement and Plan to be
performed by it prior to the Closing; and (iii) the other party shall have
delivered to such party a certificate signed by the President and by the
Secretary or equivalent officer to the foregoing effect.
(b) That each party shall have delivered to the other party a copy of
the resolutions approving this Agreement and Plan adopted by its Board of
Trustees, certified by its Secretary or equivalent officer.
(c) That the U.S. Securities and Exchange Commission shall not have
issued an unfavorable management report under Section 25(b) of the 1940 Act
or instituted or threatened to institute any proceeding seeking to enjoin
consummation of the Plan of Reorganization under Section 25(c) of the 1940
Act. And, further, no other legal, administrative or other proceeding shall
have been instituted or threatened that would materially affect the financial
condition of either party or would prohibit the transactions contemplated
hereby.
(d) That this Agreement and Plan and the Plan of Reorganization
contemplated hereby shall have been adopted and approved by the appropriate
action of the shareholders of Investment Grade Fund at an annual or special
meeting or any adjournment thereof.
(e) That each party shall have declared a distribution or
distributions prior to the Closing Date that, together with all previous
distributions, shall have the effect of distributing to its shareholders (i)
all of its net investment income and all of its net realized capital gains,
if any, for the period from the close of its last fiscal year to 1:00 p.m.
Pacific time on the Closing Date; and (ii) any undistributed net investment
income and net realized capital gains from any period to the extent not
otherwise declared for distribution.
(f) That there shall be delivered to Managed Trust and Strategic
Series an opinion from Messrs. Stradley, Ronon, Stevens & Young, LLP, counsel
to Managed Trust and Strategic Series, to the effect that, provided the
acquisition contemplated hereby is carried out in accordance with this
Agreement and Plan and based upon certificates of the officers of Managed
Trust and Strategic Series with regard to matters of fact:
(1) The acquisition by Strategic Income Fund of substantially
all the assets of Investment Grade Fund as provided for herein in exchange
for Strategic Income Fund shares will qualify as a reorganization within the
meaning of Section 368(a)(1)(C) of the Code, and Investment Grade Fund and
Strategic Income Fund will each be a party to the respective reorganization
within the meaning of Section 368(b) of the Code;
(2) No gain or loss will be recognized by Investment Grade Fund
upon the transfer of substantially all of its assets to Strategic Income Fund
in exchange solely for voting shares of Strategic Income Fund (Sections
361(a) and 357(a)). No opinion, however, will be expressed as to whether any
accrued market discount will be required to be recognized as ordinary income
pursuant to Section 1276 of the Code;
(3) No gain or loss will be recognized by Strategic Income Fund
upon the receipt of substantially all of the assets of Investment Grade Fund
in exchange solely for voting shares of Strategic Income Fund (Section
1032(a));
(4) The basis of the assets of Investment Grade Fund received
by Strategic Income Fund will be the same as the basis of such assets to
Investment Grade Fund immediately prior to the exchange (Section 362(b));
(5) The holding period of the assets of Strategic Income Fund
received by Investment Grade Fund will include the period during which such
assets were held by Investment Grade Fund (Section 1223(2));
(6) No gain or loss will be recognized to the shareholders of
Investment Grade Fund upon the exchange of their shares in Investment Grade
Fund for voting shares of Strategic Income Fund (Section 354(a));
(7) The basis of the Strategic Income Fund Shares received by
Investment Grade Fund's shareholders shall be the same as the basis of the
shares of Investment Grade Fund exchanged therefor (Section 358(a)(1));
(8) The holding period of Strategic Income Fund shares received
by Investment Grade Fund's shareholders (including fractional shares to which
they may be entitled) will include the holding period of Investment Grade
Fund's shares surrendered in exchange therefor, provided that Investment
Grade Fund's shares were held as a capital asset on the date of the exchange
(Section 1223(1)); and
(9) Strategic Income Fund will succeed to and take into account
as of the date of the proposed transfer (as defined in Section 1.381(b)-1(b)
of the Income Tax Regulations) the items of Investment Grade Fund described
in Section 381(c) of the Code (as defined in Section 1.381(b)-1(b) of the
Income Tax Regulations), subject to the conditions and limitations specified
in Sections 381(b) and (c), 382, 383 and 384 of the Code and the Income Tax
Regulations thereunder.
(g) That Strategic Series, on behalf of Strategic Income Fund, shall
have received an opinion in form and substance satisfactory to it from
Messrs. Stradley Ronon Stevens & Young, LLP, counsel to Managed Trust, to the
effect that, subject in all respects to the effects of bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance, and other laws
now or hereafter affecting generally the enforcement of creditors' rights:
(1) Investment Grade Fund is a diversified series of Managed
Trust which was organized as a business trust under the laws of the
Commonwealth of Massachusetts on July 15, 1986, and is validly existing and
in good standing under the laws of that commonwealth;
(2) Managed Trust is authorized to issue an unlimited number of
shares of beneficial interest of its series, Investment Grade Fund, par value
of $0.01 per share, which series is subdivided into two (2) classes of
shares, Class A and Advisor Class. Assuming that the initial shares of
beneficial interest were issued in accordance with the 1940 Act and the
Amended and Restated Agreement and Declaration of Trust and By-Laws of
Managed Trust, and that all other outstanding shares of Investment Grade Fund
were sold, issued and paid for in accordance with the terms of Investment
Grade Fund's prospectus in effect at the time of such sales, each such
outstanding share is fully paid, non-assessable, fully transferable and has
full voting rights;
(3) Managed Trust is an open-end investment company of the
management type registered as such under the 1940 Act;
(4) Except as disclosed in Investment Grade Fund's currently
effective prospectus, such counsel does not know of any material suit,
action, or legal or administrative proceeding pending or threatened against
Investment Grade Fund, the unfavorable outcome of which would materially and
adversely affect Managed Trust or Investment Grade Fund;
(5) All actions required to be taken by Managed Trust to
authorize this Agreement and Plan and to effect the Plan of Reorganization
contemplated hereby have been duly authorized by all necessary action on the
part of Managed Trust; and
(6) Neither the execution, delivery, nor performance of this
Agreement and Plan by Managed Trust violates any provision of its Amended and
Restated Agreement and Declaration of Trust or By-Laws, or the provisions of
any agreement or other instrument known to such counsel to which the Managed
Trust is a party or by which Managed Trust on behalf of Investment Grade Fund
is otherwise bound; this Agreement and Plan is the legal, valid and binding
obligation of Managed Trust and is enforceable against Managed Trust in
accordance with its terms.
In giving the opinions set forth above, counsel may state that it is
relying on certificates of the officers of Managed Trust and/or Investment
Grade Fund with regard to matters of fact, and certain certifications and
written statements of governmental officials with respect to the good
standing of Managed Trust and Investment Grade Fund.
(h) That Managed Trust on behalf of Investment Grade Fund shall have
received an opinion in form and substance satisfactory to it from Messrs.
Stradley, Ronon, Stevens & Young, LLP, counsel to Strategic Series, to the
effect that, subject in all respects to the effects of bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance and other laws
now or hereafter affecting generally the enforcement of creditors' rights:
(1) Strategic Income Fund is a non-diversified series of
Strategic Series, which was organized as a business trust under the laws of
the State of Delaware on January 25, 1991, and is validly existing and in
good standing under the laws of that state;
(2) Strategic Series is authorized to issue an unlimited number
of shares of beneficial interest of its series, Strategic Income Fund, par
value of $0.01 per share, which is further subdivided into four (4) classes
of shares, Classes A, B, C and Advisor Class. Assuming that the initial
shares of beneficial interest were issued in accordance with the 1940 Act,
and the Agreement and Declaration of Trust and By-Laws of Strategic Series,
and that all other outstanding shares of Strategic Income Fund were sold,
issued and paid for in accordance with the terms of Strategic Income Fund's
prospectus in effect at the time of such sales, each such outstanding share
of Strategic Income Fund is fully paid, non-assessable, freely transferable
and has full voting rights;
(3) Strategic Series is an open-end investment company of the
management type registered as such under the 1940 Act;
(4) Except as disclosed in Strategic Income Fund's currently
effective prospectus, such counsel does not know of any material suit,
action, or legal or administrative proceeding pending or threatened against
Strategic Income Fund, the unfavorable outcome of which would materially and
adversely affect Strategic Series and/or Strategic Income Fund;
(5) Strategic Income Fund shares to be issued pursuant to the
terms of this Agreement and Plan have been duly authorized and, when issued
and delivered as provided in this Agreement and Plan, will have been validly
issued and fully paid and will be non-assessable by Strategic Income Fund;
(6) All actions required to be taken by Strategic Series and/or
Strategic Income Fund to authorize this Agreement and Plan and to effect the
Plan of Reorganization contemplated hereby have been duly authorized by all
necessary corporate action on the part of Strategic Series and Strategic
Income Fund;
(7) Neither the execution, delivery, nor performance of this
Agreement and Plan by Strategic Series and/or Strategic Income Fund violates
any provision of its Agreement and Plan and Declaration of Trust, its
By-Laws, or the provisions of any agreement or other instrument known to such
counsel to which Strategic Series is a party or by which Strategic Series on
behalf of Strategic Income Fund is otherwise bound; this Agreement and Plan
is the legal, valid and binding obligation of Strategic Series and is
enforceable against Strategic Series in accordance with its terms; and
(8) The registration statement of which the prospectus, dated
September 1, 1998 as amended January 1, 1999, of Strategic Income Fund's
Class A, B and C is a part (the "Prospectus") is, at the time of the signing
of this Agreement and Plan, effective under the 1933 Act, and, to the best
knowledge of such counsel, no stop order suspending the effectiveness of such
registration statement has been issued, and no proceedings for such purpose
have been instituted or are pending before or threatened by the U.S.
Securities and Exchange Commission under the 1933 Act, and nothing has come
to such counsel's attention that causes it to believe that, at the time the
Prospectus became effective, or at the time of the signing of this Agreement
and Plan, or at the Closing, such Prospectus (except for the financial
statements and other financial and statistical data included therein, as to
which counsel need not express an opinion), contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; and such
counsel knows of no legal or government proceedings required to be described
in the Prospectus, or of any contract or document of a character required to
be described in the Prospectus that is not described as required.
In giving the opinions set forth above, this counsel may state that it
is relying on certificates of the officers of Strategic Series with regard to
matters of fact, and certain certifications and written statements of
governmental officials with respect to the good standing of Strategic Series.
(i) That Managed Trust on behalf of Investment Grade Fund shall have
received a certificate from the President and Secretary of Strategic Series
to the effect that the statements contained in Strategic Income Fund's
Prospectus, at the time the Prospectus became effective, at the date of the
signing of this Agreement and Plan, and at the Closing, did not contain any
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading.
(j) That Strategic Series' Registration Statement relating to the
Strategic Income Fund Class A Shares and Strategic Income Fund Advisor Class
Shares to be delivered to the Investment Grade Fund's shareholders in
accordance with this Agreement and Plan shall have become effective, and no
stop order suspending the effectiveness of the Registration Statement or any
amendment or supplement thereto, shall have been issued prior to the Closing
Date or shall be in effect at Closing, and no proceedings for the issuance of
such an order shall be pending or threatened on that date.
(k) That the Strategic Income Fund Class A Shares and Strategic
Income Fund Advisor Class Shares to be delivered hereunder shall be eligible
for sale by Strategic Income Fund with each state commission or agency with
which such eligibility is required in order to permit the shares lawfully to
be delivered to each Investment Grade Fund shareholder.
(l) That, at the Closing, Managed Trust, on behalf of Investment
Grade Fund, transfers to Strategic Income Fund aggregate Net Assets of
Investment Grade Fund comprising at least 90% in fair market value of the
total net assets and 70% of the fair market value of the total gross assets
recorded on the books of Investment Grade Fund on the Closing Date.
9. BROKERAGE FEES AND EXPENSES.
(a) Managed Trust and Investment Grade Fund each represents and
warrants to the other that there are no broker or finders' fees payable by it
in connection with the transactions provided for herein.
(b) The expenses of entering into and carrying out the provisions of
this Agreement and Plan shall be borne one-quarter by Investment Grade Fund,
one-quarter by Strategic Income Fund, one-quarter by Franklin Advisers, Inc.
and one-quarter by Franklin Advisory Services, LLC.
10. TERMINATION; POSTPONEMENT; WAIVER; ORDER.
(a) Anything contained in this Agreement and Plan to the contrary
notwithstanding, this Agreement and Plan may be terminated and the Plan of
Reorganization abandoned at any time (whether before or after approval
thereof by the shareholders of Investment Grade Fund) prior to the Closing or
the Closing may be postponed as follows:
(1) by mutual consent of Managed Trust and Strategic Series;
(2) by Managed Trust if any condition of its or Investment
Grade Fund's obligations set forth in Section 8 has not been fulfilled or
waived; or
(3) by Strategic Series if any condition of its or Strategic
Income Fund's obligations set forth in Section 8 has not been fulfilled or
waived.
An election by Managed Trust, on behalf of Investment Grade Fund, or
Strategic Series, on behalf of Strategic Income Fund to terminate this
Agreement and Plan and to abandon the Plan of Reorganization shall be
exercised by the respective Board of Trustees.
(b) If the transactions contemplated by this Agreement and Plan have
not been consummated by December 31, 1999, the Agreement and Plan shall
automatically terminate on that date, unless a later date is agreed to by
both Managed Trust and Strategic Series.
(c) In the event of termination of this Agreement and Plan pursuant
to the provisions hereof, the same shall become void and have no further
effect, and neither Managed Trust, Strategic Series, Investment Grade Fund
nor Strategic Income Fund, nor their trustees, officers, agents or
shareholders shall have any liability in respect of this Agreement and Plan.
(d) At any time prior to the Closing, any of the terms or conditions
of this Agreement and Plan may be waived by the party who is entitled to the
benefit thereof by action taken by that party's Board of Trustees, as
applicable, if, in the judgment of such Board, such action or waiver will not
have a material adverse affect on the benefits intended under this Agreement
and Plan to its shareholders, on behalf of whom such action is taken.
(e) The respective representations and warranties contained in
Sections 4 to 6 hereof shall expire with and be terminated by the Plan of
Reorganization, and neither Managed Trust, Strategic Series, Investment Grade
Fund nor Strategic Income Fund, nor any of their officers, trustees, agents
or shareholders shall have any liability with respect to such representations
or warranties after the Closing. This provision shall not protect any
officer, trustee or director, agent or shareholder of Managed Trust,
Strategic Series, Investment Grade Fund or Strategic Income Fund against any
liability to the entity for which that officer, trustee, agent or shareholder
so acts or to its shareholders to which that officer, trustee, agent or
shareholder would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties in the conduct
of such office.
(f) If any order or orders of the U.S. Securities and Exchange
Commission with respect to this Agreement and Plan shall be issued prior to
the Closing and shall impose any terms or conditions that are determined by
action of the Board of Trustees of Managed Trust or Strategic Series to be
acceptable, such terms and conditions shall be binding as if a part of this
Agreement and Plan without further vote or approval of the shareholders of
Investment Grade Fund, unless such terms and conditions shall result in a
change in the method of computing the number of Strategic Income Fund shares
to be issued to Investment Grade Fund in which event, unless such terms and
conditions shall have been included in the proxy solicitation material
furnished to the shareholders of Investment Grade Fund prior to the meeting
at which the transactions contemplated by this Agreement and Plan shall have
been approved, this Agreement and Plan shall not be consummated and shall
terminate unless Investment Grade Fund shall promptly call a special meeting
of shareholders at which such conditions so imposed shall be submitted for
approval.
11. ENTIRE AGREEMENT AND AMENDMENTS.
This Agreement and Plan embodies the entire Agreement between the
parties and there are no agreements, understandings, restrictions, or
warranties between the parties other than those set forth herein or herein
provided for. This Agreement and Plan may be amended only by mutual consent
of the parties in writing. Neither this Agreement and Plan nor any interest
herein may be assigned without the prior written consent of the other party.
12. COUNTERPARTS.
This Agreement and Plan may be executed in any number of counterparts,
each of which shall be deemed to be an original, but all such counterparts
together shall constitute but one instrument.
13. NOTICES.
Any notice, report, or demand required or permitted by any provision of
this Agreement and Plan shall be in writing and shall be deemed to have been
given if delivered or mailed, first class postage prepaid, addressed to
Franklin Managed Trust at 777 Mariners Island Boulevard, P. O. Box 7777, San
Mateo, CA 94403-7777, Attention: Secretary, or Franklin Strategic Series, at
777 Mariners Island Boulevard, P.O. Box 7777, San Mateo CA 94403-7777,
Attention: Secretary, as the case may be.
14. GOVERNING LAW.
This Agreement and Plan shall be governed by and carried out in
accordance with the laws of the Commonwealth Massachusetts.
IN WITNESS WHEREOF, Franklin Managed Trust on behalf of Franklin
Investment Grade Income Fund, and Franklin Strategic Series, on behalf of
Franklin Strategic Income Fund, have each caused this Agreement and Plan to
be executed on its behalf by its duly authorized officers, all as of the date
and year first-above written.
FRANKLIN MANAGED TRUST, ON BEHALF OF
FRANKLIN INVESTMENT GRADE INCOME FUND
Attest:
By:
Assistant Secretary Deborah R. Gatzek
Vice President and Secretary
FRANKLIN STRATEGIC SERIES, ON BEHALF OF
FRANKLIN STRATEGIC INCOME FUND
Attest:
By:
Assistant Secretary Deborah R. Gatzek
Vice President and Secretary
EXHIBIT B
ADDITIONAL INFORMATION REGARDING THE STRATEGIC INCOME FUND - ADVISOR CLASS
Unless otherwise defined in this Exhibit B, all capitalized terms have
the meanings set forth in the Prospectus/Proxy Statement.
The following table is designed to help you understand the costs of
investing in Strategic Income Fund - Advisor Class. This table is based on
Strategic Income Fund - Class A expenses for the fiscal year ended April 30,
1998.. It is anticipated that Strategic Income Fund - Advisor Class shares
will first be offered for sale on August 12, 1999.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge (load) imposed on purchases None
Exchange Fee1 $5.00
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management Fees 0.61%
Distribution and service (12b-1) fees None
Other expenses 0.18%
-----
Total annual operating expenses 0.79%
1 There is a $5 fee for each exchange by a market timer.
EXAMPLE
This example can help you compare the cost of investing in Strategic Income
with the cost of investing in other mutual funds.
Assume the annual return for the class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each 10,000 you invest in the fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
$81 $252 $439 $978
QUALIFIED INVESTORS FOR THE ADVISOR CLASS
The following investors may qualify to buy Advisor Class shares of Strategic
Income.
o Qualified registered investment advisors or certified financial planners
with clients invested in any series of Franklin Mutual Series Fund Inc. on
October 31, 1996, or who buy through a broker-dealer or service agent who
has an agreement with Franklin Templeton Distributors, Inc. (Distributors).
Minimum investments: $1,000 initial and $50 additional.
o Broker-dealers, registered investment advisors or certified financial
planners who have an agreement with Distributors for clients participating
in comprehensive fee programs. Minimum investments: $250,000 initial
($100,000 initial for an individual client) and $25 additional.
o Officers, trustees, directors and full-time employees of Franklin Templeton
and their immediate family members. Minimum investments: $100 initial and
$25 additional.
o Each series of the Franklin Templeton Fund Allocator Series. Minimum
investments: $1,000 initial and $1,000 additional.
o Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under section 501 of the Internal Revenue
Code. Minimum investments: $1 million initial investment in Advisor Class
or Class Z shares of any of the Franklin Templeton Funds and $25
additional.
o Accounts managed by the Franklin Templeton Group. Minimum investments: No
initial or additional minimums.
o The Franklin Templeton Profit Sharing 401(k) Plan. Minimum investments: No
initial or additional minimum.
o Defined contribution plans such as employer stock, bonus, pension or profit
sharing plans that meet the requirements for qualification under section
401 of the Internal Revenue Code, including salary reduction plans
qualified under section 401(k) of the Internal Revenue Code, and that are
sponsored by an employer (i) with at least 10,000 employees, or (ii) with
retirement plan assets of $100 million or more. Minimum investments: No
initial or additional minimum.
o Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a fiduciary,
agency, advisory, custodial or similar capacity and over which the trust
companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. Minimum investments: No initial or additional
minimums.
o Individual investors. Minimum investments: $5 million initial and $50
additional. You may combine all of your shares in the Franklin Templeton
Funds for purposes of determining whether you meet the $5 million minimum,
as long as $1 million is in Advisor Class or Class Z shares of any of the
Franklin Templeton Funds.
o Any other investor, including a private investment vehicle such as a family
trust or foundation, who is a member of an established group of 11 or more
investors. Minimum investments: $5 million initial and $50 additional. For
minimum investment purposes, the group's investments are added together.
The group may combine all of its shares in the Franklin Templeton Funds for
purposes of determining whether it meets the $5 million minimum, as long as
$1 million is in Advisor Class or Class Z shares of any of the Franklin
Templeton Funds. There are certain other requirements and the group must
have a purpose other than buying fund shares without a sales charge.
BUYING SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
THROUGH YOUR INVESTMENT Contact your investment Contact your investment
REPRESENTATVE representative representative
BY MAIL Make your check payable Make your check payable
to to Strategic Income Fund
Strategic Income Fund - - Advisor Class.
Advisor Class. Include your account
number on the check.
Mail the check and your Fill out the deposit
signed application to slip from your account
Investor Services. statement. If you do
not have a slip, include
a note with your name,
the fund name, and your
account number.
Mail the check and
deposit slip or note to
Investor Services
BY WIRE Call to receive a wire Call to recieve a wire
1-800/632-2301 control number and wire conrol number and wire
(or if busy, call instructions. instructions.
1-650/312-2000 collect)
Mail your signed To make a same day wire
application to Investor investment, please call
Services. Please include us by 1:00 p.m. Pacific
the wire control number time and make sure your
or your new account wire arrives by 3:00 p.m.
number on the application.
BY EXCHANGE To make a same day wire
investment, please call
us by 1:00 p.m. pacific
time and make sure your
wire arrives by 3:00 p.m.
Call Shareholder Services Call Shareholder
at the number below, or Services at the number
send signed written below, or send signed
instructions. written instructions.
- --------------------------------------------------------------------------------
INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN. This plan offers a convenient way for you to
invest in the fund by automatically transferring money from your checking or
savings account each month to buy shares.
DISTRIBUTION OPTIONS. You may reinvest distributions you receive from the
fund in an existing account in the same share class of the fund or in Advisor
Class or Class A shares of another Franklin Templeton Fund. To reinvest your
distributions in Advisor Class shares of another Franklin Templeton fund, you
must qualify to buy that fund's Advisor Class shares. For distributions
reinvested in Class A shares of another Franklin Templeton Fund, initial
sales charges and Contingent Deferred Sales Charges (CDSCs) will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
Your distributions will be reinvested in the same share class of the fund
unless otherwise indicated.
RETIREMENT PLANS. Franklin Templeton offers a variety of retirement plans
for individuals and businesses. These plans require a separate application
and their policies and procedures may be different that those described in
this prospectus.
TELEFACTS(R). Our TELEFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753.
TELEPHONE PRIVILEGES. You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. for
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXHCANGE PRIVILEGE. You can exchange shares between most Franklin Templeton
Funds with the same class. You also my exchange your Advisor Class shares
for Class A shares of a fund that does not currently offer an Advisor Class
(without any sales charge) or for Class Z shares of Franklin Mutual Series
Fund Inc.
If you do not qualify to buy Advisor Class shares of Templeton Developing
Markets Trust, Templeton Foreign Fund or Templeton Grown Fund, you also may
exchange your shares for Class A shares of those funds (without any sales
charge) or for shares of Templeton Institutional Funds, Inc.
If you exchange into Class A shares and you later decide you would like to
exchange into a fund that offers an Advisor Class or Class Z, you may
exchange your Class A shares for Advisor Class or Class Z shares if you
otherwise qualify to buy the fund's Advisor Class or Class Z shares.
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make.
SYSTEMATIC WITHDRAWAL PLAN. This plan allows you to automatically sell your
shares and receive regular payments from your account. Certain terms and
minimums apply.
SELLING SHARES IN WRITING. Requests to sell $100,000 or less can generally
be made over the phone or with a simple letter. Sometimes, however, to
protect you and the fund we will need written instructions signed by all
registered owners, with a signature guarantee for each owner, if:
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record,
or preauthorized bank or brokerage firm account
o you have changed the address on your account by phone within the last 15
days
We may also require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES. If you sell shares recently purchased
with a check or draft, we may delay sending you the proceeds until your check
or draft has cleared, which may take seven business days or more. A
certified or cashier's check may clear in less time.
REDEMPTION PROCEEDS. Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
RETIREMENT PLANS. Before you can sell shares in a Franklin Templeton Trust
Company retirement plan, you may need to complete additional forms. For
participants under the age 59 1/2 tax penalties may apply.
SELLING SHARES
TO SELL SOME OR ALL OF YOUR SHARES
Contact your investment representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------------------------------
BY MAIL Send written instructions and endorsed share
certificates (if you hold share certificates) to
Investor Services. Corporate, partnership or trust
accounts may need to send additional documents.
Specify the fund, the account number and the dollar
value or number of shares you wish to sell. Be sure to
include all necessary signatures and any additional
documents, as well as signature guarantees if required.
A check will be mailed to the name(s) and address on the
account, or otherwise according to your written
instructions.
- --------------------------------------------------------------------------------
BY PHONE As long as your transaction is for $100,000 or less, you
do not hold share certificates and you have not changed
your address by phone within the last 15 days, you can
sell your shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and address on the
account. Written instructions, with a signature
guarantee, are required to send the check to another
address or to make it payable to another person.
- --------------------------------------------------------------------------------
You can call or write to have redemption proceeds of
$1,000 or more wired to a bank or escrow account. See
the policies above for selling shares by mail or phone.
Before request a wire, please make sure we have your
bank account information on file. If we do not have
this information, you will need to send written
BY WIRE instructions with your bank's name and address, you bank
account number, the ABA routing number, and a signature
guarantee.
Requests received in proper form by 1:00 p.m. pacific
time will be wired the next business day.
- --------------------------------------------------------------------------------
Obtain a current prospectus for the fund you are
considering.
BY EXCHANGE Call Shareholder Services at the number below, or send
signed written instructions. See the policies above for
selling shares by mail or phone.
If you hold share certificates, you will need to return
them to the fund before your exchange can be processed.
- --------------------------------------------------------------------------------
ACCOUNT POLICIES
CALCULATING SHARES PRICE. The fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). The NAV for Advisor Class is
calculated by dividing its net assets by the number of its shares outstanding.
The fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If the fund holds securities listed primarily on a foreign exchange
that trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES. If the value of your account falls below $250
($50 for employee accounts) because you sell some of your shares, we will
mail you a notice asking you to bring the account back up to its applicable
minimum investment amount. If you choose not to do so within 30 days, we may
close your account and mail the proceeds to the address of record.
STATEMENTS AND REPORTS. You will receive confirmations and account
statements that show your account transactions. You will also receive the
fund's financial reports every six months. to reduce fund expenses, we try
to identify related shareholders in a household and send only one copy of the
financial reports.
If there is a dealer or other investment representative of record on your
account, he or she will also receive confirmations, account statements and
other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS. You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS. Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "JT Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS. The fund may restrict or refuse exchanges by market timers.
If accepted, each exchange by a market timer will be charged $5. You will be
considered a market timer if you have (i) requested an exchange out of the
fund within two weeks of an earlier exchange request, or (ii) exchanged
shares out of the fund more than twice in a calendar quarter, or (iii)
exchanged shares equal to at lest $5 million, or more than 1% of the fund's
net assets, or (iv) otherwise made large or frequent exchanges. Shares under
common ownership or control are combined for these limits.
ADDITIONAL POLICIES. Please note that the fund maintains additional policies
and reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the fund may change its investment minimums or waive or lower
its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
DEALER COMPENSATION. Qualifying dealers who sell Advisor Class shares may
receive up to 0.25% of the amount invested. This amount is paid by Franklin
Templeton Distributors, Inc. from its own resources.
EXHIBIT C
PROSPECTUS DATED SEPTEMBER 1, 1998 AS AMENDED JANUARY 1, 1999 OF THE FRANKLIN
STRATEGIC INCOME FUND
PROSPECTUS
FRANKLIN
STRATEGIC
INCOME FUND
INVESTMENT STRATEGY
INCOME
SEPTEMBER 1, 1998 AS AMENDED JANUARY 1, 1999
Franklin Strategic Series
Class A, B & C
Please read this prospectus before investing, and keep it for future
reference. It contains important information, including how the fund invests
and the services available to shareholders.
To learn more about the fund and its policies, you may request a copy of the
fund's Statement of Additional Information ("SAI"), dated September 1, 1998,
which we may amend from time to time. We have filed the SAI with the SEC and
have incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus,
contact your investment representative or call 1-800/DIAL BEN.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE FUND MAY INVEST UP TO 100% OF ITS NET ASSETS IN NON-INVESTMENT GRADE
BONDS OF BOTH U.S. AND FOREIGN ISSUERS. THESE ARE COMMONLY KNOWN AS "JUNK
BONDS." THEIR DEFAULT AND OTHER RISKS ARE GREATER THAN THOSE OF HIGHER RATED
SECURITIES. YOU SHOULD CAREFULLY CONSIDER THESE RISKS BEFORE INVESTING IN THE
FUND. PLEASE SEE "WHAT ARE THE RISKS OF INVESTING IN THE FUND?"
FRANKLIN STRATEGIC INCOME FUND
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO
SALES REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary .................................................. 2
Financial Highlights ............................................. 4
How Does the Fund Invest Its Assets? ............................. 5
What Are the Risks of Investing in the Fund? ..................... 10
Who Manages the Fund? ............................................ 14
How Taxation Affects the Fund and Its Shareholders ............... 18
How Is the Trust Organized? ...................................... 20
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ............................................. 21
May I Exchange Shares for Shares of Another Fund?................. 30
How Do I Sell Shares? ............................................ 33
What Distributions Might I Receive From the Fund? ................ 36
Transaction Procedures and Special Requirements .................. 37
Services to Help You Manage Your Account ......................... 41
What If I Have Questions About My Account? ....................... 44
GLOSSARY
Useful Terms and Definitions ..................................... 44
APPENDIX
Description of Ratings ........................................... 47
FRANKLIN
STRATEGIC
INCOME FUND
September 1, 1998
as amended January 1, 1999
When reading this prospectus, you will see certain terms beginning with
capital letters. This means the term is explained in our glossary section.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN(R)
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
fund. It is based on the fund's historical expenses for the fiscal year ended
April 30, 1998. The fund's actual expenses may vary.
Class A1 Class B2 Class C1
- ------------------------------------------------------------------------------
A SHAREHOLDER TRANSACTION EXPENSES3
Maximum Sales Charge
(as a percentage of Offering
Price) 4.25% 4.00% 1.99%
Paid at time of purchase4 4.25% None 1.00%
Paid at redemption5 None 4.00% 0.99%
Exchange Fee
(per transaction)6 None None None
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)
Management Fees7 0.61% 0.61% 0.61%
Rule 12b-1 Fees8 0.25% 0.65% 0.65%
Other Expenses 0.18% 0.18% 0.18%
------------------------------
Total Fund Operating
Expenses7 1.04% 1.44% 1.44%
==============================
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are
as described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $10,000 that you
invest in the fund.
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------
CLASS A $5279 $742 $975 $1,642
CLASS B
Assuming you sold
your shares at the
end of the period $547 $756 $987 $1,61810
Assuming you stayed in
the fund $147 $456 $787 $1,61810
CLASS C $34311 $551 $879 $1,807
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II. The fund began offering Class C shares on
May 1, 1998. Annual fund operating expenses for Class C are based on the
expenses for Class A for the fiscal year ended April 30, 1998. The Rule 12b-1
fees are based on the maximum fees allowed under Class C's Rule 12b-1 plan.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A for the fiscal year
ended April 30, 1998. The Rule 12b-1 fees are based on the maximum fees
allowed under Class B's Rule 12b-1 plan.
3. If your transaction is processed through your Securities Dealer, you may
be charged a fee by your Securities Dealer for this service.
4. There is no front-end sales charge if you invest $1 million or more in
Class A shares. Although Class B and C have
a lower front-end sales charge than Class A, their Rule 12b-1 fees are
higher. Over time you may pay more for Class B and C shares. Please see "How
Do I Buy Shares? - Choosing a Share Class."
5. A Contingent Deferred Sales Charge of 1% may apply to Class A purchases of
$1 million or more if you sell the shares within one year and to any Class C
purchase if you sell the shares within 18 months. A Contingent Deferred Sales
Charge of up to 4% may apply to any Class B purchase if you sell the shares
within six years. A Contingent Deferred Sales Charge may also apply to
purchases by certain retirement plans that qualify to buy Class A shares
without a front-end sales charge. The charge is based on the value of the
shares sold or the Net Asset Value at the time of purchase, whichever is
less. The number in the table shows the charge as a percentage of Offering
Price. While the percentage for Class C is different depending on whether the
charge is shown based on the Net Asset Value or the Offering Price, the
dollar amount you would pay is the same. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
6. There is a $5 fee for exchanges by Market Timers.
7. For the period shown, the manager had agreed in advance to waive its
management fees and to assume as its own expense certain expenses otherwise
payable by the fund. With this reduction, the fund paid no management fees
and total fund operating expenses were 0.24% for Class A and would have been
0.64% for Class B and C. Class A total fund operating expenses are different
than the ratio of expenses to average net assets shown under "Financial
Highlights" due to a timing difference between the end of the 12b-1 plan year
and the fund's fiscal year end.
8. The combination of front-end sales charges and Rule 12b-1 fees could cause
long-term shareholders to pay more than the economic equivalent of the
maximum front-end sales charge permitted under the rules of the National
Association of Securities Dealers, Inc.
9. Assumes a Contingent Deferred Sales Charge will not apply.
10. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
11. For the same Class C investment, you would pay projected expenses of $245
if you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same.
FINANCIAL HIGHLIGHTS
This table summarizes the fund's financial history. The information has been
audited by PricewaterhouseCoopers LLP, the fund's independent auditor. The
audit report covering the periods shown below appears in the Trust's Annual
Report to Shareholders for the fiscal year ended April 30, 1998. The Annual
Report to Shareholders also includes more information about the fund's
performance. For a free copy, please call Fund Information.
YEAR ENDED APRIL 30,
1998 1997 1996 19951
- -----------------------------------------------------------------------------
CLASS I SHARES:
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $10.86 $10.77 $10.18 $10.00
------------------------------------
Income from investment operations:
Net investment income .87 .93 .85 .70
Net realized and unrealized gains .50 .39 .67 .15
-------------------------------------
Total from investment operations 1.37 1.32 1.52 .85
-------------------------------------
Less distributions from:
Net investment income (.90) (.96) (.82) (.67)
Net realized gains (.09) (.27) (.11) -
-------------------------------------
Total distributions (.99) (1.23) (.93) (.67)
-------------------------------------
Net asset value, end of year $11.24 $10.86 $10.77 $10.18
=====================================
Total return* 13.10% 12.64% 15.59% 8.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $166,633 $34,864 $13,022 $6,736
Ratios to average net assets:
Expenses .25% .23% .25% .25%**
Expenses excluding waiver and payments
by affiliate 1.05% 1.05% 1.08% 1.38%**
Net investment income 7.65% 8.60% 8.53% 7.93%**
Portfolio turnover rate 47.47% 114.26% 73.95% 68.43%
*TOTAL RETURN DOES NOT REFLECT SALES COMMISSIONS OR THE CONTINGENT DEFERRED
SALES CHARGE, AND IS NOT ANNUALIZED.
**ANNUALIZED
1FOR THE PERIOD MAY 24, 1994 (EFFECTIVE DATE) TO APRIL 30, 1995.
HOW DOES THE FUND INVEST ITS ASSETS?
WHAT IS THE FUND'S GOAL?
The primary investment goal of the fund is to obtain a high level of current
income, with capital appreciation over the long term as a secondary goal.
These goals are fundamental, which means that they may not be changed without
shareholder approval.
WHAT IS THE FUND'S INVESTMENT STRATEGY?
The fund uses an active asset allocation strategy to try to achieve its goals
of income and capital appreciation. This means the fund allocates its assets
among securities in various market sectors based on Advisers' assessment of
changing economic, market, industry, and issuer conditions. Advisers uses a
"top-down" analysis of macroeconomic trends combined with a "bottom-up"
fundamental analysis of market sectors, industries, and issuers to try to
take advantage of varying sector reactions to economic events. Advisers will
evaluate country risk, business cycles, yield curves, and values between and
within markets.
WHAT KINDS OF SECURITIES DOES THE FUND BUY?
The fund normally invests at least 65% of its assets in U.S. and foreign debt
securities, government securities, mortgage securities, asset-backed
securities, convertible securities, and preferred stock. The fund may invest
up to 35% of its assets in common stocks.
In selecting these securities for the fund's portfolio, Advisers gives
particular consideration to current income, but may also consider the
potential for capital appreciation.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. These include common stock, preferred stock, and
convertible securities.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of
money to it, and generally, provide for the payment of interest. These
include bonds, notes, and commercial paper.
The fund may buy both rated and unrated securities. Independent rating
organizations rate debt and other fixed-income securities based upon their
assessment of the financial soundness of the issuer. Generally, a lower
rating indicates higher risk. Non-investment grade securities are those rated
lower than BBB by S&P or Baa by Moody's. The fund may invest in securities
rated in any category, including without limit in lower rated debt securities
such as high yield corporate securities. The fund generally invests in
securities that are rated at least Caa by Moody's or CCC by S&P, or unrated
securities that it determines to be of comparable quality. Please see the
appendix and the SAI for a description of these ratings.
MORTGAGE SECURITIES
GENERAL. Mortgage securities represent an ownership interest in mortgage
loans made by banks and other financial institutions to finance purchases of
homes, commercial buildings or other real estate. These mortgage loans may
have either fixed or adjustable interest rates. The individual mortgage loans
are packaged or "pooled" together for sale to investors. As the underlying
mortgage loans are paid off, investors receive principal and interest
payments.
The fund may invest in mortgage-backed securities that are issued by U.S.
government agencies and private institutions. The payment of interest and
principal on securities issued by U.S. government agencies generally is
guaranteed either by the full faith and credit of the U.S. government or by
the credit of the agency. The guarantee applies only to the timely repayment
of principal and interest and not to the market prices and yields of the
securities or to the Net Asset Value or performance of the fund, which will
vary with changes in interest rates and other market conditions. The U.S.
government and its agencies do not guarantee mortgage-backed securities
issued by private institutions.
Most mortgage securities are pass-through securities, which means that they
provide investors with monthly payments of regular interest and principal
payments, as well as unscheduled prepayments, on the underlying mortgages.
Collateralized mortgage obligations ("CMOs") and stripped mortgage securities
are not pass-through securities.
ADJUSTABLE RATE MORTGAGE SECURITIEs ("ARMS") are interests in pools of
mortgages with interest rates that reset periodically. Investing in ARMS
allows the fund to participate in increases in interest rates, resulting in
both higher current yields and lower price fluctuations. During periods of
declining interest rates, the interest rates on the underlying mortgages may
readjust downward, resulting in lower current yields.
STRIPPED MORTGAGE-BACKED SECURITIES typically have two classes, each
receiving different proportions of the interest and principal distributions
on a pool of mortgage loans.
CMOS are fixed-income securities that are collateralized by pools of mortgage
loans created by commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers, and other U.S. issuers. The
underlying mortgages are backed by residential and various types of
commercial properties. The timely payment
of interest and principal (but not the market value) of some of the
underlying pools is supported by insurance or guarantees issued by private
issuers and, in some cases, U.S. government agencies.
ASSET-BACKED SECURITIES are securities backed by home equity loan
receivables; credit card receivables; automobile, mobile home, and
recreational vehicle loans and leases; and other receivables. The fund may
invest in asset-backed securities rated in any category.
AMERICAN DEPOSITARY RECEIPTS. The fund may also invest in American Depositary
Receipts. American Depositary Receipts are certificates that give their holders
the right to receive securities of a foreign issuer deposited in a U.S. bank or
trust company.
GOVERNMENT SECURITIES. The fund may invest in Treasury bills and bonds, which
are direct obligations of the U.S. government, backed by the full faith and
credit of the U.S. Treasury, and in securities issued or guaranteed by
federal agencies. The fund may also invest in securities issued or guaranteed
by foreign governments and their agencies.
CONVERTIBLE SECURITIES generally are preferred stock or debt securities that
pay dividends or interest and may be converted into common stock.
SHORT-TERM INVESTMENTS. The fund may invest cash being held for liquidity
purposes in short-term debt instruments, including U.S. government
securities, high-grade commercial paper, repurchase agreements and other
money market equivalents.
GENERAL. The fund may buy foreign securities that are traded in the U.S. or
directly in foreign markets, and may buy securities denominated in foreign
currencies. The fund is non-diversified, which means that there is no
restriction under the federal securities laws on the percentage of its assets
that it may invest in the securities of any one issuer. The fund currently
intends not to invest more than 5% of its total assets in companies that have
a record of less than three years' continuous operation, including
predecessors. These investments, together with any illiquid securities, may
not exceed 10% of the fund's net assets. In addition, the fund may not engage
in joint or joint and several trading accounts in securities, except that an
order to purchase or sell may be combined with orders from other persons to
obtain lower brokerage commissions and except that the fund may engage in
joint repurchase agreement arrangements.
Please see the SAI for more details on the types of securities in which the
fund invests.
WHAT ARE SOME OF THE FUND'S OTHER INVESTMENT STRATEGIES AND PRACTICES?
TEMPORARY INVESTMENTS. When Advisers believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the fund's
portfolio in a temporary defensive manner. Under such circumstances, the fund
may invest up to 100% of its assets in short-term debt instruments, including
U.S. government securities, high-grade commercial paper, repurchase
agreements and other money market equivalents.
REPURCHASE AGREEMENTS. The fund will generally have a portion of its assets
in cash or cash equivalents for a variety of reasons including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, the fund may enter into repurchase agreements
with certain banks and broker-dealers. Under a repurchase agreement, the fund
agrees to buy a U.S. government security from one of these issuers and then
to sell the security back to the issuer after a short period of time
(generally, less than seven days) at a higher price. The bank or
broker-dealer must transfer to the fund's custodian securities with an
initial value of at least 102% of the dollar amount invested by the fund in
each repurchase agreement.
SECURITIES LENDING. To generate additional income, the fund may lend its
portfolio securities to qualified securities dealers or other institutional
investors. Such loans may not exceed 331/3% of the value of the fund's total
assets measured at the time of the most recent loan. The fund currently
intends not to exceed 10% of the value of its total assets at the time of the
most recent loan. For each loan the borrower must maintain collateral with
the fund's custodian with a value at least equal to 100% of the current
market value of the loaned securities.
OPTIONS. The fund may buy and sell options on securities, securities indices,
and futures contracts. The fund may buy and sell options on foreign
currencies to protect its portfolio against exchange rate movements. The fund
may only sell covered options. An option on a security or futures contract is
a contract that allows the buyer of the option the right to buy or sell a
specified security or futures contract from or to the seller at a specified
price during the term of the option. An option on a securities index is a
contract that allows the buyer of the option the right to receive from the
seller cash, in an amount equal to the difference between the index's closing
price and the option's exercise price. The fund may only buy options on
securities and securities indices if the total premiums it paid
for such options is 5% or less of its total assets.
FUTURES CONTRACTS. Changes in interest rates, securities prices or foreign
currency valuations may affect the value of the fund's investments. To reduce
its exposure to these factors, the fund may buy and sell financial futures
contracts and foreign currency futures contracts and options on these
contracts. A financial futures contract is an agreement to buy or sell a
specific security or commodity at a specified future date and price. A
futures contract on a foreign currency is an agreement to buy or sell a
specific amount of a currency for a set price on a future date. The fund may
not commit more than 5% of its total assets to initial margin deposits on
futures contracts.
FOREIGN CURRENCY EXCHANGE CONTRACTS. To help protect its portfolio against
adverse changes in foreign currency exchange rates or to earn additional
income, the fund may enter into forward foreign currency contracts, which are
agreements to buy or sell a specific currency at a set price on a future date.
INTEREST RATE AND CURRENCY SWAPS. Swap agreements typically are individually
negotiated agreements that are structured to enable the parties to shift
("swap") investment exposure from one type of investment to another. Interest
rate swaps involve an exchange between the parties of their respective
commitments to pay or receive interest, such as an exchange of fixed rate
payments for floating rate payments. Currency swaps involve the exchange of
the parties' respective rights to make or receive payments in specified
currencies.
INVERSE FLOATERS. The fund may invest up to 5% of its total assets in inverse
floaters. Inverse floaters are instruments with floating or variable interest
rates that move in the opposite direction, usually at an accelerated speed,
to short-term interest rates or interest rate indices.
MORTGAGE DOLLAR ROLLS. The fund may enter into mortgage dollar rolls, in
which the fund sells mortgage-backed securities for delivery in the current
month and simultaneously contracts to repurchase substantially similar
securities on a specified future date.
LOAN PARTICIPATIONS AND DEFAULTED DEBT SECURITIES. Loan participations are
interests in floating or variable rate senior loans to U.S. corporations,
partnerships and other entities. The fund will acquire loan participations
selling at a discount to par value because of the borrower's credit problems.
To the extent the borrower's credit problems are resolved, the loan
participation may appreciate in value. Advisers may acquire loan
participations for the fund when it believes, over the long term,
appreciation will occur. An investment in these securities, however, carries
substantially the same risks associated with an investment in defaulted debt
securities and may result in the loss of the fund's entire investment. The
fund will buy defaulted debt securities if, in the opinion of Advisers, it
appears the issuer may resume interest payments or other advantageous
developments appear likely in the near future.
BORROWING. The fund does not borrow money or mortgage or pledge any of its
assets, except that it may borrow for temporary or emergency purposes in an
amount not to exceed 5% of its total assets.
ILLIQUID INVESTMENTS. The fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the fund has valued them.
OTHER POLICIES AND RESTRICTIONS. The fund has a number of additional
investment policies and restrictions that govern its activities. Those that
are identified as "fundamental" may only be changed with shareholder
approval. The others may be changed by the Board alone. For a list of these
restrictions and more information about the fund's investment policies,
including those described above, please see "How Does the Fund Invest Its
Assets?" and "Investment Restrictions" in the SAI.
Generally, the policies and restrictions discussed in this prospectus and in
the SAI apply when the fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security
no longer meets one or more of the fund's policies or restrictions.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
There is no assurance that the fund will meet its investment goal.
The value of your shares will increase as the value of the securities owned
by the fund increases and will decrease as the value of the fund's
investments decrease. In this way, you participate in any change in the value
of the securities owned by the fund. In addition to the factors that affect
the value of any particular security that the fund owns, the value of fund
shares may also change with movements in the stock and bond markets as a
whole.
CREDIT RISK. The fund's investments in fixed-income securities involve credit
risk. Credit risk is the possibility that the issuer of a debt security or
the borrower on an underlying mortgage or debt obligation will be unable to
make interest payments or repay principal. Changes in an issuer's or
borrower's financial strength or in a security's credit rating may affect its
value. Even securities supported by credit enhancements have the credit risk
of the entity providing the credit support. Credit support provided by a
foreign entity may be less certain because of the possibility of adverse
foreign economic, political or legal developments that may affect the ability
of that foreign entity to meet its obligations. Changes in the credit quality
of the credit provider could affect the value of the security and the fund's
share price.
Securities rated below investment grade, sometimes called "junk bonds,"
generally have more credit risk than higher-rated securities. The risk of
default or price changes due to changes in the issuer's credit quality is
greater. Issuers of lower-rated securities are typically in weaker financial
health than issuers of higher-rated securities, and their ability to make
interest payments or repay principal is less certain. These issuers are also
more likely to encounter financial difficulties and to be materially affected
by these difficulties when they do encounter them. The market price of
lower-rated securities may fluctuate more than higher-rated securities and
may decline significantly in periods of economic difficulty. Lower-rated
securities may also be less liquid than higher-rated securities.
The fund may invest without limit in securities rated below investment grade.
The following table provides a summary of the credit quality of the fund's
portfolio. These figures are dollar-weighted averages of month-end assets
during the fiscal year ended April 30, 1998.
AVERAGE WEIGHTED
S&P RATING PERCENTAGE OF ASSETS
AAA 31.16%
AA 12.04%
A 1 1.35%
BBB 1.97%
BB 2 20.99%
B 3 30.21%
CCC 2.00%
D 0.06%
Not Rated 0.22%
1 0.46% are unrated by S&P but determined to be comparable to securities rated
A and have been included in the A rating category.
2 3.87% are unrated by S&P but determined to be comparable to securities rated
BB and have been included in the BB rating category.
3 3.78% are unrated by S&P but determined to be comparable to securities rated
B and have been included in the B rating category.
Because the fund may invest in lower-rated U.S. and foreign corporate bonds,
an investment in the fund is subject to a higher degree of risk than an
investment in a more conservative type of income fund.
Please see the SAI for more details on the risks associated with lower-rated
securities.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES RISK. The market value of
fixed-rate mortgage securities, like other fixed-income securities, will
generally vary inversely with changes in market interest rates, declining
when interest rates rise and rising when interest rates fall. Because
interest rates of ARMS move with market interest rates, their values tend to
fluctuate to a lesser degree and are unlikely to rise during periods of
declining interest rates to the same extent as fixed-rate instruments.
Mortgage-backed securities differ from conventional debt securities because
principal is paid back over the life of the security rather than at maturity.
The fund may receive unscheduled prepayments of principal due to voluntary
prepayments, refinancing, or foreclosure on the underlying mortgage loans.
During periods of declining interest rates, the volume of principal
prepayments generally increases as borrowers refinance their mortgages at
lower rates. The fund may be forced to reinvest returned principal at lower
interest rates, reducing the fund's income. For this reason, mortgage-backed
securities may be less effective than other types of securities as a means of
"locking in" long-term interest rates and may have less potential for capital
appreciation during periods of falling interest rates than other investments
with similar maturities.
A reduction in the anticipated rate of principal prepayments, especially
during periods of rising interest rates, may increase the effective maturity
of mortgage-backed securities, making them more susceptible than other debt
securities to a decline in market value when interest rates rise. This could
increase the volatility of the fund's returns and share price.
Some ARMS in which the fund may invest are backed by mortgages having limits
on the amount the loan rate can fluctuate. During periods of extreme
fluctuations in market interest rates, the interest rates on the underlying
mortgages will not adjust beyond the limits, and the securities will behave
more like long-term, fixed-rate debt securities. This could increase the
volatility of the fund's return and share price.
Stripped mortgage-backed securities have greater market volatility than other
types of mortgage securities in which the fund invests. The value of these
securities is extremely sensitive to changes in interest rates and the rate
of principal payments and prepayments on the underlying mortgage assets.
Issuers of asset-backed securities may have limited ability to enforce the
security interest in the underlying assets, and credit enhancements provided
to support these securities, if any, may be inadequate to protect investors
in the event of a default. Like mortgage-backed securities, asset-backed
securities are subject to prepayment risk.
NON-DIVERSIFICATION RISK. There is no limit on the amount of the fund's
assets that it can invest in any one issuer. Economic, business, political,
or other changes can affect securities of a similar type. As a
non-diversified fund, the fund may be more sensitive to these changes.
FOREIGN SECURITIES RISK. The value of foreign (and U.S.) securities is
affected by general economic conditions and individual company and industry
earnings prospects. While foreign securities may offer significant
opportunities for gain, they also involve additional risks that can increase
the potential for losses in the fund. These risks can be significantly
greater for investments in emerging markets. Investments in American
Depositary Receipts also involve some or all of the risks described below.
The political, economic, and social structures of some countries in which the
fund invests may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the imposition
of exchange controls, expropriation, restrictions on removal of currency or
other assets, nationalization of assets, and punitive taxes.
There may be less publicly available information about a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing, and financial reporting standards and may have less government
supervision of financial markets. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs
on foreign securities markets are generally higher than in the U.S. The
settlement practices may be cumbersome and result in delays that may affect
portfolio liquidity. The funds may have greater difficulty voting proxies,
exercising shareholder rights, pursuing legal remedies, and obtaining
judgments with respect to foreign investments in foreign courts than with
respect to domestic issuers in U.S. courts.
Some of the countries in which the fund may invest such as Russia and certain
Asian and Eastern European countries are considered developing or emerging
markets. Investments in these markets are subject to all of the risks of
foreign investing generally, and have additional and heightened risks due to
a lack of legal, business, and social frameworks
to support securities markets.
Emerging markets involve additional significant risks, including political
and social uncertainty (for example, regional conflicts and risk of war),
currency exchange rate volatility, pervasiveness of corruption and crime,
delays in settling portfolio transactions, and risk of loss arising out of
the system of share registration and custody. For more information on the
risks associated with emerging markets securities, please see the SAI.
On July 1, 1997, Hong Kong reverted to the sovereignty of China. As with any
major political transfer of power, this could result in political, social,
economic, market, or other developments in Hong Kong, China, or other
countries that could affect the value of the fund's investments.
DERIVATIVE SECURITIES RISK. Derivative investments are those whose values are
dependent upon the performance of one or more other securities or investments
or indices; in contrast to common stock, for example, whose value is
dependent upon the operations of the issuer. Option transactions, foreign
currency exchange transactions, futures contracts, and swap agreements are
considered derivative investments. To the extent the fund enters into these
transactions, their success will depend upon Advisers' ability to predict
pertinent market movements. These securities are subject to the risk that the
other party to the transaction may fail to perform, resulting in losses to
the fund.
INTEREST RATE, CURRENCY AND MARKET RISK. To the extent the fund invests in
debt securities, changes in interest rates in any country where the fund is
invested will affect the value of the fund's portfolio and its share price.
Rising interest rates, which often occur during times of inflation or a
growing economy, are likely to have a negative effect on the value of the
fund's shares. To the extent the fund invests in common stocks, a general
market decline in any country where the fund is invested may cause the value
of what the fund owns, and thus the fund's share price, to decline. Changes
in currency valuations may also affect the price of fund shares. The value of
stock markets, currency valuations and interest rates throughout the world
have increased and decreased in the past. These changes are unpredictable.
EURO RISK. On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on the value of fund shares. To the extent the
fund holds non-U.S. dollar (euro or other) denominated securities, it will
still be exposed to currency risk due to fluctuations in those currencies
versus the U.S. dollar.
YEAR 2000. When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to
verify their Year 2000 readiness.
If a company in which the fund is invested in is adversely affected by Year
2000 problems, it is likely that the price of its security will also be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the price of the fund's
shares. Please see "Year 2000 Problem" under "Who Manages the Fund?" for more
information.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the fund and elects its
officers. The officers are responsible for the fund's day-to-day operations.
The Board also monitors the fund to ensure no material conflicts exist among
the fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Franklin Advisers, Inc. manages the fund's assets and
makes its investment decisions. The manager also performs similar services
for other funds. It is wholly owned by Resources, a publicly owned company
engaged in the financial services industry through its subsidiaries. Charles
B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources. Together, the manager and its affiliates manage over $208 billion
in assets. Please see "Investment Management and Other Services" and
"Miscellaneous Information" in the SAI for information on securities
transactions and a summary of the fund's Code of Ethics.
Under an agreement with the manager, Templeton Investment Counsel, Inc. is
the sub-advisor of the fund. The sub-advisor provides the manager with
investment management advice and assistance. The sub-advisor's activities are
subject to the Board's review and control, as well as the manager's
instruction and supervision.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
fund's portfolio is:
Christopher Molumphy
Senior Vice President of Franklin Advisers, Inc.
Mr. Molumphy is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of Chicago. He earned his Bachelor
of Arts degree in Economics from Stanford University. He has been with the
Franklin Templeton Group since 1988. Mr. Molumphy is a member of several
securities industry-related associations.
Thomas J. Dickson
Portfolio Manager of Templeton Investment Counsel, Inc.
Mr. Dickson is currently a portfolio manager for several Franklin Templeton
mutual funds. He holds a BS in managerial economics from the University of
California at Davis. Prior to joining the Templeton organization in 1994, Mr.
Dickson worked as a fixed-income analyst and trader for Franklin Advisers,
Inc. Mr. Dickson currently manages fixed income and currency trading for the
Templeton organization and has country responsibilities for Australia,
Canada, Japan and New Zealand.
Eric G. Takaha
Vice President of Franklin Advisers, Inc.
Mr. Takaha is a Chartered Financial Analyst and holds a Master of Business
Administration degree from Stanford University. He earned his Bachelor of
Science degree in Business Administration from the University of California
at Berkeley. Mr. Takaha joined the Franklin Templeton Group in July of 1989.
He is a member of several securities industry-related associations.
MANAGEMENT FEES. During the fiscal year ended April 30, 1998, management fees,
before any advance waiver, totaled 0.61% of the average daily net assets of the
fund. Total operating expenses were 1.04% for Class A. Under an agreement by the
manager to waive its fees, the fund paid no management fees and operating
expenses totaling 0.25% for Class A. The manager may end this arrangement at any
time upon notice to the Board. During the same period, the manager paid the
sub-advisor no sub-advisory fees.
PORTFOLIO TRANSACTIONS. The manager tries to obtain the best execution on all
transactions. If the manager believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of fund shares, as well as shares of other funds in the Franklin Templeton Group
of Funds, when selecting a broker or dealer. Please see "How Does the Fund Buy
Securities for Its Portfolio?" in the SAI for more information.
ADMINISTRATIVE SERVICES. Under an agreement with the manager, FT Services
provides certain administrative services and facilities for the fund. During
the fiscal year ended April 30, 1998, administration fees totaling 0.15% of
the average daily net assets of the fund were paid to FT Services. These fees
are paid by the manager. They are not a separate expense of the fund. Please
see "Investment Management and Other Services" in the SAI for more
information.
YEAR 2000 PROBLEM. The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a
non-standard leap year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. The fund could experience difficulties in effecting transactions if
any of its foreign subcustodians, or if foreign broker-dealers or foreign
markets are not ready for Year 2000.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
THE RULE 12B-1 PLANS
Each class has a separate distribution or "Rule 12b-1" plan under which the
fund shall pay or may reimburse Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by the fund under the Class A plan may not exceed 0.25% per year of
Class A's average daily net assets. All distribution expenses over this
amount will be borne by those who have incurred them. During the first year
after certain Class A purchases made without a sales charge, Securities
Dealers may not be eligible to receive the Rule 12b-1 fees associated with
the purchase.
Under the Class B plan, the fund pays Distributors up to 0.50% per year of
Class B's average daily net assets to pay Distributors for providing
distribution and related services and bearing certain Class B expenses. All
distribution expenses over this amount will be borne by those who have
incurred them. Securities Dealers are not be eligible to receive this portion
of the Rule 12b-1 fees associated with the purchase.
The fund may also pay a servicing fee of up to 0.15% per year of Class B's
average daily net assets under the Class B plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish
and maintain customer accounts and records, helping with requests to buy and
sell shares, receiving and answering correspondence, monitoring dividend
payments from the fund on behalf of customers, and similar servicing and
account maintenance activities. Securities Dealers may be eligible to receive
this portion of the Rule 12b-1 fees from the date of purchase. After 8 years,
Class B shares convert to Class A shares and Securities Dealers may then
receive the Rule 12b-1 fees applicable to Class A.
The expenses relating to the Class B plan are also used to pay Distributors
for advancing the commission costs to Securities Dealers with respect to the
initial sale of Class B shares. Further, the expenses relating to the Class B
plan may be used by Distributors to pay third party financing entities that
have provided financing to Distributors in connection with advancing
commission costs to Securities Dealers.
Under the Class C plan, the fund may pay Distributors up to 0.50% per year of
Class C's average daily net assets to pay Distributors or others for
providing distribution and related services and bearing certain Class C
expenses. All distribution expenses over this amount will be borne by those
who have incurred them. During the first year after a purchase of Class C
shares, Securities Dealers may not be eligible to receive this portion of the
Rule 12b-1 fees associated with the purchase.
The fund may also pay a servicing fee of up to 0.15% per year of Class C's
average daily net assets under the Class C plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish
and maintain customer accounts and records, helping with requests to buy and
sell shares, receiving and answering correspondence, monitoring dividend
payments from the fund on behalf of customers, and similar servicing and
account maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
<TABLE>
<CAPTION>
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
<S> <C>
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TAXATION OF THE FUND'S INVESTMENTS HOW DOES THE FUND EARN INCOME AND GAINS?
The fund invests your money in the stocks, The fund earns dividends and interest
bonds and other securities that are (the fund's "income") on its investments.
described in the section "How Does the When the fund sells a security for a
Fund Invest Its Assets?" Special tax rules price that is higher than it paid, it has
may apply in determining the income and a gain. When the fund sells a security
gains that the fund earns on its for a price that is lower than it paid,
investments. These rules may, in turn, it has a loss. If the fund has held the
affect the amount of distributions that security for more than one year, the gain
the fund pays to you. These special tax or loss will be a long-term capital gain
rules are discussed in the SAI. or loss. If the fund has held the
security for one year or less, the gain
TAXATION OF THE FUND. As a regulated or loss will be a short-term caital gain
investment company, the fund generally or loss. The fund's gains and losses are
pays no federal income tax on the income netted together, and, if the fund has a
and gains that it distributes to you. net gain (the fund's "gains"), that gain
will generally be distrbuted to you.
FOREIGN TAXES. Foreign governments may
impose taxes on the income and gains from ------------------------------------------
the fund's investments in foreign stocks and bonds. These taxes will reduce the amount
of the fund's distributions to you, but, depending upon the amount of the fund's
assets that are invested in foreign securities and foreign taxes paid, may be passed
through to you as a foreign tax credit on your income tax return. The fund may also
invest in the securities of foreign companies that are "passive foreign investment
companies" ("PFICs"). These investments in PFICs may cause the fund to pay income
taxes and interest charges. If possible, the fund will adopt strategies to avoid PFIC
taxes and interest charges.
-------------------------------------------
WHAT IS A DISTRIBUTION?
TAXATION OF SHAREHOLDERS
As a shareholder, you will receive your
Distributions. Distributions from the share of the fund's income and gains on
fund, whether you receive them in cash or its investments in stocks, bonds and
in additional shares, are generally other securities. The fund's income and
subject to income tax. The fund will send short term capital gains are paid to you
you a statement in January of the current as ordinary dividends. The fund's
year that reflects the amount of ordinary long-term capital gains are paid to you
dividends, capital gain distributions and as capital gain distributions. If the
non-taxable distributions you received fund pays you an amount in excess of its
from the fund in the prior year. This income and gains, this excess will
statement will include distributions generally be treated as a non-taxable
declared in December and paid to you in distribution. These amounts, taken
January of the current year, but which are together, are what we call the fund's
taxable as if paid on December 31 of the distributions to you.
prior year.The IRS requires you to report -------------------------------------------
these amounts on your income tax return
for the prior year.
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your qualified
retirement plan, such as a 401(k) plan or IRA, are generally tax-deferred; this means
that you are not required to report fund distributions on your income tax return when
paid to your plan, but, rather, when your plan makes payments to you. Special rules
apply to payouts from Roth and Education IRAs.
DIVIDENDS-RECEIVED DEDUCTION. Corporate investors may be entitled to a
dividends-received deduction on a portion of the ordinary dividends they receive from
the fund.
REDEMPTIONS AND EXCHANGES. If you redeem -------------------------------------------
your shares or if you exchange your shares WHAT IS A REDEMPTION?
in the fund for shares of another Franklin
Templeton Fund, you will generally have a A redemption is a sale by you to the fund
gain or loss that the IRS requires you to of some or all of your shares in the
report on your income tax return. If you fund. The price per share
exchange fund shares held for 90 days or you receive when you redeem fund shares
less and pay no sales charge, or a reduced may be more or less than the price at
sales charge, for the new shares, all or a which you purchased those shares. An
portion of the sales charge you paid on exchange of shares of the fund for shares
the purchase of the shares you exchanged of another Franklin Templeton Fund is
is not included in their cost for purposes treated as a redemption of fund shares
of computing gain or loss on the exchange. and then a purchase of shares of the
If you hold your shares for six months or other fund. When you redeem or exchange
less, any loss you have will be treated as your shares, you will generally have a
a long-term capital loss to the extent of gain or loss, depending upon whether the
any capital gain distributions received by amount you receive for your shares is
you from the fund. All or a portion of any more or less than your cost or other
loss on the redemption or exchange of your basis in the shares.
shares will be disallowed by the IRS if -------------------------------------------
you purchase other shares in the fund
within 30 days before or after your redemption
or exchange.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income tax
withholding. Your home country may also tax ordinary dividends, capital gain
distributions and gains arising from redemptions or exchanges of your fund shares.
Fund shares held by the estate of a non-U.S. investor may be subject to U.S. estate
tax. You may wish to contact your tax advisor to determine the U.S. and non-U.S. tax
consequences of your investment in the fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive from
the fund, and gains arising from redemptions or exchanges of your fund shares will
generally be subject to state and local income tax. The holding of fund shares may
also be subject to state and local intangibles taxes. You may wish to contact your
tax advisor to determine the state and local tax consequences of your investment in
the fund.
-------------------------------------------
BACKUP WITHHOLDING. When you open an WHAT IS A BACKUP WITHHOLDING?
account, IRS regulations require that you
provide your taxpayer identification Backup withholding occurs when the fund
number ("TIN"), certify that it is is required to withhold and pay over to
correct, and certify that you are not the IRS 31% of your distributions and
subject to backup withholding under IRS redemption proceeds. You can avoid backup
rules. If you fail to provide a correct withholding by providing the fund with
TIN or the proper tax certifications, the your TIN, and by completing the tax
fund is required to withhold 31% of all certifications on your shareholder
the distributions (including ordinary application that you were asked to sign
dividends and capital gain distributions) when you opened your account. However, if
and redemption proceeds paid to you. The the IRS instructs the fund to begin
fund is also required to begin backup backup withholding, it is required to do
withholding on your account if the IRS so even if you provided the fund with
instructs the fund to do so. The fund your TIN and these tax certifications,
reserves the right not to open your and backup withholding will remain in
account, or, alternatively, to redeem your place until the fund is instructed by the
shares at the current net asset value, IRS that it is no longer required.
less any taxes withheld, if you fail to
provide a correct TIN, fail to provide the -----------------------------------------
proper tax certifications, or the IRS
instructs the fund to begin backup
withholding on your account.
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD
CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR FOREIGN TAX
CONSEQUENCES OF AN INVESTMENT IN THE FUND. A MORE COMPLETE DISCUSSION OF THESE RULES
AND RELATED MATTERS IS CONTAINED IN THE SECTION ENTITLED "ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES" IN THE SAI.
</TABLE>
HOW IS THE TRUST ORGANIZED?
The fund is a series of Franklin Strategic Series (the "Trust"), an open-end
management investment company, commonly called a mutual fund. It was
organized as a Delaware business trust on January 25, 1991, and is registered
with the SEC. The fund offers three classes of shares: Franklin Strategic
Income Fund - Class A, Franklin Strategic Income Fund - Class B, and Franklin
Strategic Income Fund - Class C. Additional series and classes of shares may
be offered in the future.
Shares of each class represent proportionate interests in the assets of the
fund and have the same voting and other rights and preferences as any other
class of the fund for matters that affect the fund as a whole. For matters
that only affect one class, however, only shareholders of that class may
vote. Each class will vote separately on matters affecting only that class,
or expressly required to be voted on separately by state or federal law.
Shares of each class of a series have the same voting and other rights and
preferences as the other classes and series of the Trust for matters that
affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the
Board. If this happens, holders of the remaining shares voting will not be
able to elect anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the Board to consider the
removal of a Board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are
required to help you communicate with other shareholders about the removal of
a Board member. A special meeting may also be called by the Board in its
discretion.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, please follow the steps below. This will help avoid any
delays in processing your request.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The fund's minimum
investments are:
o To open a regular, non-retirement account $1,000
o To open an IRA, IRA Rollover, Roth IRA,
or Education IRA $ 250*
o To open a custodial account for a minor
(an UGMA/UTMA account) $ 100
o To open an account with an automatic
investment plan $ 50**
o To add to an account $ 50***
*For all other retirement accounts, there is no minimum investment
requirement.
**$25 for an Education IRA.
***For all retirement accounts except IRAs, IRA Rollovers, Roth IRAs, or
Education IRAs, there is no minimum to add to an account.
We reserve the right to change the amount of these minimums from time to time
or to waive or lower these minimums for certain purchases. We also reserve
the right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed account application, including
the optional shareholder privileges section. By applying for privileges now,
you can avoid the delay and inconvenience of having to send an additional
application to add privileges later. PLEASE ALSO INDICATE WHICH CLASS OF
SHARES YOU WANT TO BUY. IF YOU DO NOT SPECIFY A CLASS, WE WILL INVEST YOUR
PURCHASE IN CLASS A SHARES. It is important that we receive a signed
application since we will not be able to process any redemptions from your
account until we receive your signed application.
4. Make your investment using the table below.
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the fund with your check
made payable to the fund.
For additional investments:
Send a check made payable to the fund. Please
include your account number on the check.
- ------------------------------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that number is
busy, call 1-650/312-2000 collect, to receive a
wire control number and wire instructions. You
need a new wire control number every time you
wire money into your account. If you do not have
a currently effective wire control number, we
will return the money to the bank, and we will
not credit the purchase to your account.
2. For an initial investment you must also return
your signed shareholder application to the fund.
IMPORTANT DEADLINES: If we receive your call before
1:00 p.m. Pacific time and the bank receives the
wired funds and reports the receipt of wired funds to
the fund by 3:00 p.m. Pacific time, we will credit
the purchase to your account that day. If we receive
your call after 1:00 p.m. or the bank receives the
wire after 3:00 p.m., we will credit the purchase to
your account the following business day.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. Your financial
representative can help you decide.
CLASS A* Class B* Class C*
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
o Front-end sales o No front-end sales o Front-end sales
charge of 4.25% or charge charge of 1%
less
o Contingent Deferred o Contingent Deferred o Contingent Deferred
Sales Charge of 1% on Sales Charge of 4% or Sales Charge of 1% on
purchases of $1 less on shares you shares you sell
million or more sold sell within six years within 18 months
within one year
o Lower annual expenses o Higher annual o Higher annual
than Class B or C due expenses than Class A expenses than Class A
to lower Rule 12b-1 (same as Class C) due (same as Class B) due
fees to higher Rule 12b-1 to higher Rule 12b-1
fees. Automatic fees. No conversion
conversion to Class A to Class A shares, so
shares after eight annual expenses do
years, reducing future not decrease
annual expenses.
o No maximum purchase o Maximum purchase o Maximum purchase
amount amount of $249,999. We amount of $999,999.
invest any investment We invest any
of $250,000 or more in investment of $1
Class A shares, since million or more in
a reduced front-end Class A shares, since
sales charge is there is no front-end
available and Class sales charge and
A's annual expenses Class A's annual
are lower. expenses are lower.
*Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II. The fund began offering Class B shares on
January 1, 1999. Class B shares are not available to all retirement plans.
Class B shares are only available to IRAs (of any type), Franklin Templeton
Trust Company 403(b) plans, and Franklin Templeton Trust Company qualified
plans with participant or earmarked accounts.
PURCHASE PRICE OF FUND SHARES
For Class A shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class C shares is
1% and, unlike Class A, does not vary based on the size of your purchase.
There is no front-end sales charge for Class B shares.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- ------------------------------------------------------------------------------
CLASS A
Under $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.50% 2.56% 2.25%
$500,000 but less than $1,000,000 2.00% 2.04% 1.85%
$1,000,000 or more* None None None
CLASS B* None None None
CLASS C
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class A purchases of
$1 million or more and any Class C purchase. A Contingent Deferred Sales
Charge of up to 4% may apply to any Class B purchase. Please see "How Do I
Sell Shares? - Contingent Deferred Sales Charge." Please also see "Other
Payments to Securities Dealers" below for a discussion of payments
Distributors may make out of its own resources to Securities Dealers for
certain purchases.
SALES CHARGE REDUCTIONS AND WAIVERS
- - IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. IF YOU DON'T
INCLUDE THIS STATEMENT, WE CANNOT GUARANTEE THAT YOU WILL RECEIVE THE
SALES CHARGE REDUCTION OR WAIVER.
CUMULATIVE QUANTITY DISCOUNTS - CLASS A ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class A purchase is added to
the cost or current value, whichever is higher, of your existing shares in
the Franklin Templeton Funds, as well as those of your spouse, children under
the age of 21 and grandchildren under the age of 21. If you are the sole
owner of a company, you may also add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds
to determine the sales charge that applies.
LETTER OF INTENT - CLASS A ONLY. You may buy Class A shares at a reduced
sales charge by completing the Letter of Intent section of the account
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class A shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE ACCOUNT APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase
in Class A shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on
the reserved shares as you direct. Our policy of reserving shares does not
apply to certain retirement plans.
If you would like more information about the Letter of Intent privilege,
please see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in
the SAI or call Shareholder Services.
GROUP PURCHASES - CLASS A ONLY. If you are a member of a qualified group, you
may buy Class A shares at a reduced sales charge that applies to the group as
a whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions. 403(b) plans that only allow salary deferral
contributions and that purchased Class A shares of the fund at a reduced
sales charge under the group purchase privilege before February 1, 1998,
however, may continue to do so.
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies to
you or your purchase of fund shares, you may buy shares of the fund without a
front-end sales charge or a Contingent Deferred Sales Charge. All of the
sales charge waivers listed below apply to purchases of Class A shares only,
except for items 1 and 2 which also apply to Class B and C purchases.
Certain distributions, payments or redemption proceeds that you receive may
be used to buy shares of the fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same class of
shares. Certain exceptions apply, however, to Class C shareholders who
chose to reinvest their distributions in Class A shares of the fund
before November 17, 1997, and to Advisor Class or Class Z shareholders of
a Franklin Templeton Fund who may reinvest their distributions in Class A
shares of the fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton
Fund. The proceeds must be reinvested in the same class of shares, except
proceeds from the sale of Class B shares will be reinvested in Class A
shares.
If you paid a Contingent Deferred Sales Charge when you sold your Class A
or C shares, we will credit your account with the amount of the
Contingent Deferred Sales Charge paid but a new Contingent Deferred Sales
Charge will apply. For Class B shares reinvested in Class A, a new
Contingent Deferred Sales Charge will not apply, although your account
will not be credited with the amount of any Contingent Deferred Sales
Charge paid when you sold your Class B shares. If you own both Class A
and B shares and you later sell your shares, we will sell your Class A
shares first, unless otherwise instructed.
Proceeds immediately placed in a Franklin Bank CD also may be reinvested
without a front-end sales charge if you reinvest them within 365 days
from the date the CD matures, including any rollover.
This waiver does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be
subject to a sales charge.
3. Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
4. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any
tax consequences that may apply.
5. Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD
or a Franklin Templeton money fund, you may reinvest them as described
above. The proceeds must be reinvested within 365 days from the date the
CD matures, including any rollover, or the date you redeem your money
fund shares.
6. Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a contingent deferred sales charge when you sold your Class A
shares from a Templeton Global Strategy Fund, we will credit your account
with the amount of the contingent deferred sales charge paid but a new
Contingent Deferred Sales Charge will apply.
If you immediately placed your redemption proceeds in a Franklin
Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date they are
redeemed from the money fund.
7. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
Various individuals and institutions also may buy Class A shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans,
have full or shared investment discretion. We will accept orders for
these accounts by mail accompanied by a check or by telephone or other
means of electronic data transfer directly from the bank or trust
company, with payment by federal funds received by the close of business
on the next business day following the order.
2. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the fund is
permissible and suitable for you and the effect, if any, of payments by
the fund on arbitrage rebate calculations.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs. The minimum initial
investment is $250.
4. Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
5. Registered Securities Dealers and their affiliates, for their investment
accounts only
6. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
7. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family
members, consistent with our then-current policies. The minimum initial
investment is $100.
8. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
9. Accounts managed by the Franklin Templeton Group
10. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
11. Group annuity separate accounts offered to retirement plans
12. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without a front-end sales
charge. Retirement plans that are not Qualified Retirement Plans, SIMPLEs or
SEPs must also meet the requirements described under "Group Purchases - Class
A Only" above to be able to buy Class A shares without a front-end sales
charge. We may enter into a special arrangement with a Securities Dealer,
based on criteria established by the fund, to add together certain small
Qualified Retirement Plan accounts for the purpose of meeting these
requirements.
For retirement plan accounts opened on or after May 1, 1997, a Contingent
Deferred Sales Charge may apply if the retirement plan is transferred out of
the Franklin Templeton Funds or terminated within 365 days of the retirement
plan account's initial purchase in the Franklin Templeton Funds. Please see
"How Do I Sell Shares? - Contingent Deferred Sales Charge" for details.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the fund.
Plan documents are required for all retirement plans. Franklin Templeton
Trust Company, an affiliate of Distributors and a wholly owned subsidiary of
Resources, can provide the plan documents for you and serve as custodian or
trustee.
Franklin Templeton Trust Company can provide you with brochures containing
important information about its plans. These plans require separate
applications and their policies and procedures may be different than those
described in this prospectus. For more information, including a free
retirement plan brochure or application, please call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing
a retirement plan. Your investment representative or advisor can help you
make investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate
and are responsible for Class B and C purchases and certain Class A purchases
made without a sales charge. The payments are subject to the sole discretion
of Distributors, and are paid by Distributors or one of its affiliates and
not by the fund or its shareholders.
1. Class A purchases of $1 million or more - up to 0.75% of the amount
invested.
2. Class B purchases - up to 3% of the amount invested.
3. Class C purchases - up to 1% of the purchase price.
4. Class A purchases made without a front-end sales charge by certain
retirement plans described under "Sales Charge Reductions and Waivers -
Retirement Plans" above - up to 1% of the amount invested.
5. Class A purchases by trust companies and bank trust departments,
Eligible Governmental Authorities, and broker-dealers or others on
behalf of clients participating in comprehensive fee programs - up to
0.25% of the amount invested.
6. Class A purchases by Chilean retirement plans - up to 1% of the amount
invested.
A Securities Dealer may receive only one of these payments for each
qualifying purchase. Securities Dealers who receive payments in connection
with investments described in paragraphs 1, 3 or 6 above or a payment of up
to 1% for investments described in paragraph 4 will be eligible to receive
the Rule 12b-1 fee associated with the purchase starting in the thirteenth
calendar month after the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES,
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI.
FOR INVESTORS OUTSIDE THE U.S.
The distribution of this prospectus and the offering of fund shares may be
limited in many jurisdictions. An investor who wishes to buy shares of the
fund should determine, or have a broker-dealer determine, the applicable laws
and regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and
a purchase of shares, an exchange is a taxable transaction.
If you own Class A shares, you may exchange into any of our money funds
except Franklin Templeton Money Fund. Franklin Templeton Money Fund is the
only money fund exchange option available to Class B and C shareholders.
Unlike our other money funds, shares of Franklin Templeton Money Fund may not
be purchased directly and no drafts (checks) may be written on Franklin
Templeton Money Fund accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment goal
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have
different investment minimums. Some Franklin Templeton Funds do not offer
Class B or C shares.
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for the
shares you want to exchange
- ------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone
to apply to your account, please let us know.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You can exchange shares between most Franklin Templeton Funds, generally
without paying any additional sales charges. If you exchange shares held for
less than six months, however, you may be charged the difference between the
front-end sales charge of the two funds if the difference is more than 0.25%.
If you exchange shares from a money fund, a sales charge may apply no matter
how long you have held the shares.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred
Sales Charge when you exchange shares. Any shares subject to a Contingent
Deferred Sales Charge at the time of exchange, however, will remain so in the
new fund. The purchase price for determining a Contingent Deferred Sales
Charge on exchanged shares will be the price you paid for the original shares.
For accounts with shares subject to a Contingent Deferred Sales Charge, we
will first exchange any shares in your account that are not subject to the
charge. If there are not enough of these to meet your exchange request, we
will exchange shares subject to the charge in the order they were purchased.
If you exchange Class A shares into one of our money funds, the time your
shares are held in that fund will not count towards the completion of any
Contingency Period. If you exchange your Class B or C shares for the same
class of shares of Franklin Templeton Money Fund, however, the time your
shares are held in that fund will count towards
the completion of any Contingency Period.
For more information about the Contingent Deferred Sales Charge, please see
"How Do
I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You must meet the applicable minimum investment amount of the fund you
are exchanging into, or exchange 100% of your fund shares.
o You may only exchange shares within the same class, except as noted
below. If you exchange your Class B shares for the same class of shares of
another Franklin Templeton Fund, the time your shares are held in that
fund will count towards the eight year period for automatic conversion to
Class A shares.
o Generally exchanges may only be made between identically registered
accounts, unless you send written instructions with a signature guarantee.
You may, however, exchange shares from a fund account requiring two or
more signatures into an identically registered money fund account
requiring only one signature for all transactions. PLEASE NOTIFY US IN
WRITING IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR ACCOUNT.
Additional procedures may apply. Please see "Transaction Procedures and
Special Requirements."
o Franklin Templeton Trust Company IRA or 403(b) retirement plan accounts
may exchange shares as described above. Restrictions may apply to other
types of retirement plans. Please contact Retirement Plan Services for
information on exchanges within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the fund more than twice in a calendar
quarter, or (iii) exchanged shares equal to at least $5 million, or more
than 1% of the fund's net assets. Shares under common ownership or control
are combined for these limits. If you have exchanged shares as described
in this paragraph, you will be considered a Market Timer. Each exchange by
a Market Timer, if accepted, will be charged $5. Some of our funds do not
allow investments by Market Timers.
Because excessive trading can hurt fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the fund
would be harmed or unable to invest effectively, or (ii) the fund receives or
anticipates simultaneous orders that may significantly affect the fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the fund, such as "Advisor Class" or "Class Z" shares. Because the
fund does not currently offer an Advisor Class, you may exchange Advisor
Class shares of any Franklin Templeton Fund for Class A shares of the fund at
Net Asset Value. If you do so and you later decide you would like to exchange
into a fund that offers an Advisor Class, you may exchange your Class A
shares for Advisor Class shares of that fund. Certain shareholders of Class Z
shares of Franklin Mutual Series Fund Inc. also may exchange their Class Z
shares for Class A shares of the fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions. If you would
like your redemption proceeds wired to a bank
account, your instructions should include:
o The name, address and telephone number of the
bank where you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit
union, the name of the corresponding bank and
the account number
2. Include any outstanding share certificates for the
shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need
to send additional documents. Accounts under
court jurisdiction may have other requirements.
- ------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other
than an escrow account, you must first sign up for
the wire feature. To sign up, send us written
instructions, with a signature guarantee. To avoid
any delay in processing, the instructions should
include the items listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $100,000 or less. Institutional
accounts may exceed $100,000 by completing a
separate agreement. Call Institutional Services to
receive a copy.
o If there are no share certificates issued for the
shares you want to sell or you have already
returned them to the fund
o Unless the address on your account was changed by
phone within the last 15 days
- If you do not want the ability to redeem by phone
to apply to your account, please let us know.
- ------------------------------------------------------------------------------
THROUGH
YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or pay
out cash in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive
your request in proper form before 1:00 p.m. Pacific time, your wire payment
will be sent the next business day. For requests received in proper form
after 1:00 p.m. Pacific time, the payment will be sent the second business
day. By offering this service to you, the fund is not bound to meet any
redemption request in less than the seven day period prescribed by law.
Neither the fund nor its agents shall be liable to you or any other person
if, for any reason, a redemption request by wire is not processed as
described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds until your check or draft has cleared, which may
take seven business days or more. A certified or cashier's check may clear in
less time.
Under unusual circumstances, we may suspend redemptions or postpone payment
for more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
FRANKLIN TEMPLETON TRUST COMPANY RETIREMENT PLAN ACCOUNTS
Before you can sell shares in a Franklin Templeton Trust Company retirement
plan, you may need to complete additional forms. For participants under age
591/2, tax penalties may apply. Call Retirement Plan Services at
1-800/527-2020 for details.
CONTINGENT DEFERRED SALES CHARGE
For Class A purchases, if you did not pay a front-end sales charge because
you invested $1 million or more or agreed to invest $1 million or more under
a Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell
all or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class A investments you make
without a sales charge may also be subject to a Contingent Deferred Sales
Charge if they are sold within the Contingency Period. For any Class C
purchase, a Contingent Deferred Sales Charge may apply if you sell the shares
within the Contingency Period. The charge is 1% of the value of the shares
sold or the Net Asset Value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class A shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge if the retirement plan is
transferred out of the Franklin Templeton Funds or terminated within 365 days
of the account's initial purchase in the Franklin Templeton Funds.
For Class B shares, there is a Contingent Deferred Sales Charge if you sell
your shares within six years, as described in the table below. The charge is
based on the value of the shares sold or the Net Asset Value at the time of
purchase, whichever is less.
THIS % IS DEDUCTED
IF YOU SELL YOUR CLASS B FROM YOUR PROCEEDS AS A
SHARES WITHIN THIS MANY CONTINGENT DEFERRED
YEARS AFTER BUYING THEM SALES CHARGE
- ------------------------------------------------------------------------------
1 YEAR 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
FOR EACH CLASS, WE WILL FIRST REDEEM ANY SHARES IN YOUR ACCOUNT THAT ARE NOT
SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE. IF THERE ARE NOT ENOUGH OF
THESE TO MEET YOUR REQUEST, WE WILL REDEEM SHARES SUBJECT TO THE CHARGE IN
THE ORDER THEY WERE PURCHASED.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT,
we will redeem additional shares to cover any Contingent Deferred Sales
Charge. For requests to sell a stated NUMBER OF SHARES, we will deduct the
amount of the Contingent Deferred Sales Charge, if any, from the sale
proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Account fees
o Sales of Class A shares purchased without a front-end sales charge by
certain retirement plan accounts if (i) the account was opened before May
1, 1997, or (ii) the Securities Dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the Securities Dealer of
record has entered into a supplemental agreement
with Distributors
o Redemptions by the fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February
1, 1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12%
annually of your account's Net Asset Value depending on the frequency of
your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R) (not applicable to Class B)
o Distributions from IRAs due to death or disability or upon periodic
distributions based on life expectancy (for Class B, this applies to all
retirement plan accounts, not only IRAs)
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans (not applicable to Class B)
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The fund intends to pay a dividend at least monthly, on or about the 15th day
of the month, representing its net investment income. Capital gains, if any,
may be distributed annually. The amount of these distributions will vary and
there is no guarantee the fund will pay dividends. The fund does not pay
"interest" or guarantee any fixed rate of return on an investment in its
shares.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will receive some of your investment back in the
form of a taxable distribution. If you would like information on upcoming
record dates for the fund's distributions, please call 1-800/DIAL BEN.
Dividends and capital gains are calculated and distributed the same way for
each class. The amount of any income dividends per share will differ,
however, generally due to the difference in the Rule 12b-1 fees of each class.
DISTRIBUTION OPTIONS
You may receive your distributions from the fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may reinvest distributions you
receive from the fund in additional shares of the fund (without a sales
charge or imposition of a Contingent Deferred Sales Charge). This is a
convenient way to accumulate additional shares and maintain or increase your
earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy shares of another Franklin Templeton Fund (without a
sales charge or imposition of a Contingent Deferred Sales Charge). Many
shareholders find this a convenient way to diversify their investments.
Please note that distributions may only be directed to an existing account.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive your distributions from
the fund in cash. If you have the money sent to another person or to a
checking or savings account, you may need a signature guarantee. If you send
the money to a checking or savings account, please see "Electronic Fund
Transfers" under "Services to Help You Manage Your Account."
Distributions may be reinvested only in the same class of shares, except as
follows: (i) Class C shareholders who chose to reinvest their distributions in
Class A shares of the fund or another Franklin Templeton Fund before November
17, 1997, may continue to do so; and (ii) Class B and C shareholders may
reinvest their distributions in shares of any Franklin Templeton money fund.
PLEASE INDICATE ON YOUR APPLICATION THE DISTRIBUTION OPTION YOU HAVE CHOSEN,
OTHERWISE WE WILL REINVEST YOUR DISTRIBUTIONS IN THE SAME SHARE CLASS OF THE
FUND. You may change your distribution option at any time by notifying us by
mail or phone. Please allow at least seven days before the record date for us
to process the new option. For Franklin Templeton Trust Company retirement
plans, special forms are required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value
per share of the class you wish to purchase, plus any applicable sales
charges. When you sell shares, you receive the Net Asset Value per share
minus any applicable Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you
buy or sell shares through your Securities Dealer, however, we will use the
Net Asset Value next calculated after your Securities Dealer receives your
request, which is promptly transmitted to the fund. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents.
HOW AND WHEN SHARES ARE PRICED
The fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the close of the NYSE, normally
1:00 p.m. Pacific time. You can find the prior day's closing Net Asset Value
and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on
a pro rata basis. It is based on each class' proportionate participation in
the fund, determined by the value of the shares of each class. Each class,
however, bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To
calculate Net Asset Value per share of each class, the assets of each class
are valued and totaled, liabilities are subtracted, and the balance, called
net assets, is divided by the number of shares of the class outstanding. The
fund's assets are valued as described under "How Are Fund Shares Valued?" in
the SAI.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any
delay in processing your transaction, they should include:
o Your name,
o The fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the
evening if preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, the fund
accepts written instructions signed by only one owner for transactions and
account changes that could otherwise be made by phone. For all other
transactions and changes, all registered owners must sign the instructions.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed
by all registered owners
on the account.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $100,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should
be able to obtain a signature guarantee from a bank, broker, credit union,
savings association, clearing agency, or securities exchange or association.
A NOTARIZED SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate
is lost, stolen or destroyed, you may have to pay an insurance premium of up
to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone.
Please refer to the sections of this prospectus that discuss the transaction
you would like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to
ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we
are not reasonably satisfied that the instructions are genuine. If this
occurs, we will not be liable for any loss. We also will not be liable for
any loss if we follow instructions by phone that we reasonably believe are
genuine or if you are unable to execute a transaction by phone.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights
and ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register
the account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of
survivorship" is shown as "Jt Ten" on your account statement. For any account
with two or more owners, we cannot accept instructions to change owners on
the account unless all owners agree in writing, even if the law in your state
says otherwise. If you would like another person or owner to sign for you,
please send us a current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this
form of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please
send us the following documents when you open your account. This will help
avoid delays in processing your transactions while we verify who may sign on
the account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- ------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- ------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
- ------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify
the trustees, or
2. A certification for trust
- ------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with Distributors or we cannot process
the transfer. Contact your Securities Dealer to initiate the transfer. We
will process the transfer after we receive authorization in proper form from
your delivering Securities Dealer. Accounts may be transferred electronically
through the NSCC. For accounts registered in street or nominee name, we may
take instructions directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements
and other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions
directly from your dealer or representative, including instructions to
exchange or redeem your shares. Electronic instructions may be processed
through established electronic trading systems and programs used by the fund.
Telephone instructions directly from your representative will be accepted
unless you have told us that you do not want telephone privileges to apply to
your account.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $250, or less than $50 for
employee accounts and custodial accounts for minors. We will only do this if the
value of your account fell below this amount because you voluntarily sold your
shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $1,000,
or $100 for employee accounts and custodial accounts for minors. These minimums
do not apply to IRAs and other retirement plan accounts or to accounts managed
by the Franklin Templeton Group.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the fund.
Under the plan, you can have money transferred automatically from your
checking or savings account to the fund each month to buy additional shares.
If you are interested in this program, please refer to the account
application included with this prospectus or contact your investment
representative. The market value of the fund's shares may fluctuate and a
systematic investment plan such as this will not assure a profit or protect
against a loss. You may discontinue the program at any time by calling
Shareholder Services.
AUTOMATIC PAYROLL DEDUCTION - CLASS A ONLY
You may have money transferred from your paycheck to the fund to buy
additional Class A shares. Your investments will continue automatically until
you instruct the fund and your employer to discontinue the plan. To process
your investment, we must receive both the check and payroll deduction
information in required form. Due to different procedures used by employers
to handle payroll deductions, there may be a delay between the time of the
payroll deduction and the time we receive the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or
annual basis. The value of your account must be at least $5,000 and the
minimum payment amount for each withdrawal must be at least $50. For
retirement plans subject to mandatory distribution requirements, the $50
minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the account application included with this
prospectus and indicate how you would like to receive your payments. You may
choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking or savings account. If you choose to have the money
sent to a checking or savings account, please see "Electronic Fund Transfers"
below. Once your plan is established, any distributions paid by the fund will be
automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. Please see "How Do I Buy, Sell and Exchange
Shares? - Systematic Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions or payments
under a systematic withdrawal plan sent directly to a checking or savings
account. If the account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton
Fund;
o exchange shares (within the same class) between identically registered
Franklin Templeton Class A, B or Class C accounts; and
o request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the code number for each class to use TeleFACTS. The code
number is 194 for Class A, 394 for Class B and 294 for Class C.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the fund will be sent every six months. To reduce
fund expenses, we attempt to identify related shareholders within a
household and send only one copy of a report. Call Fund Information if you
would like an additional free copy of the fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more
information, call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your
shares are held by a financial institution, in a street name account, or
networked through the NSCC, the fund may not be able to offer these services
directly to you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor
Services at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California
94403-7777. The fund, Distributors and the manager are also located at this
address. The sub-advisor is located at Broward Financial Centre, Suite 2100,
Fort Lauderdale, Florida 33394-3091. You may also contact us by phone at one
of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- -------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with
high quality service. You will hear a regular beeping tone if your call is
being recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS A, CLASS B AND CLASS C - The fund offers three classes of shares,
designated "Class A", "Class B" and "Class C." The three classes have
proportionate interests in the fund's portfolio. They differ, however,
primarily in their sales charge structures and Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class A shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. The contingency period is six
years for Class B shares and 18 months for Class C shares. The holding period
begins on the day you buy your shares. For example, if you buy shares on the
18th of the month, they will age one month on the 18th day of the next month
and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply
if you sell your Class A or C shares within the Contingency Period. For Class
B, the maximum CDSC is 4% and declines to 0% after six years.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the fund's principal
underwriter.
The SAI lists the officers and Board members who are affiliated with
Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined
the fund is a legally permissible investment and that can only buy shares of
the fund without paying sales charges.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable
Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds.
FT SERVICES - Franklin Templeton Services, Inc., the fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the fund's
shareholder servicing and transfer agent
IRA - Individual retirement account or annuity qualified under section 408 of
the Code
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange
shares based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value
per share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class A and 1% for Class C. There is no
front-end sales charge for Class B. We calculate the offering price to two
decimal places using standard rounding criteria.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established
under section 408(k) of the Code
SIMPLE (Savings Incentive Match Plan for Employees) - An employer sponsored
salary deferral plan established under section 408(p) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
WE/OUR/US - Unless the context indicates a different meaning, these terms
refer to the fund and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong and, in the majority of
instances, differ from AAA issues only in a small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service
payments are continuing. The C1 rating is reserved for income bonds on which
no interest is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
EXHIBIT D
ANNUAL REPORT OF FRANKLIN STRATEGIC SERIES
DATED APRIL 30, 1998
ANNUAL
REPORT
FRANKLIN STRATEGIC SERIES
Franklin Biotechnology Discovery Fund
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin Global Health Care Fund
Franklin Global Utilities Fund
Franklin MidCap Growth Fund
Franklin Natural Resources Fund
Franklin Small Cap Growth Fund
Franklin Strategic Income Fund
Technology Update:
Franklin Templeton Combats
the Year 2000 Problem
By Charles B. Johnson,
President of Franklin Resources, Inc.
As we near the 21st century, Franklin Templeton is taking important steps to
tackle the computer glitch dubbed the Year 2000 Problem, Y2K, or the
Millennium Bug. The problem originated from the software designers' attempt
to save memory by recording years in a two-digit format -- "98" instead of
"1998," for example -- but didn't take into account that the year 2000 or
"00," could also be interpreted as 1900. Uncorrected, this problem could
prevent computers from accurately processing date-sensitive data after 1999.
Franklin Templeton's Information Services & Technology division established a
Year 2000 Project Team that has already begun making the necessary software
changes to help our computer systems, which service the funds and their
shareholders, be Year 2000 Compliant. As changes reach completion, we plan to
conduct comprehensive tests to verify their effectiveness. We will also seek
reasonable assurances from all of our major software or data-services
suppliers that they will be Year 2000 Compliant.
In addition, with an estimated 80% of businesses facing the Year 2000
Problem, mutual fund managers appreciate the impact it potentially could have
on companies. That's why Franklin Templeton managers are aware of this issue
when managing fund portfolios.
Rupert H. Johnson, Jr.
President
Franklin Strategic Series
CONTENTS
Shareholder Letter ............................. 1
Fund Reports
Franklin Biotechnology
Discovery Fund ................................ 3
Franklin Blue Chip Fund ....................... 8
Franklin California
Growth Fund ................................... 14
Franklin Global
Health Care Fund .............................. 24
Franklin Global
Utilities Fund ................................ 36
Franklin MidCap
Growth Fund ................................... 46
Franklin Natural
Resources Fund ................................ 52
Franklin Small Cap
Growth Fund ................................... 64
Franklin Strategic
Income Fund ................................... 78
Financial Highlights &
Statement of Investments ....................... 88
Financial Statements ........................... 141
Notes to
Financial Statements ........................... 155
Independent
Auditors' Report ............................... 167
Tax Designation ................................ 168
SHAREHOLDER LETTER
Dear Shareholder:
We are pleased to bring you the Franklin Strategic Series annual report for
the fiscal year ended April 30, 1998.
A Volatile `97
The 12 months covered by this report proved to be a positive year for many
investors. On April 30, 1997, the Dow Jones(R) Industrial Average (the Dow)
closed at 7008.99, and by July 16, it had pushed through the 8000-point mark.
However, during the following months, securities markets experienced severe
volatility, and on October 27, the Dow plunged 7.18% due to investor concerns
about currency crises in Asia. But it regained more than half its losses the
very next day, and at the end of 1997, the Dow stood at 7908.25.*
*Source: Unmanaged Dow Jones Industrial Average total return calculated by
Wilshire Associates, Inc. includes reinvested dividends.
A Surprising `98
The beginning of 1998 was as eventful as the end of 1997. Rather than being
slowed down by Asia's financial problems, the U.S. economy actually picked up
speed, and grew at a surprisingly strong, 4.2% annualized rate during the
first three months of the year. Just as surprising, instead of drifting
higher, inflation dropped to its lowest rate since 1964, and at the close of
the reporting period, the Dow stood at 9063.37, up 31.61% from 12 months
earlier.
What's Next?
After such an impressive rise in the Dow, many investors wondered how long we
would continue to enjoy this remarkable combination of strong economic
growth, low inflation and relatively stable interest rates. The question on
everyone's mind was: would the market drop again in the near future, or would
it soar to new heights?
We, of course, cannot answer that -- and neither can anyone else. But we do
know that markets always have, and always will, fluctuate. That's why prudent
investors view their funds as long-term investments, and realize that
short-term volatility usually has minimal impact upon their long-term
financial goals. They understand that patience, discipline and
diversification are keys to successful investing, and that mutual funds offer
a level of diversification almost impossible for individuals to achieve on
their own.
Regardless of the market's direction, Franklin Templeton's management teams
will strive to provide shareholders careful selection, broad diversification,
and constant professional supervision. We encourage you to speak with your
investment representative about your financial goals, diversify your
investments, and remember that it is time -- not timing -- that makes the
difference.
As always, we appreciate your support, welcome your comments, and look
forward to serving your future investment needs.
Sincerely,
Rupert H. Johnson, Jr.
President
Franklin Strategic Series
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal value, beginning on page 89 of
this report.
FRANKLIN BIOTECHNOLOGY
DISCOVERY FUND
Your Fund's Objective: Franklin Biotechnology Discovery Fund seeks capital
appreciation by investing primarily in equity securities of biotechnology
companies and discovery research firms located in the U.S. and other
countries.
We are pleased to bring you this report of Franklin Biotechnology Discovery
Fund, which covers the period since the fund's inception on September 15,
1997, through April 30, 1998. During this seven and one-half months, the fund
produced a +7.78% cumulative total return, as discussed in the Performance
Summary on page 6, outperforming the fund's benchmark, the Amex Biotechnology
Index, which returned 6.97% for the same period.
As you know, the fund intends to invest in the small capitalization
biotechnology sector and will not likely own many large capitalization stocks
because we believe the best growth opportunities exist in smaller, more
dynamic companies. These companies typically focus on finding new drugs to
treat diseases that are less researched by larger pharmaceutical companies.
We expect the average market capitalization of the fund's holdings will be in
the $200 million to $800 million range. By the end of the reporting period,
the fund had investments in 32 securities representing 6 industries, and
total net assets reached $73 million.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
The fund's holdings are highly volatile stocks and therefore experienced
dramatic swings during the period. On the negative side, shares of Cell
Therapeutics, Inc. and Alteon, Inc. fell 50% or more each during the last
quarter of the reporting period as key products produced disappointing
results in clinical studies. Partially offsetting this decline was
outstanding performance in the shares of Chiroscience Group, Plc. and Heska
Corp., both of which gained significantly during the same period. We expect
these types of returns (both positive and negative) to continue regularly
throughout the fund's life. In an attempt to reduce this high volatility and
diversify the portfolio, we increased the number of positions in the fund and
established short positions in stocks of companies which, in our opinion,
were selling at prices that exceeded their true value.
Looking forward, we believe the outlook for biotechnology companies is
strong, with a record number of approved drugs expected from the Federal Drug
Administration in 1998. Biotechnology-related sales exceeded $12 billion in
1997, with a steady increase in profitable companies in this sector over the
past several years. As a reminder, no new accounts (other than retirement
plan accounts) will be accepted into the fund once its assets reach $150
million. However, shareholders of record at that time will be able to add to
their existing accounts or through reinvestment of dividends and capital
gains.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of April 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected
to affect our strategies and the fund's portfolio composition. Although
historic performance is no guarantee of future results, these insights may
help you understand our investment and management philosophy.
Biotechnology companies are often small, relatively new, or unseasoned. Such
companies can be particularly sensitive to changing economic conditions, and
have less certain growth prospects than larger, more established companies.
And since small company stocks are volatile, they may not be appropriate for
short-term investors. Also, the fund is non-diversified and concentrates in a
single industry, involving other risks, such as patent considerations,
product liability, government regulatory requirements, and regulatory
approval for new drugs and medical products. The fund may invest in foreign
securities, which involve additional risks, including political uncertainty
and currency volatility. These and other risks, including hedging strategies,
are described more fully in the fund's prospectus.
We thank you for your participation in Franklin Biotechnology Discovery Fund
and look forward to serving your investment needs in the future.
Sincerely,
Kurt von Emster
Portfolio Manager
Franklin Biotechnology Discovery Fund
FRANKLIN BIOTECHNOLOGY
DISCOVERY FUND
Top 10 Holdings
4/30/98
Company, % of Total
Industry Net Assets
- -----------------------------------
PathoGenesis Corp.,
Drugs 5.66%
Chiroscience Group, Plc.,
Drugs 4.64%
Inhale Therapeutic Systems,
Delivery Systems 4.57%
Texas Biotechnology Corp.,
Drugs 4.25%
Aviron,
Delivery Systems 4.04%
Zonagen, Inc.,
Drugs 4.02%
Ligand Pharmaceutical Inc.,
Class B,
Drugs 4.02%
Neurex Corp.,
Drugs 3.66%
IDEC Pharmaceuticals Corp.,
Biomedical 3.42%
Chiron Corp.,
Therepeutics 3.29%
PERFORMANCE SUMMARY
Franklin Biotechnology Discovery Fund provided a +7.78% cumulative total
return since inception on September 15, 1997, through April 30, 1998.
Cumulative total return measures the change in value of an investment,
assuming reinvestment all distributions, and does not include the initial
sales charge.
The fund's share price, as measured by net asset value, increased $1.89, from
$25.00 on September 15, 1997, to $26.89 on April 30, 1998. During the
reporting period, shareholders received per-share distributions of 4.7 cents
($0.0470) in short-term capital gains. Distributions will vary depending on
income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
Franklin Biotechnology Discovery Fund
Period ended 4/30/98
Since
Inception
(9/15/97)
Cumulative Total Return1 7.78%
Aggregate Total Return1 2.92%
Value of $10,000 Investment2 $10,292
1. Total return represents the change in value of an investment over the
period indicated. Cumulative total return does not include the sales charge,
and aggregate total return includes the maximum 4.5% initial sales charge.
Since the fund has existed for less than one year, average annual total
returns are not provided.
2. This figure represents the value of a hypothetical $10,000 investment in
the fund over the period indicated and includes the sales charge.
Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, currency volatility, and the
economic, social and political climates of countries where investments are
made. You may have a gain or loss when you sell your shares. Past expense
reductions by the fund's manager increased total return.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 92
of this report.
FRANKLIN BLUE CHIP FUND
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Your Fund's Objective: Franklin Blue Chip Fund seeks long-term capital
appreciation by investing primarily in high quality, blue chip companies with
market capitalization of $1 billion or more, that the managers believe are
leaders in their industries and are positioned for stable, long-term growth
potential.
This annual report of Franklin Blue Chip Fund covers the 12 months ended
April 30, 1998. Early in the period, share prices rose in many countries
around the globe as a result of low inflation and strong corporate profits.
However, Thailand's currency devaluation in July sparked a series of currency
crises in Asia, pushing the region's stock prices sharply lower. This led to
increased volatility in most of the world's equity markets, but some
rebounded toward the end of the period, and finished the fiscal year with
significant gains. Within this environment, Franklin Blue Chip Fund delivered
a +16.41% one-year cumulative total return, as discussed in the Performance
Summary on page 11.
Seeking to take advantage of the volatility described above, we added to many
of our existing positions, and on April 30, 1998, our holdings were
diversified across more than 75 companies. Consumer staples, healthcare,
technology and financial services were the largest groups represented in the
fund.
During the reporting period, the technology and consumer staples sectors
strengthened considerably, and our holdings of Cisco Systems Inc., Nestle,
SA, and Gillette Co. contributed positively to the fund's performance. Riding
the wave of industry consolidation, our shares of Citicorp, Wells Fargo &
Co., and HSBC Holding Plc. also appreciated substantially in value. However,
we believed that other financial companies had high stock valuations, and
maintained a relatively low weighting in this sector. Although this may
penalize us in the short term, it is consistent with our long-term
conservative investment discipline. During the fiscal year, we initiated a
position in Xerox Corp., a major manufacturer of document processing
products, when the price of its shares were temporarily depressed due to
investor concerns about the company's Asian exposure. And we sold our
holdings of Starbucks at a profit due to high valuations.
When the energy sector experienced severe volatility due to the Asian
currency crisis, we took advantage of price declines and established a
position in Schlumberger, Ltd., the world's premier oilfield services
company. We also added to our existing positions in Royal Dutch Petroleum Co.
and Exxon Corp. because we believed that their shares were undervalued. In
our opinion, this industry continues to have growth potential due to steadily
rising energy consumption around the world.
Despite Asia's financial problems and the lofty valuations of the U.S. equity
market, we believe that prospects remain bright for companies with quality
assets, solid management, sound competitive strategies, and the potential to
generate strong earnings in the future. It is important to remember, however,
that investing in the fund involves the special risks of global, and
especially emerging market, investing related to market and currency
volatility, and adverse social and political developments.
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
This discussion reflects our views, opinions and portfolio holdings as of
April 30, 1998, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the fund's portfolio composition. Although historic
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
We thank you for your participation in Franklin Blue Chip Fund and look
forward to serving you in the future. Please feel free to contact us with
your questions or comments.
FRANKLIN BLUE CHIP FUND
Top 10 Holdings
4/30/98
Company % of Total
Industry, Country Net Assets
- -----------------------------------------
Nestle SA, 2.1%
Registered Shares
Consumer Staples,
Switzerland
Hewlett-Packard Co. 2.0%
Technology, U.S.
American International
Group, Inc. 2.0%
Financial Services, U.S.
Exxon Corp. 2.0%
Energy, U.S.
Royal Dutch Petroleum Co.,
New York Shares 2.0%
Energy, U.S.
General Electric Co. 1.9%
Consumer Durables, U.S.
HSBC Holding Plc. 1.9%
Financial Services
United Kingdom
Intel Corp. 1.9%
Technology, U.S.
Eli Lilly & Co. 1.8%
Healthcare, U.S.
The Coca Cola Co. 1.8%
Consumer Staples, U.S.
Sincerely,
Suzanne W. Killea
Portfolio Manager
Franklin Blue Chip Fund
PERFORMANCE SUMMARY
Franklin Blue Chip Fund produced a +16.41% cumulative total return for the
one-year period ended April 30, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of all distributions,
and does not include the initial sales charge.
The fund's share price, as measured by net asset value, increased $1.61, from
$10.85 on April 30, 1997, to $12.46 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 6.4 cents ($0.064)
in dividend income, 7 cents ($0.07) in short-term capital gains, and 1.5
cents ($0.015) in long-term capital gains. Distributions will vary depending
on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
The graph on page 12 compares the fund's performance since inception with the
unmanaged Morgan Stanley Capital International(R) (MSCI) World Index, which
includes approximately 1,500 companies representing the stock markets of 22
countries, including the U.S., Canada, the United Kingdom, and Japan. Of
course, such an unmanaged market index has inherent performance differentials
over any fund. The index does not pay management fees to cover salaries of
securities analysts or portfolio managers, or pay commissions or market
spreads to buy and sell securities. Unlike the index, mutual funds are never
100% invested because they need cash on hand to redeem shares. In addition,
the performance shown for the fund includes the maximum initial sales charge,
all fund expenses and account fees. If operating expenses such as the fund's
had been applied to the index, its performance would have been lower. Please
remember that an index is simply a measure of performance and one cannot
invest in it directly.
GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Blue Chip Fund
Periods ended 4/30/98
Since
Inception
1-Year (6/3/96)
Cumulative Total Return1 16.41% 27.05%
Average Annual Total Return2 11.18% 10.69%
Value of $10,000 Investment3 $11,118 $12,134
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the maximum 4.5%
initial sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the sales charge.
Past expense reductions by the fund's manager increased the fund's total
return to shareholders. Without this waiver, the fund's total returns would
have been lower.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, currency volatility
and the social, economic and political climates of countries where
investments are made. Emerging markets involve heightened risks related to
the same factors, in addition to those associated with their relatively small
size and lesser liquidity. You may have a gain or loss when you sell your
shares.
The Franklin Blue Chip Fund paid distributions derived from long-term capital
gains of 1.5 cents ($0.015) per share in December 1997. The fund hereby
designates such distributions as capital gain dividends per Section 852
(b)(3) of the Internal Revenue Code.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 97
of this report.
FRANKLIN CALIFORNIA GROWTH FUND
Your Fund's Objective: 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.
During the fiscal year ended April 30, 1998, the severe devaluation of
several Asian currencies adversely affected many California companies,
especially those in the high-tech sector. However, a decline in long-term
U.S. interest rates helped spur growth in other sectors of the state's
economy, and California's gross state product grew at an estimated rate of
4.8% during 1997, exceeding $1 trillion for the first time. Within this
environment, Franklin California Growth Fund - Class I produced a +34.98%
one-year cumulative total return, as discussed in the Performance Summary on
page 17.
Although the Asian currency crisis created volatility in securities markets
throughout the world, it also created opportunities for the fund. During the
last several months of the reporting period, we attempted to take advantage
of short-term weakness in the share prices of companies in the semiconductor
equipment and computer peripheral industries by purchasing positions in
Seagate Technology Inc., Applied Materials Inc., Integrated Process Equipment
Corp. and KLA-Tencor Corp. We also added shares of electronic manufacturing
service companies Flextronics International Ltd., Sanmina Corp. and Solectron
Corp. to the fund.
Fund holdings that contributed greatly to our performance during the fund's
fiscal year included Mercury Interactive Corp., Uniphase Corp., Airtouch
Communications Inc. and Cisco Systems Inc. Total returns on each of these
stocks exceeded 100% for the period. In our opinion, these companies still
possessed good growth prospects, even after these gains, and we maintained
our weighting in their shares.
During the reporting period, the fund's performance relative to the S&P 500
was hurt by our technology and real estate holdings. We were heavily weighted
in the various technology sectors when these stocks declined substantially in
the fourth quarter of 1997, and our holdings in the real estate sector also
failed to live up to expectations. While many real estate companies continued
to benefit from California's strong economy, their total return lagged that
of the overall market. However, we believe that given their healthy dividend
yields and cash flows from operations, the relative performance of these
sectors could reverse themselves.
Looking forward, we believe that the financial turmoil in Asia may remain the
most important variable confronting investors this year and next. On the
bright side, the Asian situation may actually help induce a reform of the
region's banks and reduce the corruption of some Asian companies. It may also
help slow the U.S. economy enough so that the Federal Reserve Board would not
have to raise interest rates. However, in our opinion, Asia still represents
a major growth opportunity for many California companies in the long term.
GRAPHIC MATERIAL 5 OMITTED - SEE APPENDIX AT END OF DOCUMENT
FRANKLIN CALIFORNIA
GROWTH FUND
Top 10 Holdings on 4/30/98
Company % of Total
Industry Net Assets
- ----------------------------------------
Cisco Systems Inc. 2.0%
Electronic Technology
Varco International Inc. 1.8%
Industrial Services
Synopsys Inc. 1.7%
Technology Services
Atlantic Richfield Co. (ARCO) 1.6%
Energy/Minerals
Computer Sciences Corp. 1.6%
Electronic Technology
BankAmerica Corp. 1.5%
Financial Services
Chevron Corp. 1.5%
Energy/Minerals
Arden Realty Inc. 1.5%
Real Estate
Avery Dennison Corp. 1.4%
Process Industries
Safeway Inc. 1.4%
Retail
As we continue to scan the investment horizon for what we perceive to be
bargain-priced companies, we find that there is no shortage of potential
investments for Franklin California Growth Fund. With almost 1,400 publicly
traded companies, California is fertile soil for investment opportunity, and
we will continue to use our professional staff of research analysts to help
us take advantage of this fact.
Of course, there are risks involved with investing in a non-diversified fund
concentrating in securities associated with a single state, such as increased
susceptibility to adverse economic or regulatory developments. The fund also
invests a portion of its assets in small or relatively new or unseasoned
companies, which involves the additional risks related to relatively small
revenues, limited product lines and small market share. These and other risks
are described in the prospectus.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of April 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected
to affect our strategies and the fund's portfolio composition. Although
historic performance is no guarantee of future results, these insights may
help you understand our investment and management philosophy.
Thank you for your participation in Franklin California Growth Fund. We
welcome any comments or suggestions you may have.
Sincerely,
Conrad B. Herrmann
Portfolio Manager
Franklin California Growth Fund
PERFORMANCE SUMMARY
Class I
Franklin California Growth Fund - Class I produced a +34.98% cumulative total
return for the one-year period ended April 30, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge. We always
maintain a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner. As you can see
from the table on page 19, the fund's Class I shares delivered a +266.77%
cumulative total return since inception on October 30, 1991.
The fund's share price, as measured by net asset value, increased $5.62, from
$19.35 on April 30, 1997, to $24.97 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 14 cents ($0.14) in
dividend income, 55.7 cents ($0.557) in short-term capital gains, and 30.5
cents ($0.305) in long-term capital gains. Distributions will vary depending
on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
The graph on page 18 compares the performance of the fund's Class I shares
since inception with that of the Standard and Poor's(R) 500 (S&P 500(R)) Stock
Index and the Franklin California 250 Growth Index as of April 30, 1998. The
S&P 500 Stock Index is a domestic broad market index consisting of companies
of various sizes, whereas the Franklin California 250 Growth Index is
equally-weighted, representing 250 of the largest corporations headquartered
in California.
GRAPHIC MATERIAL 6 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Of course, such unmanaged market indices have inherent performance
differentials over any fund. They do not pay management fees to cover
salaries of securities analysts or portfolio managers, or pay commissions or
market spreads to buy and sell securities. Unlike unmanaged indices, mutual
funds are never 100% invested because they need cash on hand to redeem
shares. In addition, the performance shown for the fund includes the maximum
initial sales charge, all fund expenses and account fees. If operating
expenses such as the fund's had been applied to the index, its performance
would have been lower. Please remember that an index is simply a measure of
performance and one cannot invest in it directly.
Franklin California Growth Fund - Class I
Periods ended 4/30/98
Since
Inception
1-Year 5-Year (10/30/91)
Cumulative Total Return1 34.98% 251.46% 266.77%
Average Annual Total Return2 28.92% 27.40% 21.27%
Value of $10,000 Investment3 $12,892 $33,568 $35,028
4/30/94 4/30/95 4/30/96 4/30/97 4/30/98
One-Year Total Return4 25.55% 29.09% 47.50% 8.88% 34.98%
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the maximum 4.5%
initial sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the initial sales charge.
4. One-year total return represents the change in value of an investment over
the indicated periods ended on the specified dates and does not include the
initial sales charge.
Past expense reductions by the fund's manager increased the fund's total
return to shareholders. Without this waiver, the fund's total return would
have been lower.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
Franklin California Growth Fund - Class I paid distributions derived from
long-term capital gains of 30.5 cents ($0.305) per share in December 1997.
The fund hereby designates such distributions as capital gain dividends per
Section 852(b)(3) of the Internal Revenue Code.
Class II
Franklin California Growth Fund - Class II produced a +34.02% cumulative
total return for the one-year period ended April 30, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment
of all distributions, and does not include sales charges.
The fund's share price, as measured by net asset value, increased $5.54, from
$19.27 on April 30, 1997, to $24.81 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 2.91 cents ($0.0291)
in dividend income, 55.7 cents ($0.557) in short-term capital gains, and 30.5
cents ($0.305) in long-term capital gains. Distributions will vary depending
on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses.
The graph on page 22 compares the performance of the fund's Class II shares
since inception with that of the Standard and Poor's 500 (S&P 500) and the
Franklin California 250 Growth Index. The S&P 500 Stock Index is a domestic
broad market index consisting of companies of various sizes, whereas the
Franklin California 250 Growth Index is equally-weighted, representing 250 of
the largest corporations headquartered in California.
Of course, such unmanaged market indices have inherent performance
differentials over any fund. They do not pay management fees to cover
salaries of securities analysts or portfolio managers, or pay commissions or
market spreads to buy and sell securities. Unlike unmanaged indices, mutual
funds are never 100% invested because they need cash on hand to redeem
shares. In addition, the performance shown for the fund includes the maximum
initial sales charge, all fund expenses and account fees. If operating
expenses such as the fund's had been applied to the index, its performance
would have been lower. Please remember that an index is simply a measure of
performance and one cannot invest in it directly.
GRAPHIC MATERIAL 7 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin California Growth Fund - Class II
Periods ended 4/30/98
Since
Inception
1-Year (9/3/96)
Cumulative Total Return1 34.02% 46.34%
Average Annual Total Return2 31.72% 25.14%
Value of $10,000 Investment3 $13,172 $14,490
1. Cumulative total return represents the change in value of an investment
over the indicated periods and does not include sales charges.
2. Average annual total return represents the average annual change in value
of an investment over the indicated periods and includes the 1.0% initial
sales charge and the 1.0% contingent deferred sales charge applicable to
shares redeemed within 18 months of purchase.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the indicated periods and include sales charges.
All calculations assume reinvestment of dividends and capital gains at net
asset value.
Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, and you may have a gain or loss
when you sell your shares.
Franklin California Growth Fund - Class II paid distributions derived from
long-term capital gains of 30.5 cents ($0.305) per share in December 1997.
The fund hereby designates such distributions as capital gain dividends per
Section 852(b)(3) of the Internal Revenue Code.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 104
of this report.
FRANKLIN GLOBAL HEALTH CARE FUND
Your Fund's Objective: Franklin Global Health Care Fund seeks capital
appreciation by investing primarily in the equity securities of health care
companies located throughout the world.
Securities markets in general, and health care stocks in particular, experienced
volatility during the reporting period. Small capitalization (cap) stocks
enjoyed a favorable environment during the first six months of the fiscal year,
but corrected sharply in late 1997 and continued to lag their large cap
counterparts through the end of the reporting period. Within this environment,
the fund's Class I shares provided a +28.22% one-year cumulative total return,
as discussed in the Performance Summary on page 28. During the same period, the
unmanaged Standard & Poor's 500(R) (S&P 500(R)) Stock Index returned +38.74%.1
Of course, securities in the health care sector are notoriously volatile, and we
have always maintained a long-term perspective on investments, as we encourage
our shareholders to do. As the Performance Summary also shows, the Franklin
Global Health Care Fund - Class I provided a +183.52% cumulative total return
over the past five years, outperforming the S&P 500, which provided a +179.33%
total return over the same period.
1. Source: Standard & Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
During the period, we continued to reduce our weighting in large cap
pharmaceutical companies because this group traded at what, in our opinion,
were premium prices despite moderate growth. We found what we believed was
better value and greater growth potential among smaller cap stocks. Although
they fell out of favor during the period, we felt that over the long term,
shares of small cap companies could significantly outperform those of large
cap firms. In view of the high prices being paid for shares of some of the
large pharmaceutical companies during the fiscal year, we felt more positive
about small caps' potential.
Medical technology was one of the fund's largest sectors throughout the
reporting period. In our opinion, a number of companies in this group
possessed excellent growth potential and attractive valuations, and we added
to our holdings of ESC Medical Systems, Ltd., a manufacturer of laser and
pulsed-light devices for the cosmetic enhancement market. The price of this
stock, our largest holding, rose significantly following Federal Drug
Administration approval of its Epilight Hair Removal system and successful
acquisition of Laser Industries, one of its leading competitors. We believe
that cosmetic surgery may gain popularity as procedures become less invasive
and less costly.
Our best performing sector was the health care software and information
systems group. Following earnings disappointments, Access Health, Inc.,
Transitions Systems, Inc., and HBO & Co., our three largest holdings in the
sector, enjoyed strong rebounds in value during the reporting period.
Believing that expenditures on information systems may grow rapidly, we added
to some existing positions in this group.
GRAPHIC MATERIAL 9 OMITTED - SEE APPENDIX AT END OF DOCUMENT
FRANKLIN GLOBAL
HEALTH CARE FUND
Top 10 Holdings
4/30/98
Company, % of Total
Industry, Country Net Assets
- ----------------------------------------
ESC Medical Systems, Ltd.,
Medical Technology
and Supplies, U.S. 7.8%
Serologicals Corp.
Biotechnology, U.S. 6.1%
Total Renal Care Holdings, Inc.,
Alternate Site Providers, U.S. 4.5%
Renal Care Group, Inc.
Alternate Site Providers, U.S. 4.5%
Zonagen, Inc.
Specialty Pharmaceuticals,
U.S. 4.5%
Algos Pharmaceutical Corp.,
Specialty Pharmaceuticals,
U.S. 4.1%
Boston Scientific Corp.,
Medical Technology
and Supplies, U.S. 3.6%
Inhale Therepeutic Systems,
Specialty Pharmaceuticals,
U.S. 3.5%
United Healthcare Corp.,
Managed Care
and HMOs, U.S. 3.5%
Novartis, AG,
Pharmaceuticals, Switzerland 3.2%
We also increased our exposure to alternate site health care providers
because we were encouraged by strong market growth in this sector. We added
to our holdings in Renal Care Group, Inc. and Total Renal Care Holdings,
Inc., companies that provide dialysis and related services to patients with
chronic kidney failure, and initiated a position in National Surgery Centers,
Inc., which owns and operates a network of freestanding ambulatory surgery
centers. With health maintenance organizations attempting to treat patients
in lower cost settings, we believe that surgery centers will benefit from
increased volume at the expense of hospitals.
Looking forward, we are confident about future prospects for investors in
health care stocks. In our opinion, overall health care expenditures will be
driven by an aging population and rapidly changing technology, both of which
may result in a wider range of treatable conditions and increasing life
expectancy. In addition, demand for health care products and services is not
necessarily affected by the cyclical swings of the business cycle. Our goal,
as always, is to seize upon investment opportunities in a timely and
disciplined manner in an attempt to provide our shareholders unique
opportunities to invest in today's newest and fastest-growing health care
companies.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of April 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected
to affect our strategies and the fund's portfolio composition. Although
historic performance is no guarantee of future results, these insights may
help you understand our investment and management philosophy.
Of course, there are 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 Franklin Global Health Care Fund and look
forward to serving your investment needs in the future.
Sincerely,
Kurt von Emster
Portfolio Manager
Franklin Global Health Care Fund
PERFORMANCE SUMMARY
Class I
Franklin Global Health Care Fund - Class I provided a +28.22% cumulative
total return for the one-year period ended April 30, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment
of all distributions, and does not include the initial sales charge. We
always maintain a long-term perspective when managing the fund, and encourage
shareholders to view their investments in a similar manner. As you can see
from the table on page 31, the fund's Class I shares delivered a +154.17%
cumulative total return since inception on February 14, 1992.
The fund's share price, as measured by net asset value, increased $3.17, from
$16.11 on April 30, 1997, to $19.28 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 9.2 cents ($0.0920)
in dividend income, 99.2 cents ($0.9920) in short-term capital gains, and
19.0 cents ($0.1900) in long-term capital gains. Distributions will vary
depending on income earned by the fund and any profits realized from the sale
of securities in the portfolio, as well as the level of the fund's operating
expenses.
The graph on page 30 compares the performance of Franklin Global Health Care
Fund - Class I since inception with that of the Standard & Poor's 500 (S&P
500) Stock Index. The S&P 500 is a domestic broad market index, which
includes a variety of securities issued by companies not associated with the
health care industry. Of course, such unmanaged indices have inherent
performance differentials over any fund. They do not pay management fees to
cover salaries of securities analysts or portfolio managers or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need cash on hand to redeem
shares. In addition, the performance shown for the fund includes the maximum
initial sales charge, all fund expenses and account fees. If operating
expenses such as the fund's had been applied to the index, its performance
would have been lower. Please remember that an index is simply a measure of
performance, and one cannot invest in it directly.
GRAPHIC MATERIAL 10 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Global Health Care Fund - Class I
Periods ended 4/30/98
Since
Inception
1-Year 3-Year 5-Year (2/14/92)
Cumulative Total Return1 28.22% 99.88% 183.52% 154.17%
Average Annual Total Return2 22.45% 24.05% 22.04% 15.36%
Value of $10,000 Investment3 $12,245 $19,088 $27,072 $24,276
4/30/95 4/30/96 4/30/97 4/30/98
One-Year Total Return4 16.33% 82.68% -14.67% 28.22%
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the maximum 4.5%
initial sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the sales charge.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales
charge.
Past expense reductions by the fund's manager increased the fund's total
returns. Without this waiver, the fund's total returns would have been lower.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, currency volatility
and the economic, social and political climates of countries where
investments are made. You may have a gain or loss when you sell your shares.
Franklin Global Health Care Fund - Class I paid distributions derived from
long-term capital gains of 19.0 cents ($0.1900) per share in December 1997.
The fund hereby designates such distributions as capital gain dividends per
Section 852(b)(3) of the Internal Revenue Code.
Class II
Franklin Global Health Care Fund - Class II provided a +27.22% cumulative
total return for the one-year period ended April 30, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment
of all distributions and does not include sales charges.
The fund's Class II share price, as measured by net asset value, increased
$3.10, from $16.07 on April 30, 1997, to $19.17 on April 30, 1998. During the
reporting period, shareholders received per-share distributions of 99.2 cents
($0.9920) in short-term capital gains and 19.0 cents ($0.1900) in long-term
capital gains. Distributions will vary depending on income earned by the fund
and any profits realized from the sale of securities in the portfolio, as
well as the level of the fund's operating expenses.
The graph on page 34 compares the performance of Franklin Global Health Care
Fund - Class II since inception with that of the Standard & Poor's 500 (S&P
500) Stock Index. The S&P 500 is a domestic broad market index, which
includes a variety of securities issued by companies not associated with the
health care industry. Of course, such unmanaged market indices have inherent
performance differentials over any fund. They do not pay management fees to
cover salaries of securities analysts or portfolio managers or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need cash on hand to redeem
shares. In addition, the performance shown for the fund includes the sales
charges, all fund expenses and account fees. If operating expenses such as
the fund's had been applied to the index, its performance would have been
lower. Please remember that an index is simply a measure of performance, and
one cannot invest in it directly.
GRAPHIC MATERIAL 11 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Global Health Care Fund - Class II
Periods ended 4/30/98
Since
Inception
1-Year (9/3/96)
Cumulative Total Return1 27.22% 20.54%
Average Annual Total Return2 24.98% 11.26%
Value of $10,000 Investment3 $12,498 $11,931
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the 1.0% initial
sales charge and 1.0% contingent deferred sales charge applicable to shares
redeemed within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include sales charges.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, currency volatility
and the economic, social and political climates of countries where
investments are made. You may have a gain or loss when you sell your shares.
Franklin Global Health Care Fund - Class II paid distributions derived from
long-term capital gains of 19.0 cents ($0.1900) per share in December 1997.
The fund hereby designates such distributions as capital gain dividends per
Section 852(b)(3) of the Internal Revenue Code.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 108
of this report.
FRANKLIN GLOBAL UTILITIES FUND
Your Fund's Objective: Franklin Global Utilities Fund seeks to provide total
return by investing in the equity and debt securities of utility companies
located in the United States and around the world.
GRAPHIC MATERIAL 12 OMITTED - SEE APPENDIX AT END OF DOCUMENT
FRANKLIN GLOBAL UTILITIES FUND
Top 10 Holdings
4/30/98
Company % of Total
Industry, Country Net Assets
- -----------------------------------------
Duke Energy Corp. 3.7%
Electric & Gas Utilities, U.S.
ICG Communications Inc. 3.5%
Telecommunications
Services & Equipment, U.S.
The AES Corp. 3.2%
Electric & Gas Utilities, U.S.
AirTouch Communications Inc. 3.0%
Telecommunications
Services & Equipment, U.S.
Pacific Enterprises 2.8%
Electric & Gas Utilities, U.S.
Portugal Telecom, SA 2.7%
Telecommunications
Services & Equipment, Portugal
Enron Corp. 2.6%
Electric & Gas Utilities, U.S.
Tele Danmark A/S, 2.3%
Sponsored ADR
Telecommunications
Services & Equipment, Denmark
Telecom Italia, SpA 2.2%
Telecommunications
Services & Equipment, Italy
Nortel Inversora SA, 2.1%
10.00%, cvt., pfd.
Telecommunications, Argentina
During the 12 months under review, electric companies generally benefited
from cost cutting and more clearly defined regulations, while
telecommunications firms experienced better-than-expected demand for cellular
services and higher traffic volume. As a result, many global utility shares
rose in value. Although U.S. and European utility stocks led the way, those
in Latin America also performed well. However, most Asian utility stocks were
weaker. Within this environment, Franklin Global Utilities Fund - Class I
produced a +37.02% one-year cumulative total return, as discussed in the
Performance Summary on page 41, outperforming the utility fund average return
of +35.76% for the same period, as measured by Lipper Analytical Services.*
*Source: Lipper Analytical Services, Inc. There are 95 funds in the Lipper
Utility Funds Category. Lipper calculations do not include sales charges. The
fund's performance relative to the category may have differed if sales
charges had been considered. Past performance does not guarantee future
results.
United States
Strong corporate profits and subdued inflation enabled the U.S. equity market
to continue setting records during the reporting period. Although U.S.
utility shares generally underperformed broad market indices, many advanced
because of declining interest rates and an improving regulatory outlook.
Telephone stocks performed particularly well, and our holdings of Ameritech
Corp., Airtouch Communications Inc., and ICG Communications Inc. appreciated
considerably in value.
The electric power industry experienced significant regulatory changes during
the fiscal year. California and Massachusetts announced plans to restructure
the electric generation business, and a number of other states came close to
completing similar plans. These could help make electric utility companies
more competitive, and in some cases, also improve their balance sheets. In
our opinion, complete resolution of regulatory issues should enhance the
earnings of electric utility companies and make their stocks more attractive
to investors.
Europe
During the reporting period, European economies continued to recover, as
government attempts to meet European Monetary Union criteria generally led to
lower interest rates and benign inflation. In addition, many of the region's
utility companies restructured, reduced costs, and consolidated, which
contributed to the advance of many utility stock prices. Portugal, Italy,
Spain and Germany were among the best performing utility markets for the
fund. Taking advantage of this strength, we sold our shares of Electricidade
de Portugal and Telecel-Comunicacoes Pessoais, SA at a profit.
In our opinion, many European companies are now positioned to benefit from a
large, pent-up demand for telecommunications services, and we believe that
our holdings of Telefonica de Espana (Spain) and Hellenic Telecommunications
Organization, SA (Greece) could experience extensive growth for several years
to come.
Latin America
Our Latin American weighting remained relatively stable during the reporting
period. Although the region experienced strong economic growth and low
inflation, the Asian currency crisis in late 1997 sent a shock wave
throughout Latin America because many investors feared that Asia's economic
difficulties could spread. However, the international investment community
regained confidence when Brazil responded with monetary and fiscal measures
designed to quell concerns. And many Latin American markets recovered in
early 1998, as investors began viewing this area on its own economic merits.
During the fiscal year, Latin American countries continued to privatize
state-owned telephone and electric utility companies. Consortiums from all
over the world participated in the process that will create 12 different
telecommunications companies in Brazil, constituting one of the largest
privatizations ever. Brazil has substantial demand for telecommunications
services, and we initiated a position in Telecomunicacoes Brasileiras, SA,
the Brazilian national phone company that is in the process of being
privatized. We view the region's evolution towards a more market-oriented
economic environment positively and believe it will continue to provide
attractive investment opportunities.
Asia
The Asian financial crisis made headlines around the world in late 1997 and
early 1998. Fortunately, we had maintained a low Asian weighting because we
felt that most utility stock valuations there were too high. However, stock
prices fell dramatically once the crisis started, and we will scrutinize
Asian markets for any possible investments.
Looking forward, we are optimistic about prospects for global utility
companies. Worldwide demand for telecommunications, electric power, gas,
water and other utility services is accelerating, and many foreign countries
are now building infrastructures that could produce high levels of revenue
growth for many years to come. As always, we remain committed to our
long-term objective of maximizing total return through investing in a
portfolio of utility stocks from around the world. Utilities provide services
that are an essential part of peoples' lives, and we believe that their
stocks play an important role in a well-diversified investment portfolio. Of
course, there are special risks involved with investing globally in a
non-diversified fund concentrating 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.
This discussion reflects our views, opinions and portfolio holdings as of
April 30, 1998, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the fund's portfolio composition. Although historic
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
We thank you for your participation in Franklin Global Utilities Fund and
look forward to serving you in the future. Please feel free to contact us
with your questions or comments.
Sincerely,
Sally E. Haff
Portfolio Manager
Franklin Global Utilities Fund
PERFORMANCE SUMMARY
Class I
Franklin Global Utilities Fund - Class I produced a +37.02% cumulative total
return for the one-year period ended April 30, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge. We always
maintain a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner. As you can see
from the table on page 43, the fund's Class I shares delivered a +158.14%
cumulative total return since inception on July 2, 1992.
The fund's share price, as measured by net asset value, increased $2.90, from
$14.46 on April 30, 1997, to $17.36 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 37 cents ($0.37) in
dividend income, 57.32 cents ($0.5732) in short-term capital gains, and
$1.1778 in long-term capital gains. Distributions will vary depending on
income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
GRAPHIC MATERIAL 13 OMITTED - SEE APPENDIX AT END OF DOCUMENT
The graph on page 42 compares the performance of Franklin Global Utilities
Fund - Class I since inception with that of the unmanaged Standard and Poor's
500 (S&P 500) Stock Index. The S&P 500 is a domestic, broad market index
consisting of companies of various sizes. Of course, such unmanaged market
indices have inherent performance differentials over any fund. They do not
pay management fees to cover salaries of securities analysts or portfolio
managers, or pay commissions or market spreads to buy and sell securities.
Unlike unmanaged indices, mutual funds are never 100% invested because they
need cash on hand to redeem shares. In addition, the performance shown for
the fund includes the maximum initial sales charge, all fund expenses and
account fees. If operating expenses such as the fund's had been applied to
the index, its performance would have been lower. Please remember that an
index is simply a measure of performance and one cannot invest in it directly.
Franklin Global Utilities Fund - Class I
Periods ended 4/30/98
Since
Inception
1-Year 3-Year 5-Year (7/2/92)
Cumulative Total Return1 37.02% 90.77% 124.44% 158.14%
Average Annual Total Return2 30.86% 22.12% 16.46% 16.75%
Value of $10,000 Investment3 $13,086 $18,213 $21,146 $24,655
4/30/94 4/30/95 4/30/96 4/30/97 4/30/98
One-Year Total Return4 14.04% 3.17% 23.27% 12.94% 37.02%
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the maximum 4.5%
initial sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the sales charge.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales
charge.
Past expense reductions by the fund's manager increased the fund's total
return to shareholders. Without this waiver, the fund's total returns would
have been lower.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, currency volatility
and the economic, social and political climates of countries where
investments are made. Emerging markets involve heightened risks related to
the same factors, in addition to those associated with their relatively small
size and lesser liquidity. You may have a gain or loss when you sell your
shares.
The Franklin Global Utilities Fund - Class I paid distributions derived from
long-term capital gains of $1.1778 per share in December 1997. The fund
hereby designates such distributions as capital gain dividends per Section
852 (b)(3) of the Internal Revenue Code.
Class II
Franklin Global Utilities Fund - Class II produced a +36.21% cumulative total
return for the one-year period ended April 30, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include sales charges.
The fund's share price, as measured by net asset value, increased $2.88, from
$14.37 on April 30, 1997, to $17.25 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 26.59 cents
($0.2659) in dividend income, 57.32 cents ($0.5732) in short-term capital
gains, and $1.1778 in long-term capital gains. Distributions will vary
depending on income earned by the fund and any profits realized from the sale
of securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
The graph on page 45 compares the performance of Franklin Global Utilities
Fund - Class II since inception with that of the Standard and Poor's 500 (S&P
500) Stock Index. The S&P 500 is a domestic, broad market index consisting of
companies of various sizes. Of course, such unmanaged market indices have
inherent performance differentials over any fund. They do not pay management
fees to cover salaries of securities analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike unmanaged
indices, mutual funds are never 100% invested because they need cash on hand
to redeem shares. In addition, the performance shown for the fund includes
the maximum initial sales charge, all fund expenses and account fees. If
operating expenses such as the fund's had been applied to the index, its
performance would have been lower. Please remember that an index is simply a
measure of performance and one cannot invest in it directly.
GRAPHIC MATERIAL 14 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Global Utilities Fund - Class II
Periods ended 4/30/98
Since
Inception
1-Year (5/1/95)
Cumulative Total Return1 36.21% 87.90%
Average Annual Total Return2 33.81% 23.01%
Value of $10,000 Investment3 $13,381 $18,607
1. Cumulative total return represents the change in value of an investment
over the indicated periods and does not include sales charges.
2. Average annual total return represents the average annual change in value
of an investment over the indicated periods and includes the 1.0% initial
sales charge and the 1.0% contingent deferred sales charge applicable to
shares redeemed within 18 months of purchase.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the indicated periods and include sales charges.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, currency volatility
and the economic, social and political climates of countries where
investments are made. Emerging markets involve heightened risks related to
the same factors, in addition to those associated with their relatively small
size and lesser liquidity. You may have a gain or loss when you sell your
shares.
The Franklin Global Utilities Fund - Class II paid distributions derived from
long-term capital gains of $1.1778 per share in December 1997. The fund
hereby designates such distributions as capital gain dividends per Section
852 (b)(3) of the Internal Revenue Code.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 112
of this report.
FRANKLIN MIDCAP GROWTH FUND
Your Fund's Objective: Franklin MidCap Growth Fund seeks long-term capital
growth by investing primarily in equity securities of medium-capitalization
companies -- those with a market capitalization between $200 million and $5
billion.
We are pleased to present the annual report of Franklin MidCap Growth Fund,
which covers the 12 months ended April 30, 1998. During this period,
inflation remained subdued despite moderate economic growth and healthy
corporate profits. Interest rates were relatively stable, and U.S. equity
markets performed impressively. However, Asia's financial turmoil in October
1997 adversely effected domestic financial markets, particularly the
technology sector. Fortunately, the market resumed its upward ascent in the
first quarter of 1998, as investor concerns about the impact of the Asian
currency crisis waned. Within this environment, Franklin MidCap Growth Fund
delivered a 12-month cumulative total return of +35.53%, as discussed in the
Performance Summary on page 49, outperforming the Dow Jones Industrial
Average, which provided a total return of +31.61% for the same period.*
*Source: Standard & Poor's Micropal. Dow Jones Industrial Average's total
return is calculated by Wilshire Associates, Inc. Index is unmanaged and
includes reinvested dividends. One cannot invest directly in an index.
The fund benefited from the considerable rise in value of many of its
positions in the financial services sector. A number of companies providing
educational services also performed well, and our holdings of Apollo Group
Inc. (which offers higher-education programs to working adults), DeVry Inc.
(a leading developer of higher education), and Sylvan Learning Systems Inc.
(a provider of private educational and testing services), also contributed
positively to the fund's return. However, the fund's performance was hindered
by our exposure to energy stocks, whose value fell due to a drop in oil
prices.
Throughout the reporting period, we focused on investing in companies with
diversified product lines and sustainable competitive advantages. In
searching for these firms, we also looked for reasonable stock valuations,
and sold positions when valuations appeared excessive or fundamentals seemed
to be deteriorating.
Taking advantage of market volatility, we initiated positions in a number of
industry leaders. For example, we purchased shares of Viking Office Products
Inc., a major supplier to small and medium-sized businesses; Starwood Hotels
& Resorts, a large, U.S. real estate investment trust specializing in hotel
properties; and Providian Financial Corp., a domestic issuer of secured
credit cards.
Looking forward, we remain optimistic about growth opportunities for midcap
companies. In our opinion, the midcap sector brings together the best
features of small and large cap stocks, combining above-average growth
potential with greater stability.
Because of the U.S. economic expansion and high stock market appreciation of
the last two years, we are increasingly conscious of maintaining our
valuation criteria and discipline in the investment decision process. Of
course, there are risks associated with investing in a fund seeking long-term
capital growth from small-to-medium size companies that have less certain
growth prospects and greater sensitivity to changing economic conditions than
large cap companies. These and other risks are further discussed in the
fund's prospectus.
GRAPHIC MATERIAL 15 OMITTED - SEE APPENDIX AT END OF DOCUMENT
This discussion reflects our views, opinions and portfolio holdings as of
April 30, 1998, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the fund's portfolio composition. Although historic
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
FRANKLIN MIDCAP GROWTH FUND
Top 10 Holdings
4/30/98
Company % of Total
Industry Net Assets
- ----------------------------------------
Transocean Offshore Inc. 2.2%
Industrial Services
Sylvan Learning Systems, Inc. 2.1%
Commercial Services
Apollo Group, Inc., Class A 2.1%
Consumer Services
DeVry Inc. 2.0%
Consumer Services
Tellabs Inc. 2.0%
Electronic Technology
Jones Apparel Group Inc. 2.0%
Consumer Non-Durables
The Estee Lauder
Cos., Inc. Class A 1.8%
Consumer Non-Durables
Clayton Homes Inc. 1.8%
Consumer Durables
Expeditors International
of Washington Inc. 1.7%
Transportation
Viking Office Products Inc. 1.7%
Retail
We thank you for your participation in the Franklin MidCap Growth Fund and
look forward to serving you in the future. Please feel free to contact us
with your questions or comments.
Sincerely,
Edward B. Jamieson
Portfolio Manager
Franklin MidCap Growth Fund
PERFORMANCE SUMMARY
Franklin MidCap Growth Fund produced a +35.53% cumulative total return for
the one-year period ended April 30, 1998. Cumulative total return measures
the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge. We always
maintain a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner. As you can see
from the table on page 51, the fund's shares delivered a +118.22% cumulative
total return since inception on August 17, 1993.
The fund's share price, as measured by net asset value, increased $4.10, from
$13.34 on April 30, 1997, to $17.44 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 22.30 cents
($0.2230) in short-term capital gains, and 33.50 cents ($0.3350) in long-term
capital gains. Distributions will vary depending on income earned by the fund
and any profits realized from the sale of securities in the portfolio, as
well as the level of the fund's operating expenses. Past distributions are
not indicative of future trends.
The graph on page 50 compares the fund's performance since its inception on
August 17, 1993, with that of the unmanaged Standard and Poor's MidCap 400
Index (S&P MidCap 400). On June 1, 1996, the fund became available to retail
investors. Prior to that date, it was only offered to institutional investors
(without a sales charge or 12b-1 fees). The S&P MidCap 400 is a market value
weighted index consisting of 400 domestic stocks chosen for market size,
liquidity, and industry group representation. Of course, such an unmanaged
market index has inherent performance differentials over any fund. The index
does not pay management fees to cover salaries of securities analysts or
portfolio managers, or pay commissions or market spreads to buy and sell
securities. Unlike the index, mutual funds are never 100% invested because
they need cash on hand to redeem shares. In addition, the performance shown
for the fund includes the maximum initial sales charge, all fund expenses and
account fees. If operating expenses such as the fund's had been applied to
the index, its performance would have been lower. Please remember that an
index is simply a measure of performance and one cannot invest in it directly.
GRAPHIC MATERIAL 16 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin MidCap Growth Fund
Periods ended 4/30/98
Since
Inception
1-Year5 3-Year5 (8/17/93)5
Cumulative Total Return1 35.53% 95.10% 118.22%
Average Annual Total Return2 29.42% 23.05% 16.91%
Value of $10,000 Investment3 $12,942 $18,631 $20,842
4/30/95 4/30/96 4/30/97 4/30/98
One-Year Total Return4 10.06% 35.40% 6.47% 35.53%
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the maximum 4.5%
initial sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the sales charge.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales
charge.
5. On January 2, 1996, the fund changed its investment objective, strategy,
and investment adviser.
Past expense reductions by the fund's manager increased the fund's total
return to shareholders. Without this waiver, the fund's total returns would
have been lower. All calculations assume reinvestment of dividends and
capital gains at net asset value. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions,
and you may have a gain or loss when you sell your shares.
The Franklin MidCap Growth Fund paid distributions derived from long-term
capital gains of 33.50 cents ($0.3350) per share in December 1997. The fund
hereby designates such distributions as capital gain dividends per Section
852 (b)(3) of the Internal Revenue Code.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 118
of this report.
FRANKLIN NATURAL RESOURCES FUND
Your Fund's Objective: Franklin Natural Resources Fund seeks long-term
capital appreciation by investing at least 65% of its total assets in
securities of companies that own, produce, refine, process or market natural
resources, as well as those that provide support services for natural
resources companies.
GRAPHIC MATERIAL 17 OMITTED - SEE APPENDIX AT END OF DOCUMENT
This annual report of Franklin Natural Resources Fund covers the 12 months
ended April 30, 1998. Led by technology, financial services, and health care
companies, the U.S. stock market performed well during the fiscal year.
However, economic and political turmoil in Asia during late 1997 raised
investor concerns about future demand for a wide range of commodities
including energy, chemicals, steel, and paper.
As a result, the natural resources sector underperformed the overall domestic
market. Although many commodity markets performed poorly during the reporting
period, Franklin Natural Resources Fund - Class I delivered a +17.57%
one-year cumulative total return, as discussed in the Performance Summary on
page 56. This was significantly higher than the natural resources fund
average return of +11.26% for the same period, as measured by Lipper
Analytical Services.*
*Source: Lipper Analytical Services, Inc. There are 50 funds in the Lipper
Natural Resources Funds Category. Lipper calculations do not include sales
charges, and expense reductions by the fund's manager increased the fund's
total returns. The fund's performance relative to the category may have
differed if these factors had been considered. Past performance does not
guarantee future results.
Throughout the reporting period, many natural resources companies attempted
to diversify their service capabilities and develop economies of scale by
consolidating. One of our holdings, United Meridian Corp., merged with Ocean
Energy Inc., creating a leading independent producer of oil and gas. In the
oilfield services industry, Falcon Drilling Cos. Inc., another holding,
united with Reading & Bates to form R&B Falcon Corp., an offshore drilling
contractor with a fleet of drilling rigs. Consolidation also occurred in the
forest products and paper sector, with still another holding, Bowater Inc.,
acquiring Canadian-based Avenor and Korean-based Halla Paper, creating a
low-cost global newsprint business. And one of our positions in the precious
metals sector, Placer Dome Inc., announced it was taking a stake in Vengold,
which has exposure to vast, gold reserves in Lihir, Papua New Guinea.
Energy, our largest sector weighting on April 30, 1998, contributed
significantly to the fund's performance, as the value of our holdings in
Varco International Inc., Atwood Oceanics Inc., and Transocean Offshore Inc.
appreciated considerably. Varco profited from higher sales of hardware that
makes oil and gas drilling more productive, and Atwood Oceanics and
Transocean Offshore, global leaders in deepwater drilling projects,
experienced increased demand for their premium rigs.
As in all reporting periods, some positions hindered the fund's performance.
Due to higher levels of OPEC production, the return of Iraqi oil to the world
market, and a warmer-than-normal winter season in much of the northern
hemisphere, crude oil prices declined significantly. Consequently, our shares
of Gulf Canada Resources Ltd. and Nuevo Energy Co. fell in value. The
strength of the forest products and paper sector also negatively impacted our
performance because of our relatively low weighting in this area.
GRAPHIC MATERIAL 18 OMITTED - SEE APPENDIX AT END OF DOCUMENT
FRANKLIN NATURAL
RESOURCES FUND
Top 10 Holdings
4/30/98
Company % of Total
Industry, Country Net Assets
- ----------------------------------------
Barrett Resources Corp. 4.1%
Energy, U.S.
Varco International Inc. 3.4%
Energy, U.S.
Diamond Offshore Drilling Inc. 3.2%
Energy, U.S.
EVI Inc. 3.0%
Energy, U.S.
Transocean Offshore Inc. 2.7%
Energy, U.S.
Gulf Canada Resources Ltd. 2.6%
Energy, Argentina
Nuevo Energy Co. 2.1%
Energy, U.S.
The AES Corp. 1.7%
Energy, U.S.
NewField Exploration Co. 1.6%
Energy, U.S.
During the reporting period, we did not make investments based solely on the
assumption that commodity prices would rise or fall. Rather, we purchased
shares of firms with efficient, technologically advanced operations that we
felt would prosper even in a weak environment. For example, we added to our
holdings of Barrett Resources Corp., the leading explorer of natural gas in
North America, and bought stock in EVI Inc., a major manufacturer of premium
tubular products for offshore oil and gas operations.
Looking forward, we anticipate a period of balanced supply and demand
conditions for a wide range of natural resources in the near future. In our
opinion, this should lead to moderate growth and sustained levels of
profitability for low-cost producers in commodity-related industries. It is
important to remember, however, that the rewards the fund may offer also
involve the special risks of investing in a non-diversified, sector fund, as
well as the currency volatility and political, economic or regulatory
uncertainty associated with foreign, and especially developing market,
investing.
This discussion reflects our views, opinions and portfolio holdings as of
April 30, 1998, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the fund's portfolio composition. Although historic
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
We thank you for your participation in Franklin Natural Resources Fund and
look forward to serving you in the future. Please feel free to contact us
with your questions or comments.
Sincerely,
Suzanne W. Killea
Portfolio Manager
Franklin Natural Resources Fund
PERFORMANCE SUMMARY
Class I
Franklin Natural Resources Fund - Class I produced a +17.57% cumulative total
return for the one-year period ended April 30, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge.
The fund's share price, as measured by net asset value, increased $1.39, from
$14.07 on April 30, 1997, to $15.46 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 8.7 cents ($0.087)
in dividend income, 48.51 cents ($0.4851) in short-term capital gains, and
39.39 cents ($0.3939) in long-term capital gains. Distributions will vary
depending on income earned by the fund and any profits realized from the sale
of securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
The graph on page 58 compares the performance of Franklin Natural Resources
Fund - Class I since inception with that of the Standard and Poor's 500 (S&P
500) Stock Index. The S&P 500 is a domestic, broad market index consisting of
companies of various sizes. Of course, such unmanaged market indices have
inherent performance differentials over any fund. They do not pay management
fees to cover salaries of securities analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need cash on hand to redeem
shares. In addition, the performance shown for the fund includes the maximum
initial sales charge, all fund expenses and account fees. If operating
expenses such as the fund's had been applied to the index, its performance
would have been lower. Please remember that an index is simply a measure of
performance and one cannot invest in it directly.
GRAPHIC MATERIAL 19 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Natural Resources Fund - Class I
Periods ended 4/30/98
Since
Inception
1-Year (6/5/95)
Cumulative Total Return1 17.57% 72.82%
Average Annual Total Return2 12.30% 18.85%
Value of $10,000 Investment3 $11,230 $16,506
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the maximum 4.5%
initial sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the sales charge.
The fund's manager has agreed in advance to waive a portion of its management
fees, which reduces operating expenses and increases total return to
shareholders. Without this waiver, total returns would have been lower. The
waiver may be discontinued at any time upon notice to the fund's Board of
Trustees.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, currency volatility,
and the economic, social, and political climates in countries where
investments are made. You may have a gain or loss when you sell your shares.
The Franklin Natural Resources Fund - Class I paid distributions derived from
long-term capital gains of 39.39 cents ($0.3939) per share in December 1997.
The fund hereby designates such distributions as capital gain dividends per
Section 852 (b)(3) of the Internal Revenue Code.
Advisor Class
Franklin Natural Resources Fund - Advisor Class produced a +18.11% cumulative
total return for the one-year period ended April 30, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment
of all distributions.
The fund's share price, as measured by net asset value, increased $1.41, from
$14.07 on April 30, 1997 to $15.48 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 13.55 cents
($0.1355) in dividend income, 48.51 cents ($0.4851) in short-term capital
gains, and 39.39 cents ($0.3939) in long-term capital gains. Distributions
will vary depending on income earned by the fund and any profits realized
from the sale of securities in the portfolio, as well as the level of the
fund's operating expenses. Past distributions are not indicative of future
trends.
The graph on page 62 compares the performance of Franklin Natural Resources
Fund - Advisor Class since inception with that of the Standard and Poor's 500
(S&P 500) Stock Index. The S&P 500 is a domestic, broad market index
consisting of companies of various sizes. Of course, such unmanaged market
indices have inherent performance differentials over any fund.
GRAPHIC MATERIAL 20 OMITTED - SEE APPENDIX AT END OF DOCUMENT
They do not pay management fees to cover salaries of securities analysts or
portfolio managers, or pay commissions or market spreads to buy and sell
securities. Unlike an index, mutual funds are never 100% invested because
they need cash on hand to redeem shares. In addition, the performance shown
for the fund includes all fund expenses and account fees. If operating
expenses such as the fund's had been applied to the index, its performance
would have been lower. Please remember that an index is simply a measure of
performance and one cannot invest in it directly.
Franklin Natural Resources Fund - Advisor Class
Period ended 4/30/98
Since
Inception
1-Year* (6/5/95)*
Cumulative Total Return1 18.11% 73.62%
Average Annual Total Return1 18.11% 20.94%
Value of $10,000 Investment2 $11,811 $17,362
*On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I sales
charge, but including the effect of Class I expenses, including Rule 12b-1 fees;
and (b) for periods after January 1, 1997, figures reflect actual Advisor Class
performance, including the deduction of all fees and expenses applicable only to
that class. Since January 2, 1997 (commencement of sales), the cumulative total
return of Advisor Class shares was 13.35%.
1. Cumulative total return represents the change in value of an investment
over the periods indicated. Average annual total return represents the
average annual change in value of an investment over the periods indicated.
2. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated.
The fund's manager has agreed in advance to waive a portion of its management
fees, which reduces operating expenses and increases total return to
shareholders. Without this waiver, total returns would have been lower. The
waiver may be discontinued at any time upon notice to the fund's Board of
Trustees.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, currency volatility,
and the economic, social and political climates of countries where
investments are made. You may have a gain or loss when you sell your shares.
The Franklin Natural Resources Fund - Advisor Class paid distributions
derived from long-term capital gains of 39.39 cents ($0.3939) per share in
December 1997. The fund hereby designates such distributions as capital gain
dividends per Section 852 (b)(3) of the Internal Revenue Code.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 125
of this report.
FRANKLIN SMALL CAP GROWTH FUND
Your Fund's Objective: 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.
Despite considerable market volatility, the 12 months under review proved to
be a favorable period for many investors in small-cap stocks. During this
time, a strong U.S. dollar put pressure on the earnings of many large,
multi-national corporations, but had less effect on small-cap companies.
Lacking significant exposure to overseas markets, these companies generally
experienced healthy earnings growth, and their stocks performed particularly
well as investor interest shifted from large-cap to small-cap equities.
However, in October 1997, fears about Asia's economic woes adversely affected
global equity markets, and nervous investors began to search for more liquid
investments. Fortunately, concerns about the "Asian flu" spreading to other
economies seemed to abate by the end of the fund's fiscal year.
Within this environment, Franklin Small Cap Growth Fund - Class I delivered a
+43.09% one-year cumulative total return, as discussed in the Performance
Summary on page 67. It outperformed the Standard & Poor's 500 Stock Index and
the Dow Jones Industrial Average, which provided total returns of +41.07% and
+31.61%, respectively, for the same period. The fund also outperformed its
benchmark, the Russell 2500(R) Index, which produced a +40.62% total return for
the 12 months under review.*
*Source: Standard & Poor's Micropal. Indices are unmanaged, and price
appreciation includes reinvested dividends. One cannot invest directly in an
index. Dow Jones Industrial Average's total return is calculated by Wilshire
Associates, Inc.
Contributing to the fund's performance was the rise in value of many of our
technology holdings, some of which advanced more than 75% during the fiscal
year. For example, Tekelec, a supplier of diagnostic systems and network
switching solutions, rose more than 300%, and PMC-Sierra Inc., a provider of
high speed internetworking component solutions, increased more than 160%. The
fund also benefited from its holdings in Tracor Inc., Sapient Corp., and
Integrated Systems Inc.
As impressive as the fund's performance was, it was hampered somewhat by our
exposure to energy stocks, whose value fell when commodity prices began to
drop. However, many energy stocks recovered from their lows by the end of the
reporting period, and despite volatile commodity prices, we remain bullish on
this sector's long-term prospects. On April 30, 1998, the fund's largest
holding was Varco International Inc., an equipment provider for offshore
drilling rigs, which we believe should benefit from increased capital
spending by large oil and gas companies.
In our search for small-cap companies that we considered well-positioned for
rapid growth of revenues, earnings, or cash flow, we focused on firms with
competitive advantages such as a proprietary product or unique marketing
niche. Despite the strength of the domestic equity stock market, we found no
shortage of attractively priced growth stocks. The expanding U.S. economy
provided a favorable environment for small-cap companies, and our research
led us to invest in a number of industries.
Believing that new developments should lead to substantial growth for
technology companies into the next century, we established several new
positions in that sector. For example, we purchased shares of i2 Technologies
Inc., a major vendor of supply chain management software, and Cambridge
Technology Partners Inc., a leading developer of client/server and Internet
applications. However, we sold our holdings of Adaptec Inc. and Altera Corp.
at a profit because we believe that the future growth of these companies was
already reflected in their stock prices.
GRAPHIC MATERIAL 21 OMITTED - SEE APPENDIX AT END OF DOCUMENT
FRANKLIN SMALL CAP
GROWTH FUND
Top 10 Holdings
4/30/98
Company, % of Total
Industry Net Assets
- ----------------------------------------
Varco International Inc. 2.2%
Industrial Services
Atwood Oceanics Inc. 1.4%
Industrial Services
Barrett Resources Corp. 1.3%
Energy Minerals
Komag Inc. 1.2%
Electronic Technology
Affiliated Computer
Services Inc. Class A 1.2%
Technology Services
Synopsys Inc. 1.2%
Electronic Technology
Tekelec 1.2%
Electronic Technology
Etec Systems Inc. 1.2%
Electronic Technology
Tommy Hilfiger Corp. 1.1%
Consumer Non-Durable
Carpenter Technology Corp. 1.1%
Non-Energy Minerals
Looking forward, we are optimistic about prospects for small cap stocks.
Valuations for these companies relative to those of large cap companies
remain below historical averages, and we believe the growing U.S. economy and
apparent lack of inflationary pressure should create a favorable environment
for small cap firms. Of course, there are risks involved in investing in a
fund seeking long-term growth from small or relatively new or unseasoned
companies. These risks, which include relatively small revenues, limited
product lines and small market share, are further discussed in the fund's
prospectus.
This discussion reflects our views, opinions and portfolio holdings as of
April 30, 1998, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the fund's portfolio composition. Although historic
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
We thank you for your participation in Franklin Small Cap Growth Fund and
look forward to serving you in the future. Please feel free to contact us
with your questions or comments.
Sincerely,
Edward B. Jamieson
Portfolio Manager
Franklin Small Cap Growth Fund
PERFORMANCE SUMMARY
Class I
Franklin Small Cap Growth Fund - Class I produced a +43.09% cumulative total
return for the one-year period ended April 30, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge. We always
maintain a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner. As you can see
from the table on page 69, the fund's Class I shares delivered a +249.62%
cumulative total return since inception on February 14, 1992.
The fund's share price, as measured by net asset value, increased $6.97, from
$18.96 on April 30, 1997, to $25.93 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 9.2 cents ($0.092)
in dividend income, 56 cents ($0.56) in short-term capital gains, and 36.7
cents ($0.367) in long-term capital gains. Distributions will vary depending
on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
The graph on page 68 compares the performance of Franklin Small Cap Growth
Fund - Class I since inception with that of the unmanaged Standard and Poor's
500 (S&P 500) Stock Index and the Russell 2500 Index. The S&P 500 is a
domestic, broad market index consisting of companies of various sizes,
whereas the Russell 2500 is an index of 2,500 companies with small market
capitalizations. Of course, such unmanaged market indices have inherent
performance differentials over any fund. They do not pay management fees to
cover salaries of securities analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need cash on hand to redeem
shares. In addition, the performance shown for the fund includes the maximum
initial sales charge, all fund expenses and account fees. If operating
expenses such as the fund's had been applied to the index, its performance
would have been lower. Please remember that an index is simply a measure of
performance and one cannot invest in it directly.
GRAPHIC MATERIAL 22 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Small Cap Growth Fund - Class I
Periods ended 4/30/98
Since
Inception
1-Year 3-Year 5-Year (2/14/92)
Cumulative Total Return1 43.09% 106.42% 238.99% 249.62%
Average Annual Total Return2 36.74% 25.39% 26.49% 21.44%
Value of $10,000 Investment3 $13,764 $19,716 $32,378 $33,392
4/30/94 4/30/95 4/30/96 4/30/97 4/30/98
One-Year Total Return4 29.26% 27.05% 44.06% 0.09% 43.09%
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the maximum 4.5%
initial sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the sales charge.
4. One-year total return represents the change in value of an investment over
the indicated periods ended on the specified dates and does not include the
initial sales charge.
Past expense reductions by the fund's manager increased the fund's total
return to shareholders. Without this waiver, the fund's total returns would
have been lower.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
The Franklin Small Cap Growth Fund - Class I paid distributions derived from
long-term capital gains of 36.70 cents ($0.3670) per share in December 1997.
The fund hereby designates such distributions as capital gain dividends per
Section 852 (b)(3) of the Internal Revenue Code.
Class II
Franklin Small Cap Growth Fund - Class II produced a +42.06% cumulative total
return for the one-year period ended April 30, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include sales charges.
The fund's share price, as measured by net asset value, increased $6.81, from
$18.78 on April 30, 1997, to $25.59 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 56 cents ($0.56) in
short-term capital gains, and 36.7 cents ($0.367) in long-term capital gains.
Distributions will vary depending on income earned by the fund and any
profits realized from the sale of securities in the portfolio, as well as the
level of the fund's operating expenses. Past distributions are not indicative
of future trends.
The graph on page 72 compares the performance of Franklin Small Cap Growth
Fund - Class II since inception with that of the unmanaged Standard and
Poor's 500 (S&P 500) Stock Index and the Russell 2500 Index. The S&P 500 is a
domestic, broad market index consisting of companies of various sizes,
whereas the Russell 2500 is an index of 2,500 companies with small market
capitalizations. Of course, such unmanaged market indices have inherent
performance differentials over any fund. They do not pay management fees to
cover salaries of securities analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need cash on hand to redeem
shares. In addition, the performance shown for the fund includes the maximum
initial sales charge, all fund expenses and account fees. If operating
expenses such as the fund's had been applied to the index, its performance
would have been lower. Please remember that an index is simply a measure of
performance and one cannot invest in it directly.
GRAPHIC MATERIAL 23 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Small Cap Growth Fund - Class II
Periods ended 4/30/98
Since
Inception
1-Year (10/2/95)
Cumulative Total Return1 42.06% 65.94%
Average Annual Total Return2 39.66% 21.24%
Value of $10,000 Investment3 $13,966 $16,426
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the 1.0% initial
sales charge and the 1.0% contingent deferred sales charge applicable to
shares redeemed within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include sales charges.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
The Franklin Small Cap Growth Fund - Class II paid distributions derived from
long-term capital gains of 36.70 cents ($0.3670) per share in December 1997.
The fund hereby designates such distributions as capital gain dividends per
Section 852 (b)(3) of the Internal Revenue Code.
Advisor Class
Franklin Small Cap Growth Fund - Advisor Class produced a +43.68% cumulative
total return for the one-year period ended April 30, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment
of all distributions.
The fund's share price, as measured by net asset value, increased $7.04, from
$18.97 on April 30, 1997 to $26.01 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 12.89 cents
($0.1289) in dividend income, 56 cents ($0.56) in short-term capital gains,
and 36.7 cents ($0.367) in long-term capital gains. Distributions will vary
depending on income earned by the fund and any profits realized from the sale
of securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
The graph on page 76 compares the performance of Franklin Small Cap Growth
Fund - Advisor Class since inception with that of the unmanaged Standard and
Poor's 500 (S&P 500) Stock Index and the Russell 2500 Index. The S&P 500 is a
domestic, broad market index consisting of companies of various sizes,
whereas the Russell 2500 is an index of 2,500 companies with small market
capitalizations. Of course, such unmanaged market indices have inherent
performance differentials over any fund. They do not pay management fees to
cover salaries of securities analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need cash on hand to redeem
shares. In addition, the performance shown for the fund includes the maximum
initial sales charge, all fund expenses and account fees. If operating
expenses such as the fund's had been applied to the index, its performance
would have been lower. Please remember that an index is simply a measure of
performance and one cannot invest in it directly.
GRAPHIC MATERIAL 24 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Small Cap Growth Fund - Advisor Class
Periods ended 4/30/98
Since
Inception
1-Year* 3-Year* 5-Year* (2/14/92)*
Cumulative Total Return1 43.68% 107.30% 240.43% 251.11%
Average Annual total Return1 43.68% 27.51% 27.76% 22.43%
Value of $10,000 Investment2 $14,368 $20,730 $34,043 $35,111
4/30/95 4/30/96 4/30/96 4/30/97 4/30/98
One-Year Total Return*,3 29.26% 27.05% 44.06% 0.20% 43.68%
*On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures
reflect the fund's Class I performance, excluding the effect of the Class I
sales charge, but including the effect of Class I expenses, including Rule
12b-1 fees; and (b) for periods after January 1, 1997, figures reflect actual
Advisor Class performance, including the deduction of all fees and expenses
applicable only to that class. Since January 2, 1997 (commencement of sales),
the cumulative total return of Advisor Class shares was 33.03%.
1. Cumulative total return represents the change in value of an investment
over the periods indicated. Average annual total return represents the
average annual change in value of an investment over the periods indicated.
2. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated.
3. One-year total return represents the change in value of an investment over
the periods ended on the specified dates.
Past expense reductions by the fund's manager increased the fund's total
return to shareholders. Without this waiver, the fund's total returns would
have been lower.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
The Franklin Small Cap Growth Fund - Advisor Class paid distributions derived
from long-term capital gains of 36.7 cents ($0.367) per share in December
1997. The fund hereby designates such distributions as capital gain dividends
per Section 852 (b)(3) of the Internal Revenue Code.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 132
of this report.
FRANKLIN STRATEGIC INCOME FUND
Your Fund's Objective: Franklin Strategic Income Fund seeks a high level of
current income, with capital preservation 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, preferred stock, common stock that pays
dividends, and income-producing securities convertible into common stock of
such companies.
Steady, moderate economic growth, coupled with continued low inflation,
characterized the year under review. By diversifying across the six distinct
asset classes listed in the fund's objective, Franklin Strategic Income Fund
was able to capitalize on arising opportunities, maximizing the strengths of
certain sectors, while reducing volatility through diversification among
asset classes. We focused on economically sensitive sectors, maintaining our
position in U.S. high yield corporate bonds, increasing our allocation in
emerging markets and convertible securities, and selectively hedging our
international sector against the rising U.S. dollar. Relative to an internal
benchmark allocation, the fund maintained an underweighted exposure to more
interest-rate sensitive sectors because we expected lower total returns from
these markets over the intermediate term. Within this environment, the fund
achieved a +13.10% cumulative total return for the one-year period, as
detailed in the Performance Summary on page 84.
High Yield Corporate Bonds
During the 12-month period the fund maintained an overweighted position in
the high yield sector, as this market's strong total returns reflected the
continuation of low inflation and a growing economy.
Growing global demand for wireless communication services favorably impacted
the fund's performance over the past year. Our position in Nextel
Communications, a national digital network provider of wireless
communications services, has benefited from growing customer demand for its
product, translating into subscriber gains well above expectations. The fund
also benefited from our increased exposure in the media and broadcasting
sectors, which have been the direct beneficiaries of deregulation and
consolidation. Two fund holdings, Chancellor Media Corp., one of the
country's largest radio station operators, and Outdoor Systems, Inc., North
America's largest outdoor advertising company, experienced meaningful credit
improvement during the period, which was reflected in their securities'
prices. As many companies converted to real estate investment trusts (REITs)
to capture the potential tax benefits, their bond prices rose. This trend
helped to drive the prices for our bond positions in Vencor, Inc., a health
care provider, and in Marriott (HMH Properties, Inc.), as these companies
announced plans to move to REIT corporate structures, and subsequently to
tender for our bonds at substantial premiums.
Emerging Markets
Our relatively light exposure to various developing Asian markets helped the
fund largely avoid the significant declines in that region's financial
markets. Subsequent concern over these markets precipitated late 1997's
sell-off in the emerging markets sector. Seeking to take advantage of this
situation, the fund nearly doubled this sector's allocation, as we added to
government bond positions that we believe still have favorable, fundamental
long-term outlooks.
The fund's largest segment within the emerging markets sector is still Latin
America, where we found attractive investment opportunities, primarily in
Mexico, Argentina, Brazil and Venezuela. However, since February 1998,
emerging markets bond returns have strengthened. Consequently, the fund began
to focus on this sector's more liquid securities with intermediate-term
maturities, as we found they offer more compelling risk/return tradeoffs.
International
Activity in the fund's international arena was directly related to the
sources of global bond market volatility, particularly to certain foreign
currencies' declines in value relative to the U.S. dollar. After our
assessment of how these sources of volatility might affect the international
sector's performance, we reduced our positions in this sector, as the
comparison table on page 81 shows. The fund also continued to selectively
hedge its foreign currency exposure in an effort to preserve the dollar value
of these holdings.
Over the course of the annual period, we reallocated the fund's European
holdings by increasing our positions in peripheral countries including
Sweden, Denmark and Italy, while reducing our relative allocation in the U.K.
and Germany. In the dollar-bloc countries, the fund reduced its Canadian
exposure while adding to its Australia and New Zealand holdings.
Franklin Strategic Income Fund
Portfolio Breakdown
Based on Total Net Assets
April 30, 1998 April 30, 1997
High Yield Corporate Bonds 28.0% 26.9%
Emerging Market Bonds 23.7% 11.7%
International Bonds 15.9% 21.3%
Convertible Securities 10.1% 8.9%
Mortgage Securities 7.6% 4.7%
U.S. Government Bonds 4.8% 1.9%
Preferred Stock (Non-Convertible) 0.6% 3.7%
Cash & Equivalents 9.3% 20.9%
Convertible Securities
The fund's fiscal year saw a combination of declining interest rates and
healthy corporate earnings growth drive equity markets upward. Prices for
convertible securities similarly evidenced the appreciation of such
companies' underlying common shares. The fund capitalized on this strength as
it increased its convertible securities sector exposure. However, recent
stock market valuations appeared to fairly reflect the positive domestic
economic outlook, and we decided not to overweight this sector at the close
of the reporting period.
During the period under review, the fund held an investment in a Salomon
Smith Barney security that is convertible into Cincinnati Bell common stock.
This investment benefited from Cincinnati Bell's revenue growth, which
resulted from its move into the customer service and telemarketing
businesses. We also recently added to our holdings in Dovatron International,
Inc., an electronics design and manufacturing services provider, as we did
not believe the company's stock price accurately reflected its long-term
earnings growth potential.
Treasuries
Although inflation remained subdued during the year under review, given the
U.S. economy's continued strength, we believe the probability for a
significant near-term drop in interest rates has declined. Consequently,
although the fund moderately increased its Treasury holdings, as shown on
page 81, this sector's weighting was below average at the end of the period.
U.S. Mortgage Securities
The general trend of falling interest rates during the fund's fiscal year
increased refinancing risk, which largely offset the positive impacts from
declining volatility for the mortgage sector's interest rates. The fund
remained somewhat underweighted relative to our internal benchmark
allocation, based largely on an expectation of lower total returns compared
with other fixed-income investment alternatives.
Looking Forward
In our opinion, the fund's performance should continue to benefit from
relatively low inflation and moderate domestic economic growth. In addition,
we believe ongoing positive economic fundamentals in selected developing
countries should also lead to healthy performance from the fund's emerging
market allocation. The fund should also benefit from its more limited
exposure to interest-rate sensitive markets, given the expectation for lower
total returns from these sectors as we move toward the latter half of 1998.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of April 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected
to affect our strategies and the fund's portfolio composition. Although
historic performance is no guarantee of future results, these insights may
help you understand our investment and management philosophy.
Sincerely,
Christopher J. Molumphy
Portfolio Manager
Franklin Strategic Income Fund
PERFORMANCE SUMMARY
Franklin Strategic Income Fund produced a +13.10% cumulative total return for
the one-year period ended April 30, 1998. Cumulative total return measures
the change in value of an investment, assuming reinvestment of all
distributions, and does not include the sales charge.
The fund's share price, as measured by net asset value, increased 38 cents,
from $10.86 on April 30, 1997, to $11.24 on April 30, 1998. During the
reporting period, shareholders received per-share distributions of 90.3 cents
($0.903) in dividend income, 7.19 cents ($0.0719) in short-term capital
gains, and 1.51 cents ($0.0151) in long-term capital gains. Distributions
will vary depending on income earned by the fund and any profits realized
from the sale of securities in the portfolio, as well as the level of the
fund's operating expenses. Past distributions are not indicative of future
trends.
The graph on page 86 compares the fund's performance to a number of indices,
including the Salomon Brothers Non-U.S. World Government Bond Index, Salomon
Brothers High Yield Bond Index, and a composite index. Of course, such
unmanaged market indices have inherent performance differentials over any
fund. They do not pay management fees to cover salaries of securities
analysts or portfolio managers, or pay commissions or market spreads to buy
and sell securities. Unlike an index, mutual funds are never 100% invested
because they need cash on hand to redeem shares. In addition, the performance
shown for the fund includes the maximum initial sales charge, all fund
expenses and account fees. If operating expenses such as the fund's had been
applied to the indices, their performance would have been lower. Please
remember that an index is simply a measure of performance and one cannot
invest in it directly.
GRAPHIC MATERIAL 25 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Strategic Income Fund
Periods ended 4/30/98
Since
Inception
1-Year 3-Year (6/1/94)
Cumulative Total Return1 13.10% 47.27% 60.44%
Average Annual Total Return2 8.32% 12.14% 11.61%
Value of $10,000 Investment3 $10,832 $14,103 $15,368
Distribution Rate4 7.67%
30-Day Standardized Yield5 6.08%
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the maximum 4.25%
initial sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the sales charge.
4. Distribution rate is based on an annualization of April's 7.5 cent per
share monthly dividend and the maximum offering price of $11.74 on April 30,
1998.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended April 30, 1998.
The fund's manager has agreed in advance to waive a portion of its management
fees and to make certain payments to reduce expenses. If the manager had not
taken this action, the fund's distribution rate and total return would have
been lower and the yield for the period would have been 5.42%. The fee waiver
may be discontinued at any time upon notice to the fund's Board of Trustees.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, currency volatility
and the social, economic and political climates of countries where
investments are made. Emerging markets involve heightened risks related to
the same factors, in addition to those associated with the relatively small
size and lesser liquidity of these markets. You may have a gain or loss when
you sell your shares.
Franklin Strategic Income Fund paid distributions derived from long-term
capital gains of 1.51 cents ($0.0151) per share in December 1997. The fund
hereby designates such distributions as capital gain dividends per Section
852(b)(3) of the Internal Revenue Code.
FRANKLIN STRATEGIC SERIES
Financial Highlights
<TABLE>
<CAPTION>
Franklin Biotechnology Discovery Fund
Class I
-------------
Year Ended
April 30, 19981
-------------
<S> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ......................................................... $25.00
-------------
Income from investment operations:
Net investment loss ....................................................................... (.05)
Net realized and unrealized gains ......................................................... 1.99
-------------
Total from investment operations ........................................................... 1.94
-------------
Less distributions from:
Net realized gains ........................................................................ (.05)
-------------
Net asset value, end of year ............................................................... $26.89
=============
Total return*............................................................................... 7.78%
Ratios/supplemental data
Net assets, end of year (000's) ............................................................ $73,546
Ratios to average net assets:
Expenses .................................................................................. 1.50%***
Expenses excluding waiver and payments by affiliate ....................................... 1.61%***
Net investment loss ....................................................................... (.44%)***
Portfolio turnover rate .................................................................... 75.50%
Average commission rate paid** ............................................................. $.0339
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Relates to purchases and sales of equity securities.
***Annualized
1For the period September 15, 1997 (effective date) to April 30, 1998.
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 1998
<TABLE>
<CAPTION>
Franklin Biotechnology Discovery Fund SHARES VALUE
<S> <C> <C>
Common Stocks 85.7%
aAnimal Health 3.0%
Heska Corp. .................................................................... 167,600 $ 2,178,800
-------------
aBiomedical 13.3%
IDEC Pharmaceuticals Corp. ..................................................... 69,800 2,512,800
LifeCell Corp. ................................................................. 242,500 1,924,844
Synaptic Pharmaceutical Corp. .................................................. 140,000 1,750,000
Triangle Pharmaceuticals, Inc................................................... 152,500 2,363,750
Vical, Inc...................................................................... 50,000 753,125
XOMA Corp. ..................................................................... 100,000 487,500
-------------
9,792,019
-------------
aDelivery Systems 17.0%
Alkermes, Inc................................................................... 50,000 1,193,750
Aradigm Corp. .................................................................. 131,600 1,908,200
Aviron ......................................................................... 119,800 2,972,538
DepoTech Corp. ................................................................. 182,300 837,450
Inhale Therapeutic Systems ..................................................... 120,000 3,360,000
TRANSGENE S.A., Sponsored ADR (France).......................................... 125,000 2,250,000
-------------
12,521,938
-------------
aDiagnostics 2.5%
Myriad Genetics, Inc............................................................ 40,000 830,000
Technical Chemicals and Products, Inc........................................... 100,000 987,500
-------------
1,817,500
-------------
aDrugs 43.9%
Agouron Pharmaceuticals, Inc.................................................... 60,000 2,040,000
Alteon, Inc..................................................................... 115,000 517,500
Cell Therapeutics, Inc.......................................................... 137,500 519,929
Chiroscience Group, Plc. (United Kingdom)....................................... 623,000 3,411,400
CuraGen Corp. .................................................................. 151,000 1,698,750
Ligand Pharmaceuticals, Inc., Class B........................................... 200,000 2,900,000
Medicis Pharmaceutical Corp., Class A........................................... 45,000 1,923,750
Neurex Corp. ................................................................... 90,000 2,694,375
PathoGenesis Corp. ............................................................. 105,000 4,160,625
Schein Pharmaceutical, Inc...................................................... 40,000 980,000
SYNSORB Biotech, Inc. (Canada).................................................. 278,000 1,963,016
Texas Biotechnology Corp. ...................................................... 400,000 3,125,000
Vertex Pharmaceuticals, Inc..................................................... 60,000 1,867,500
ViroPharma, Inc................................................................. 70,000 1,522,500
Zonagen, Inc.................................................................... 85,000 2,953,750
-------------
32,278,095
-------------
aTherapeutics 6.0%
Chiron Corp. ................................................................... 125,000 $ 2,421,875
Neurogen Corp. ................................................................. 107,500 1,988,750
-------------
4,410,625
-------------
Total Long Term Investments (Cost $60,702,665) ................................. 62,998,977
-------------
PRINCIPAL
AMOUNT
------------
eRepurchase Agreement 8.9%
Joint Repurchase Agreement, 5.487%, 5/01/98,
(Maturity Value $6,574,607) (Cost $6,573,605) ................................. $6,573,605 6,573,605
BancAmerica Robertson Stephens (Maturity Value $586,192)
Barclays Capital Group, Inc. (Maturity Value $586,192)
Bear, Stearns & Co., Inc. (Maturity Value $319,723)
BT Alex Brown, Inc. (Maturity Value $586,192)
Chase Securities, Inc. (Maturity Value $392,964)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $586,192)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $586,192)
Greenwich Capital Markets, Inc. (Maturity Value $586,192)
Lehman Brothers, Inc. (Maturity Value $586,192)
Paribas Corp. (Maturity Value $586,192)
SBC Warburg Dillon Read, Inc. (Maturity Value $586,192)
UBS Securities, L.L.C. (Maturity Value $586,192)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $67,276,270) 94.6% ..................................... 69,572,582
Securities Sold Short (8.9%) ................................................... (6,519,963)
Other Assets, less Liabilities 14.3% ........................................... 10,493,538
-------------
Net Assets 100.0% .............................................................. $73,546,157
=============
a,gSecurities Sold Short
ISSUER SHARES VALUE
Biogen, Inc..................................................................... 30,000 $ 1,331,250
Biora AB, Sponsored ADR (Sweden)................................................ 14,700 461,213
Elan Corp., Plc., Sponsored ADR (Ireland)....................................... 25,000 1,553,125
ICOS Corp. ..................................................................... 25,000 368,750
Protein Design Labs, Inc........................................................ 32,500 1,040,000
SangStat Medical Corp. ......................................................... 20,000 676,250
Transkaryotic Therapies, Inc.................................................... 35,000 1,089,375
-------------
Total (Proceeds $6,874,305) .................................................... $ 6,519,963
=============
</TABLE>
aNon-income producing.
eSee Note 1(c) regarding joint repurchase agreement.
gSee Note 1(e) regarding securities sold short.
FRANKLIN STRATEGIC SERIES
Financial Highlights
<TABLE>
<CAPTION>
Franklin Blue Chip Fund
Class I
----------------------
Year Ended April 30,
----------------------
1998 19975
----------------------
<S> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................................................. $10.85 $10.00
----------------------
Income from investment operations:
Net investment income .............................................................. .09 .09
Net realized and unrealized gains .................................................. 1.67 .82
----------------------
Total from investment operations .................................................... 1.76 .91
----------------------
Less distributions from:
Net investment income .............................................................. (.06) (.06)
Net realized gains ................................................................. (.09) --
----------------------
Total distributions ................................................................. (.15) (.06)
----------------------
Net asset value, end of year ........................................................ $12.46 $10.85
======================
Total return* ....................................................................... 16.41% 9.14%
Ratios/supplemental data
Net assets, end of year (000's) ..................................................... $16,836 $5,600
Ratios to average net assets:
Expenses ........................................................................... 1.25% 1.25%***
Expenses excluding waiver and payments by affiliate ................................ 1.95% 2.22%***
Net investment income .............................................................. 1.04% 1.07%***
Portfolio turnover rate ............................................................. 57.67% 11.14%
Average commission rate paid** ...................................................... $.0367 $.0525
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Relates to purchases and sales of equity securities.
***Annualized
5For the period June 3, 1996 (effective date) to April 30, 1997.
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 1998
<TABLE>
<CAPTION>
Franklin Blue Chip Fund COUNTRY SHARES VALUE
<S> <C> <C> <C>
Common Stocks 93.5%
Consumer Durables 4.4%
General Electric Co. ....................................................... United States 3,800 $ 323,475
Sony Corp. ................................................................. Japan 2,900 241,648
Toyota Motor Corp. ......................................................... Japan 7,000 182,775
------------
747,898
------------
Consumer Staples 17.8%
Bestfoods .................................................................. United States 3,400 186,575
Campbell Soup Co. .......................................................... United States 3,700 189,856
Gillette Co. ............................................................... United States 2,200 253,963
Kao Corp. .................................................................. Japan 12,000 176,644
L'OREAL .................................................................... France 365 174,077
Nestle, SA, Registered Shares .............................................. Switzerland 185 358,924
Nike, Inc., Class B ........................................................ United States 4,300 205,325
Panamerican Beverages, Inc., A Shares ...................................... Mexico 4,800 191,400
PepsiCo, Inc. .............................................................. United States 4,000 158,750
Philip Morris Cos., Inc. ................................................... United States 6,500 242,531
Procter & Gamble Co. ....................................................... United States 2,200 180,813
The Coca-Cola Co. .......................................................... United States 4,000 303,500
Unilever, NV, New York Shares .............................................. Netherlands 2,600 194,025
Wm. Wrigley Jr. Co. ........................................................ United States 2,000 178,000
------------
2,994,383
------------
Energy 9.2%
British Petroleum Co., Plc., Sponsored ADR ................................. United Kingdom 2,619 247,495
Exxon Corp. ................................................................ United States 4,600 335,513
Royal Dutch Petroleum Co., New York Shares ................................. Netherlands 5,800 328,063
Schlumberger, Ltd. ......................................................... United States 3,600 298,350
Total, SA, Sponsored ADR ................................................... France 3,300 193,875
YPF, SA, Sponsored ADR ..................................................... Argentina 4,300 149,963
------------
1,553,259
------------
Financial Services 11.8%
American International Group, Inc. ......................................... United States 2,575 338,773
Charles Schwab Corp. ....................................................... United States 4,300 150,500
Citicorp ................................................................... United States 1,400 210,700
Federal National Mortgage Association ...................................... United States 4,700 281,413
HSBC Holding, Plc. ......................................................... United Kingdom 10,033 316,881
J.P. Morgan & Co., Inc. .................................................... United States 1,000 131,250
Merrill Lynch & Co., Inc. .................................................. United States 2,300 201,825
Tokio Marine & Fire Insurance Co., Sponsored ADR ........................... Japan 3,100 170,887
Wells Fargo & Co. .......................................................... United States 500 184,250
------------
1,986,479
------------
Healthcare 11.9%
Abbott Laboratories ........................................................ United States 2,500 182,813
Baxter International, Inc. ................................................. United States 3,500 194,031
Eli Lilly & Co. ............................................................ United States 4,400 306,075
Johnson & Johnson .......................................................... United States 3,400 242,675
Healthcare (cont.)
Medtronic, Inc. ............................................................ United States 3,600 $ 189,450
Merck & Co., Inc. .......................................................... United States 2,100 253,050
Novartis, AG ............................................................... Switzerland 180 297,620
Roche Holding, AG .......................................................... Switzerland 21 212,884
Smithkline Beecham, Plc. ................................................... United Kingdom 11,169 133,242
------------
2,011,840
------------
Industrial Cyclicals 9.4%
ABB AB, B Shares ........................................................... Sweden 9,900 153,512
Avery Dennison Corp. ....................................................... United States 4,600 240,924
De Beers Consolidated Mines, AG, ADR ....................................... South Africa 8,000 206,000
Minnesota Mining and Manufacturing Co. ..................................... United States 2,800 264,250
Monsanto Co. ............................................................... United States 2,400 126,900
Praxair, Inc. .............................................................. United States 3,500 176,094
Rio Tinto, Plc., Sponsored ADR ............................................. United Kingdom 4,000 233,000
Sigma-Aldrich Corp. ........................................................ United States 4,500 179,437
------------
1,580,117
------------
Retail .8%
Wal-Mart Stores, Inc. ...................................................... United States 2,600 131,463
------------
Services 10.3%
Brambles Industries, Ltd. .................................................. Australia 10,700 220,524
aCendant Corp. ............................................................. United States 5,922 148,050
Disney (Walt) Co. .......................................................... United States 1,600 198,900
First Data Corp. ........................................................... United States 6,700 226,963
Hutchison Whampoa, Ltd. .................................................... Hong Kong 23,000 142,228
McDonald's Corp. ........................................................... United States 2,800 173,250
SAP, AG .................................................................... Germany 500 236,277
Secom ...................................................................... Japan 3,000 177,098
Xerox Corp. ................................................................ United States 1,800 204,300
------------
1,727,590
------------
Technology 11.9%
aApplied Materials, Inc. ................................................... United States 3,200 115,600
aCisco Systems, Inc. ....................................................... United States 2,650 194,113
Compaq Computer Corp. ...................................................... United States 4,500 126,281
Ericsson (L.M.) Telecommunications, Sponsored ADR .......................... Sweden 3,800 195,463
Hewlett-Packard Co. ........................................................ United States 4,500 338,906
Intel Corp. ................................................................ United States 3,900 315,169
Lucent Technologies, Inc. .................................................. United States 722 54,962
aMicrosoft Corp. ........................................................... United States 1,200 108,150
Molex, Inc. ................................................................ United States 8,000 229,000
Motorola, Inc. ............................................................. United States 3,700 205,813
aOracle Corp. .............................................................. United States 4,500 116,437
------------
1,999,894
------------
Utilities and Telecommunications 6.0%
aAirTouch Communications, Inc. ............................................. United States 1,800 $ 95,625
Bellsouth Corp. ............................................................ United States 2,300 147,631
Enron Corp. ................................................................ United States 3,600 177,075
SK Telecom Co., Ltd., ADR .................................................. South Korea 204 1,520
Telecomunicacoes Brasileiras, SA, Sponsored ADR ............................ Brazil 1,100 133,994
Telefonica de Espana, Sponsored ADR ........................................ Spain 1,091 136,307
aThe AES Corp. ............................................................. United States 2,900 160,044
VEBA, AG ................................................................... Germany 2,400 158,216
------------
1,010,412
------------
Total Long Term Investments (Cost $13,431,295) ............................. 15,743,335
------------
PRINCIPAL
AMOUNT
--------
eRepurchase Agreement 5.9%
Joint Repurchase Agreement, 5.487%, 5/01/98,
(Maturity Value $990,407) (Cost $990,256) .................................. United States $990,256 990,256
BancAmerica Robertson Stephens (Maturity Value $88,305)
Barclays Capital Group, Inc. (Maturity Value $88,305)
Bear, Stearns & Co., Inc. (Maturity Value $48,160)
BT Alex Brown, Inc. (Maturity Value $88,305)
Chase Securities, Inc. (Maturity Value $59,197)
Donaldson, Lufkin, & Jenrette Securities Corp. (Maturity Value $88,305)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $88,305)
Greenwich Capital Markets, Inc. (Maturity Value $88,305)
Lehman Brothers, Inc. (Maturity Value $88,305)
Paribas Corp. (Maturity Value $88,305)
SBC Warburg Dillon Read, Inc. (Maturity Value $88,305)
UBS Securities, L.L.C. (Maturity Value $88,305)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $14,421,551) 99.4% ................................. 16,733,591
Other Assets, less Liabilities .6% ......................................... 102,529
------------
Net Assets 100.0% .......................................................... $16,836,120
============
</TABLE>
aNon-income producing
eSee Note 1(c) regarding joint repurchase agreement.
FRANKLIN STRATEGIC SERIES
Financial Highlights
<TABLE>
<CAPTION>
Franklin California Growth Fund
Class I
------------------------------------------------
Year Ended April 30,
------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $19.35 $18.26 $14.03 $12.05 $10.21
------------------------------------------------
Income from investment operations:
Net investment income ................................ .14 .13 .20 .16 .14
Net realized and unrealized gains .................... 6.48 1.51 6.03 3.04 2.43
------------------------------------------------
Total from investment operations ...................... 6.62 1.64 6.23 3.20 2.57
------------------------------------------------
Less distributions from:
Net investment income ................................ (.14) (.12) (.23) (.12) (.15)
Net realized gains ................................... (.86) (.43) (1.77) (1.10) (.58)
------------------------------------------------
Total distributions ................................... (1.00) (.55) (2.00) (1.22) (.73)
------------------------------------------------
Net asset value, end of year .......................... $24.97 $19.35 $18.26 $14.03 $12.05
================================================
Total return* ......................................... 34.98% 8.94% 47.42% 29.09% 25.55%
Ratios/supplemental data
Net assets, end of year (000's) ....................... $721,254 $282,898 $81,175 $13,844 $4,646
Ratios to average net assets:
Expenses ............................................. .99% 1.08% .71% .25% .09%
Expenses excluding waiver and payments by affiliate .. .99% 1.08% 1.09% 1.27% 1.89%
Net investment income ................................ .67% .84% 1.42% 1.63% 1.16%
Portfolio turnover rate ............................... 48.52% 44.81% 61.82% 79.52% 135.12%
Average commission rate paid** ........................ $.0530 $.0544 $.0536 -- --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Relates to purchases and sales of equity securities. Prior to fiscal year end
1996 disclosure of average commission rate was not required.
<TABLE>
<CAPTION>
Class II
---------------------
Year Ended April 30,
---------------------
1998 19977
---------------------
<S> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................................................. $19.27 $18.05
---------------------
Income from investment operations:
Net investment income .............................................................. -- .05
Net realized and unrealized gains .................................................. 6.43 1.65
---------------------
Total from investment operations .................................................... 6.43 1.70
---------------------
Less distributions from:
Net investment income .............................................................. (.03) (.05)
Net realized gains ................................................................. (.86) (.43)
---------------------
Total distributions ................................................................. (.89) (.48)
---------------------
Net asset value, end of year ........................................................ $24.81 $19.27
=====================
Total return* ....................................................................... 34.02% 9.32%
Ratios/supplemental data
Net assets, end of year (000's) ..................................................... $122,701 $24,556
Ratios to average net assets:
Expenses ........................................................................... 1.74% 1.86%***
Net investment income (loss) ....................................................... (.10%) .05%***
Portfolio turnover rate ............................................................. 48.52% 44.81%
Average commission rate paid** ...................................................... $.0530 $.0544
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Relates to purchases and sales of equity securities.
***Annualized
7For the period September 3, 1996 (effective date) to April 30, 1997.
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 1998
<TABLE>
<CAPTION>
Franklin California Growth Fund SHARES VALUE
<S> <C> <C>
Common Stocks 90.1%
a Commercial Services 2.3%
f RemedyTemp, Inc., Class A.................................................. 350,000 $ 11,112,500
Robert Half International, Inc............................................. 160,000 8,660,000
--------------
19,772,500
--------------
Consumer Durables 2.2%
K2, Inc.................................................................... 250,000 5,671,875
Mattel, Inc................................................................ 300,000 11,493,750
a Signature Eyewear, Inc..................................................... 150,000 1,275,000
--------------
18,440,625
--------------
Consumer Non-Durables 1.0%
Clorox Co. ................................................................ 100,000 8,387,500
--------------
Consumer Services 2.1%
Disney (Walt) Co. ......................................................... 30,000 3,729,375
Hilton Hotels Corp. ....................................................... 75,000 2,395,313
The McClatchy Co., Class A................................................. 175,000 5,239,062
United Television, Inc..................................................... 60,000 6,630,000
--------------
17,993,750
--------------
Electronic Technology 21.7%
a 3COM Corp. ................................................................ 275,000 9,418,750
a Adaptec, Inc............................................................... 250,000 5,921,875
a Applied Materials, Inc..................................................... 75,000 2,709,375
a Applied Micro Circuits Corp. .............................................. 253,700 7,008,463
a Broadcom Corp., Class A.................................................... 3,200 153,600
a Cisco Systems, Inc......................................................... 225,000 16,481,250
a Coherent, Inc.............................................................. 400,000 9,500,000
Computer Sciences Corp. ................................................... 250,000 13,187,500
a Cypress Semiconductor Corp. ............................................... 500,000 5,000,000
a Electroglas, Inc........................................................... 175,000 2,953,125
First Virtual Corp. ....................................................... 108,000 1,701,000
a Flextronics International, Ltd............................................. 100,000 4,750,000
Hewlett-Packard Co. ....................................................... 125,000 9,414,063
a Integrated Process Equipment Corp. ........................................ 125,000 2,273,438
a Integrated Sensor Solutions, Inc........................................... 250,000 2,187,500
Intel Corp. ............................................................... 100,000 8,081,250
a KLA-Tencor Corp. .......................................................... 125,000 5,039,063
a Komag, Inc................................................................. 500,000 7,750,000
Linear Technology Corp. ................................................... 55,000 4,427,500
a Read-Rite Corp. ........................................................... 300,000 4,143,750
Rockwell International Corp. .............................................. 100,000 5,593,750
a Sanmina Corp. ............................................................. 55,000 4,950,000
a Seagate Technology, Inc.................................................... 375,000 10,007,813
a Solectron Corp. ........................................................... 85,000 3,766,563
a Spectra-Physics Lasers, Inc................................................ 176,500 3,154,938
a SpeedFam International, Inc................................................ 100,000 2,900,000
a Sun Microsystems, Inc...................................................... 200,000 8,237,500
Electronic Technology (cont.)
a Uniphase Corp. ............................................................ 125,000 $ 6,781,250
a Western Digital Corp. ..................................................... 200,000 3,950,000
a Xilinx, Inc................................................................ 250,000 11,437,500
--------------
182,880,816
--------------
Energy Minerals 5.7%
Atlantic Richfield Co. (ARCO) ............................................. 175,000 13,650,000
a Benton Oil & Gas Co. ...................................................... 200,000 2,437,500
Chevron Corp. ............................................................. 150,000 12,403,125
a Nuevo Energy Co. .......................................................... 50,000 1,781,250
Ultramar Diamond Shamrock Corp. ........................................... 275,000 8,885,938
Unocal Corp. .............................................................. 225,000 9,210,938
--------------
48,368,751
--------------
Finance 8.4%
a BA Merchant Services, Inc., Class A........................................ 400,000 6,000,000
BankAmerica Corp. ......................................................... 150,000 12,750,000
Charles Schwab Corp. ...................................................... 100,000 3,500,000
Countrywide Credit Industries, Inc......................................... 225,000 10,884,375
a Freedom Securities Corp. .................................................. 95,900 2,127,781
Providian Financial Corp. ................................................. 175,000 10,532,813
a Silicon Valley Bancshares ................................................. 148,700 9,702,675
United Panam Financial Corp. .............................................. 99,800 1,322,350
Washington Mutual, Inc..................................................... 100,000 7,006,250
Zenith National Insurance Corp. ........................................... 250,000 7,031,250
--------------
70,857,494
--------------
Health Services 2.4%
a Access Health, Inc......................................................... 100,000 3,375,000
a,fCohr, Inc. ................................................................ 425,000 3,320,313
McKesson Corp. ............................................................ 50,000 3,534,375
a Total Renal Care Holdings, Inc............................................. 300,000 9,937,500
--------------
20,167,188
--------------
Health Technology 5.2%
a Chiron Corp. .............................................................. 400,000 7,750,000
a Dura Pharmaceuticals, Inc.................................................. 250,000 6,625,000
a Inhale Therapeutic Systems ................................................ 300,000 8,400,000
Mentor Corp. .............................................................. 225,000 6,117,188
a Molecular Devices Corp. ................................................... 180,000 3,037,500
a Nanogen, Inc............................................................... 185,000 1,780,625
a Penederm, Inc.............................................................. 266,800 3,001,500
a The Cooper Companies, Inc.................................................. 173,900 6,684,281
--------------
43,396,094
--------------
Industrial Services 4.0%
a Catalytica, Inc............................................................ 273,400 3,964,300
a Emcon ..................................................................... 275,400 1,377,000
Industrial Services (cont.)
Granite Construction, Inc.................................................. 220,000 $ 6,503,750
a UNOVA, Inc................................................................. 65,000 1,511,250
a Varco International, Inc................................................... 500,000 15,375,000
a Western Atlas, Inc......................................................... 65,000 5,135,000
--------------
33,866,300
--------------
Non-Energy Minerals .8%
Reliance Steel & Aluminum Co. ............................................. 164,000 6,621,500
--------------
Process Industries 1.4%
Avery Dennison Corp. ...................................................... 225,000 11,784,375
--------------
Producer Manufacturing 1.4%
a International Manufacturing Services, Inc.................................. 100,000 993,750
a Simpson Manufacturing Co., Inc............................................. 75,000 3,121,875
Superior Industries International, Inc..................................... 225,000 7,228,125
a US Filter Corp. ........................................................... 25,000 815,625
--------------
12,159,375
--------------
Real Estate 6.9%
Alexandria Real Estate Equities, Inc....................................... 150,000 4,940,625
AMB Property Corp. ........................................................ 250,000 5,750,000
Arden Realty, Inc.......................................................... 450,000 12,628,125
Burnham Pacific Properties, Inc............................................ 575,000 8,121,875
a Catellus Development Corp. ................................................ 325,000 5,789,062
Innkeepers USA Trust ...................................................... 450,000 6,806,250
Irvine Apartment Communities, Inc.......................................... 150,000 4,584,375
c Pacific Retail Trust ...................................................... 359,922 4,678,986
Spieker Properties, Inc.................................................... 125,000 4,953,125
--------------
58,252,423
--------------
a Retail Trade 5.2%
Cost Plus, Inc............................................................. 218,000 7,057,750
Costco Co., Inc............................................................ 150,000 8,381,250
Federated Department Stores, Inc........................................... 100,000 4,918,750
Foodmaker, Inc............................................................. 100,000 1,900,000
Guitar Center, Inc......................................................... 15,000 427,500
Safeway, Inc............................................................... 300,000 11,475,000
Viking Office Products, Inc................................................ 400,000 9,675,000
--------------
43,835,250
--------------
Technology Services 14.1%
a Activision, Inc............................................................ 390,000 4,241,250
Autodesk, Inc.............................................................. 200,000 9,400,000
b Brio Technology, Inc....................................................... 4,700 51,700
a BroadVision, Inc........................................................... 76,900 1,422,650
a Clarify, Inc............................................................... 330,000 4,537,500
a Documentum, Inc............................................................ 75,000 4,040,625
a E*TRADE Group, Inc......................................................... 150,000 3,740,625
Technology Services (cont.)
a Electronic Arts, Inc....................................................... 225,000 $ 10,406,250
a HNC Software, Inc.......................................................... 290,000 11,310,000
a i2 Technologies, Inc....................................................... 75,000 5,006,250
a Integrated Systems, Inc.................................................... 250,000 4,718,750
a Mercury Interactive Corp. ................................................. 100,000 4,050,000
a MetaCreations Corp. ....................................................... 425,000 4,462,500
a Oracle Corp. .............................................................. 100,000 2,587,500
a Parametric Technology Corp. ............................................... 100,000 3,196,880
a PeopleSoft, Inc............................................................ 50,000 2,325,000
a Remedy Corp. .............................................................. 150,000 3,309,375
a Synopsys, Inc.............................................................. 325,000 13,975,000
a Vantive Corp. ............................................................. 330,000 10,560,000
a VERITAS Software Corp. .................................................... 89,700 4,911,075
a Wind River Systems, Inc.................................................... 300,000 10,387,500
--------------
118,640,430
--------------
Transportation 1.8%
Air Express International Corp. ........................................... 300,000 7,875,000
Expeditors International of Washington, Inc................................ 170,000 7,225,000
--------------
15,100,000
--------------
Utilities 3.5%
a AirTouch Communications, Inc............................................... 200,000 10,625,000
California Water Service Group ............................................ 180,000 4,826,250
Enova Corp. ............................................................... 400,000 10,700,000
Southern California Water Co. ............................................. 140,000 3,255,000
--------------
29,406,250
--------------
Total Common Stocks (Cost $646,581,313) ................................... 759,930,621
--------------
Convertible Preferred Stocks .7%
Glenborough Realty Trust, Inc., cvt., pfd., 7.75%, Series A (Cost $6,000,000) 240,000 6,120,000
--------------
PRINCIPAL
AMOUNT
------------
Convertible Bonds 1.7%
Activision, Inc., cvt. sub. notes, 144A, 6.75%,1/1/05 ..................... $ 3,000,000 2,595,000
Heartport, Inc., cvt. deb., 144A, 7.25%, 5/01/04 .......................... 3,500,000 2,646,870
Hexcel Corp., cvt. sub. notes, 7.00%, 8/01/03 ............................. 2,000,000 3,752,500
US Filter Corp., cvt. sub. notes, 4.50%, 12/15/01 ......................... 5,000,000 5,250,000
--------------
Total Convertible Bonds (Cost $13,912,286) ................................ 14,244,370
--------------
Total Long Term Investments (Cost $666,493,599) 780,294,991
--------------
e Repurchase Agreement 7.8%
Joint Repurchase Agreement, 5.487%, 5/01/98,
(Maturity Value $66,067,133) (Cost $66,057,064) ........................... $66,057,064 $ 66,057,064
BancAmerica Robertson Stephens (Maturity Value $5,890,546)
Barclays Capital Group, Inc. (Maturity Value $5,890,546)
Bear, Stearns & Co., Inc. (Maturity Value $3,212,845)
BT Alex Brown, Inc. (Maturity Value $5,890,546)
Chase Securities, Inc. (Maturity Value $3,948,833)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $5,890,546)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $5,890,546)
Greenwich Capital Markets, Inc. (Maturity Value $5,890,545)
Lehman Brothers, Inc. (Maturity Value $5,890,545)
Paribas Corp. (Maturity Value $5,890,545)
SBC Warburg Dillon Read, Inc. (Maturity Value $5,890,545)
UBS Securities, L.L.C. (Maturity Value $5,890,545)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $732,550,663) 100.3% .............................. 846,352,055
Other Assets, less Liabilities (.3%) ...................................... (2,396,971)
--------------
Net Assets 100.0% ......................................................... $843,955,084
==============
</TABLE>
aNon-income producing.
bSufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
cSee Note 8 regarding restricted securities.
eSee Note 1 (c) regarding joint repurchase agreement.
fSee Note 9 regarding holdings of 5% voting securities.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Global Health Care Fund
Class I
------------------------------------------------
Year Ended April 30,
------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $16.11 $19.34 $11.45 $10.43 $ 8.88
------------------------------------------------
Income from investment operations:
Net investment income (loss) ......................... (.14) (.06) .11 .08 .07
Net realized and unrealized gains (losses) ........... 4.58 (2.75) 8.96 1.56 1.86
------------------------------------------------
Total from investment operations ...................... 4.44 (2.81) 9.07 1.64 1.93
------------------------------------------------
Less distributions from:
Net investment income ................................ (.09) (.04) (.13) (.06) (.08)
Net realized gains ................................... (1.18) (.38) (1.05) (.56) (.30)
------------------------------------------------
Total distributions ................................... (1.27) (.42) (1.18) (.62) (.38)
------------------------------------------------
Net asset value, end of year .......................... $19.28 $16.11 $19.34 $11.45 $10.43
================================================
Total return* ......................................... 28.22% (14.71%) 82.78% 16.33% 21.93%
Ratios/supplemental data
Net assets, end of year (000's) ....................... $176,545 $150,653 $108,914 $12,906 $5,795
Ratios to average net assets:
Expenses ............................................. 1.15% 1.14% .73% .25% .10%
Expenses excluding waiver and payments by affiliate .. 1.15% 1.14% 1.16% 1.37% 1.74%
Net investment income (loss) ......................... (.67%) (.39%) .50% .80% .68%
Portfolio turnover rate ............................... 66.84% 73.17% 54.78% 93.79% 110.82%
Average commission rate paid** ........................ $.0358 $.0368 $.0709 -- --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Relates to purchases and sales of equity securities. Prior to fiscal year end
1996 disclosure of average commission rate was not required.
<TABLE>
<CAPTION>
CLASS II
------------------------
YEAR ENDED APRIL 30,
------------------------
1998 19977
------------------------
<S> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................................................. $16.07 $17.37
------------------------
Income from investment operations:
Net investment loss ................................................................ (.20) (.07)
Net realized and unrealized gains (losses) ......................................... 4.48 (.85)
------------------------
Total from investment operations .................................................... 4.28 (.92)
------------------------
Less distributions from:
Net realized gains ................................................................. (1.18) (.38)
------------------------
Net asset value, end of year ........................................................ $19.17 $16.07
========================
Total return* ....................................................................... 27.22% (5.47%)
Ratios/supplemental data
Net assets, end of year (000's) ..................................................... $25,321 $10,099
Ratios to average net assets:
Expenses ........................................................................... 1.90% 1.92%***
Net investment loss ................................................................ (1.44%) (1.29%)***
Portfolio turnover rate ............................................................. 66.84% 73.17%
Average commission rate paid** ...................................................... $.0358 $.0368
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Relates to purchases and sales of equity securities.
***Annualized
7For the period September 3, 1996 (effective date) to April 30, 1997.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 1998
Franklin Global Health Care Fund COUNTRY SHARES VALUE
Common Stocks 93.9%
aAlternate Site Providers 11.8%
<S> <C> <C> <C>
National Surgery Centers, Inc. ............................................. United States 200,000 $ 5,675,000
Renal Care Group, Inc. ..................................................... United States 237,500 9,084,375
Total Renal Care Holdings, Inc. ............................................ United States 275,000 9,109,375
-------------
23,868,750
-------------
aBiotechnology 13.0%
DepoTech Corp. ............................................................. United States 350,000 1,607,830
Ligand Pharmaceuticals, Class B ............................................ United States 325,000 4,712,500
Neurogen Corp. ............................................................. United States 124,600 2,305,100
Serologicals Corp. ......................................................... United States 414,100 12,423,000
Vertex Pharmaceuticals, Inc. ............................................... United States 170,000 5,291,250
-------------
26,339,680
-------------
aHospitals 2.3%
Tenet Healthcare Corp. ..................................................... United States 125,000 4,679,688
-------------
Managed Care and HMOs 3.5%
United Healthcare Corp. .................................................... United States 100,000 7,025,000
-------------
Medical Technology and Supplies 20.2%
aBoston Scientific Corp. ................................................... United States 100,000 7,231,250
Cochlear, Ltd. ............................................................. Australia 225,000 990,227
aESC Medical Systems, Ltd. ................................................. Israel 485,000 15,762,500
Mentor Corp. ............................................................... United States 120,000 3,262,500
aMolecular Devices Corp. ................................................... United States 270,000 4,556,250
aOrthoLogic Corp. .......................................................... United States 500,000 3,000,000
aSomnus Medical Technologies, Inc. ......................................... United States 290,000 3,480,000
aTechnical Chemicals and Products, Inc. .................................... United States 250,000 2,468,750
-------------
40,751,477
-------------
aNursing Homes 3.3%
Assisted Living Concepts, Inc. ............................................. United States 200,000 3,675,000
Centennial Healthcare Corp. ................................................ United States 125,000 2,968,750
-------------
6,643,750
-------------
aMiscellaneous 5.0%
fCohr, Inc. ................................................................ United States 405,500 3,167,969
Healthcare Recoveries, Inc. ................................................ United States 210,000 5,013,750
Pharmaceutical Product Development, Inc. ................................... United States 75,000 1,879,688
-------------
10,061,407
-------------
Pharmaceuticals 3.2%
Novartis, AG ............................................................... Switzerland 3,900 6,448,430
-------------
aPhysician Practice Management 5.0%
Advanced Health Corp. ...................................................... United States 340,000 4,845,000
Pediatrix Medical Group, Inc. .............................................. United States 125,000 5,273,438
-------------
10,118,438
-------------
Software and Information Systems 4.6%
aAccess Health, Inc. ....................................................... United States 100,000 $ 3,375,000
HBO & Co. .................................................................. United States 75,000 4,485,938
aTransitions Systems, Inc. ................................................. United States 67,900 1,527,750
-------------
9,388,688
-------------
aSpecialty Pharmaceuticals 21.3%
Algos Pharmaceutical Corp. ................................................. United States 250,000 8,218,750
Anesta Corp. ............................................................... United States 75,000 1,293,750
fCIMA Labs, Inc. .......................................................... United States 625,000 2,578,122
Dura Pharmaceuticals, Inc. ................................................. United States 150,000 3,975,000
Ethical Holdings, Plc., ADR ................................................ United Kingdom 100,000 187,500
Heska Corp. ................................................................ United States 125,000 1,625,000
Inhale Therapeutic Systems ................................................. United States 251,400 7,039,200
Matrix Pharmaceutical, Inc. ................................................ United States 156,200 702,900
Noven Pharmaceutical, Inc. ................................................. United States 113,800 739,700
fPenederm, Inc. ........................................................... United States 525,000 5,906,250
Shire Pharmaceuticals Group, Plc., ADR ..................................... United States 76,300 1,716,750
Zonagen, Inc. .............................................................. United States 260,000 9,035,000
-------------
43,017,922
-------------
aWholesalers/Distributors .7%
Grupo Casa Autrey, SA de CV, ADR ........................................... Mexico 100,000 1,325,000
-------------
Total Long Term Investments (Cost $166,158,408) ............................ 189,668,230
-------------
PRINCIPAL
AMOUNT
------------
eRepurchase Agreement 3.2%
Joint Repurchase Agreement, 5.487%, 5/01/98 (Maturity Value $6,443,258)
(Cost $6,442,276) ......................................................... United States $6,442,276 6,442,276
BancAmerica Robertson Stephens (Maturity Value $574,481)
Barclays Capital Group, Inc. (Maturity Value $574,481)
Bear, Stearns & Co., Inc. (Maturity Value $313,335)
BT Alex Brown, Inc. (Maturity Value $574,481)
Chase Securities, Inc. (Maturity Value $385,113)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $574,481)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $574,481)
Greenwich Capital Markets, Inc. (Maturity Value $574,481)
Lehman Brothers, Inc. (Maturity Value $574,481)
Paribas Corp. (Maturity Value $574,481)
SBC Warburg Dillon Read, Inc. (Maturity Value $574,481)
UBS Securities, L.L.C. (Maturity Value $574,481)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $172,600,684) 97.1% ................................ 196,110,506
Other Assets, less Liabilities 2.9% ........................................ 5,755,129
-------------
Net Assets 100.0% .......................................................... $201,865,635
=============
</TABLE>
aNon-income producing.
eSee Note 1(c) regarding joint repurchase agreement.
fSee Note 9 regarding holdings of 5% voting securities.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Global Utilities Fund
Class I
-----------------------------------------------
Year Ended April 30,
-----------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $14.46 $14.28 $12.23 $12.60 $11.36
-----------------------------------------------
Income from investment operations:
Net investment income ................................ .33 .42 .37 .42 .30
Net realized and unrealized gains (losses) ........... 4.69 1.35 2.39 (.07) 1.28
-----------------------------------------------
Total from investment operations ...................... 5.02 1.77 2.76 .35 1.58
-----------------------------------------------
Less distributions from:
Net investment income ................................ (.37) (.38) (.39) (.36) (.30)
Net realized gains ................................... (1.75) (1.21) (.32) (.36) (.04)
-----------------------------------------------
Total distributions ................................... (2.12) (1.59) (.71) (.72) (.34)
-----------------------------------------------
Net asset value, end of year .......................... $17.36 $14.46 $14.28 $12.23 $12.60
===============================================
Total return* ......................................... 37.02% 12.94% 23.27% 3.17% 14.04%
Ratios/supplemental data
Net assets, end of year (000's) ....................... $226,594 $174,023 $167,225 $119,250 $124,188
Ratios to average net assets:
Expenses ............................................. 1.03% 1.00% 1.04% 1.12% .84%
Expenses excluding waiver and payments by affiliate .. 1.03% 1.00% 1.04% 1.12% 1.28%
Net investment income ................................ 2.02% 2.82% 2.85% 3.47% 2.95%
Portfolio turnover rate ............................... 45.51% 47.55% 50.51% 16.65% 16.28%
Average commission rate paid** ........................ $.0277 $.0150 $.0313 -- --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Relates to purchases and sales of equity securities. Prior to fiscal year end
1996 disclosure of average commission rate was not required.
<TABLE>
<CAPTION>
Class II
--------------------------
Year Ended April 30,
--------------------------
1998 1997 1996
--------------------------
<S> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................................ $14.37 $14.24 $12.23
--------------------------
Income from investment operations:
Net investment income .................................................... .24 .32 .37
Net realized and unrealized gains ........................................ 4.66 1.33 2.32
--------------------------
Total from investment operations .......................................... 4.90 1.65 2.69
--------------------------
Less distributions from:
Net investment income .................................................... (.27) (.31) (.36)
Net realized gains ....................................................... (1.75) (1.21) (.32)
--------------------------
Total distributions ....................................................... (2.02) (1.52) (.68)
--------------------------
Net asset value, end of year .............................................. $17.25 $14.37 $14.24
==========================
Total return* ............................................................. 36.21% 12.04% 22.63%
Ratios/supplemental data
Net assets, end of year (000's) ........................................... $16,324 $8,467 $2,727
Ratios to average net assets:
Expenses ................................................................. 1.78% 1.77% 1.81%
Net investment income .................................................... 1.29% 1.98% 2.10%
Portfolio turnover rate ................................................... 45.51% 47.55% 50.51%
Average commission rate paid** ............................................ $.0277 $.0150 $.0313
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Relates to purchases and sales of equity securities.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 1998
Franklin Global Utilities Fund COUNTRY SHARES VALUE
<S> <C> <C> <C>
Common Stocks 94.0%
Electric & Gas Utilities 52.3%
Beijing Datang Power Generation Co., Ltd. .................................. Hong Kong 509,000 $ 206,991
BSES, Ltd., 144A ........................................................... India 21,400 351,495
CINergy Corp. .............................................................. United States 67,000 2,336,625
Coastal Corp. .............................................................. United States 34,000 2,428,875
Companhia Paranaense de Energia-Copel, Sponsored ADR ....................... Brazil 41,700 594,225
Dominion Resources, Inc. ................................................... United States 69,700 2,757,506
Duke Energy Corp. .......................................................... United States 155,701 9,011,195
Empresa Nacional de Electricidad, SA, Sponsored ADR ........................ Chile 160,000 2,790,000
Enron Corp. ................................................................ United States 127,000 6,246,813
Entergy Corp. .............................................................. United States 77,000 1,915,375
Espoon Sahko Oy, 144A ...................................................... Finland 195,000 4,832,003
EVN Energie-Versorgung Niederoesterreich, AG ............................... Austria 3,360 496,229
Florida Progress Corp. ..................................................... United States 105,000 4,265,625
FPL Group, Inc. ............................................................ United States 39,000 2,420,438
Hong Kong Electric Holdings, Ltd. .......................................... Hong Kong 687,500 2,112,381
aHuaneng Power International, Inc., Sponsored ADR .......................... China 62,000 1,364,000
Korea Electric Power Corp. ................................................. South Korea 25,530 347,659
Light Servicos de Eletricidade, SA ......................................... Brazil 2,750,000 1,105,769
MCN Corp. .................................................................. United States 26,700 1,007,925
MDU Resources Group, Inc. .................................................. United States 88,800 3,080,250
MidAmerican Energy Holdings Co. ............................................ United States 43,600 921,050
National Fuel Gas Co. ...................................................... United States 109,000 5,014,000
National Power, Plc. ....................................................... United Kingdom 97,500 950,400
New Century Energies, Inc. ................................................. United States 50,000 2,375,000
New Jersey Resources Corp. ................................................. United States 125,400 4,733,850
Northwestern Public Service Co. ............................................ United States 150,000 3,337,500
aNRG Generating (U.S), Inc. ................................................ United States 260,500 3,940,063
OGE Energy Corp. ........................................................... United States 16,700 917,456
Pacific Enterprises ........................................................ United States 176,000 6,853,000
Pacific Gas & Electric Co. ................................................. United States 100,000 3,237,500
Pinnacle West Capital Corp. ................................................ United States 60,000 2,655,000
PowerGen, Plc. ............................................................. United Kingdom 102,000 1,380,545
RWE, AG .................................................................... Germany 70,000 3,580,942
Scottish Power, Plc. ....................................................... United Kingdom 180,000 1,648,498
Shandong Huaneng Power Co., Ltd., Sponsored ADR ............................ China 45,600 330,600
SIG Corp., Inc. ............................................................ United States 61,800 1,826,963
Sonat, Inc. ................................................................ United States 85,000 3,771,875
Southern Co. ............................................................... United States 146,500 3,882,250
Southern Electric, Plc. .................................................... United Kingdom 95,446 885,695
TECO Energy, Inc. ......................................................... United States 126,900 3,378,713
Texas Utilities Co. ........................................................ United States 86,400 3,456,000
TNP Enterprises, Inc. ...................................................... United States 140,000 4,515,000
Tokyo Electric Power Co. ................................................... Japan 48,000 920,911
Tokyo Gas Co., Ltd. ........................................................ Japan 700,000 1,584,046
Transportadora de Gas del Sur, SA, Sponsored ADR ........................... Argentina 179,000 2,069,688
aThe AES Corp. ............................................................. United States 140,000 7,726,250
Viag, AG ................................................................... Germany 2,600 1,327,746
Electric & Gas Utilities (cont.)
Western Resources, Inc. .................................................... United States 1,700 $ 66,406
Wing Shan International, Ltd. .............................................. Hong Kong 340,000 45,649
------------
127,003,975
------------
aElectronic Technology .1%
NCR Corp. .................................................................. United States 4,375 160,508
------------
Telecommunications Services/Equipment 41.6%
aAirTouch Communications, Inc. ............................................. United States 135,150 7,179,844
Alcatel Alsthom ............................................................ France 5,000 926,426
Ameritech Corp. ............................................................ United States 20,000 851,250
aApplied Micro Circuits Corp. .............................................. United States 40,700 1,124,338
aArch Communications Group, Inc. ........................................... United States 285,000 1,620,938
aAscend Communications, Inc. ............................................... United States 13,300 579,381
Bellsouth Corp. ............................................................ United States 50,000 3,209,375
aBroadcom Corp., Class A ................................................... United States 1,000 48,000
aChina Telecom (Hong Kong), Ltd., Sponsored ADR ............................ Hong Kong 109,900 4,244,888
aEsat Telecom Group, Plc., ADR ............................................. Ireland 85,000 2,720,000
aEsprit Telecom Group, Plc., ADR ........................................... United Kingdom 91,900 1,458,913
aGlobal TeleSystems Group, Inc. ............................................ United States 95,300 4,479,100
aGrupo Iusacell, SA, Series D ............................................. Mexico 44,400 53,835
aGrupo Iusacell, SA, Series L, Sponsored ADR .............................. Mexico 73,000 1,414,375
Hellenic Telecommunications Organization, SA ............................... Greece 116,585 3,336,879
aICG Communications, Inc. .................................................. United States 240,000 8,400,000
aIntermedia Communications, Inc. ........................................... United States 56,900 4,152,812
aItron, Inc. ............................................................... United States 104,500 1,600,156
aLightbridge, Inc. ......................................................... United States 100,000 1,200,000
aPaging Network, Inc. ...................................................... United States 275,000 3,867,188
Pakistan Telecommunications Corp., Sponsored GDR ........................... Pakistan 3,127 220,454
Philippine Long Distance Telephone Co., Sponsored ADR ..................... Philippines 10,835 292,555
Portugal Telecom, SA ....................................................... Portugal 119,900 6,443,118
aPrimus Telecommunications Group, Inc. ..................................... United States 13,000 310,375
PT Indosat ................................................................. Indonesia 750,000 1,086,687
PT Indosat, ADR ............................................................ Indonesia 21,200 299,450
aRELTEC Corp. .............................................................. United States 123,000 4,904,625
aRural Cellular Corp., Class A ............................................. United States 95,700 1,698,675
SBC Communications, Inc. ................................................... United States 115,800 4,798,463
Tele Danmark, A/S, Class B ................................................. Denmark 7,830 657,921
Tele Danmark, A/S, Sponsored ADR .......................................... Denmark 133,540 5,608,680
Telecom Corp. of New Zealand, Ltd., ADR .................................... New Zealand 91,400 1,965,100
Telecom Italia, SpA ........................................................ Italy 1,004,767 5,295,589
Telecomunicacoes Brasileiras, SA, Sponsored ADR ............................ Brazil 16,000 1,949,000
Telefonica de Argentina, ADS ............................................... Argentina 34,200 1,318,838
Telefonica de Espana, Sponsored ADR ....................................... Spain 27,110 3,387,056
Telefonica del Peru, SA, Sponsored ADR ..................................... Peru 169,000 3,739,125
Total Access Communication Public Co., Ltd. ................................ Thailand 600,000 834,000
Telecommunications Services/Equipment (cont.)
Videsh Sanchar Nigam, Ltd., Sponsored GDR, 144A ............................ India 140,000 $ 1,732,500
aWorldCom, Inc. ............................................................ United States 50,000 2,139,058
------------
101,148,967
------------
Total Common Stocks (Cost $173,513,333) .................................... 228,313,450
------------
Preferred Stocks .5%
Electric Gas & Utilities
Eletropaulo Metropolitana-Electricidade de Sao Paulo, SA, pfd. ............. Brazil 7,500,000 883,086
aEmpresa Bandeirante de Energia, SA, pfd. .................................. Brazil 7,500,000 255,682
aEmpresa Metropolitana de Aguas e Energia, SA, pfd. ........................ Brazil 7,500,000 14,423
aEmpresa Paulista de Transmissao de Energia Eletrica, SA, pfd. ............. Brazil 7,500,000 51,136
------------
Total Preferred Stock (Cost $1,582,356) .................................... 1,204,327
------------
Convertible Preferred Stocks 2.9%
Telecommunications
cCMS Energy Corp., cvt., pfd. .............................................. United States 35,000 2,091,250
Nortel Inversora, SA, 10.00%, cvt., pfd. ................................... Argentina 80,000 5,040,000
------------
Total Convertible Preferred Stock (Cost $7,079,000) ........................ 7,131,250
------------
Total Long Term Investments (Cost $182,174,689) ............................ 236,649,027
------------
PRINCIPAL
AMOUNT
----------
eRepurchase Agreement 3.8%
Joint Repurchase Agreement, 5.487%, 5/01/98, (Maturity Value $9,253,277)
(Cost $9,251,867).......................................................... United States $9,251,867 9,251,867
BancAmerica Robertson Stephens (Maturity Value $825,022)
Barclays Capital Group, Inc. (Maturity Value $825,022)
Bear, Stearns & Co., Inc. (Maturity Value $449,987)
BT Alex Brown, Inc. (Maturity Value $825,022)
Chase Securities, Inc. (Maturity Value $553,070)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $825,022)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $825,022)
Greenwich Capital Markets, Inc. (Maturity Value $825,022)
Lehman Brothers, Inc. (Maturity Value $825,022)
Paribas Corp. (Maturity Value $825,022)
SBC Warburg Dillon Read, Inc. (Maturity Value $825,022)
UBS Securities, L.L.C. (Maturity Value $825,022)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $191,426,556) 101.2% ............................... 245,900,894
Other Assets, less Liabilities (1.2%) ...................................... (2,982,907)
------------
Net Assets 100.0% .......................................................... $242,917,987
============
</TABLE>
aNon-income producing.
cSee Note 8 regarding restricted securities.
eSee Note 1(c) regarding joint repurchase agreement.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin MidCap Growth Fund
Class I
----------------------------------------------
Year Ended April 30,
----------------------------------------------
1998 1997 1996 1995 19946
----------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $13.34 $14.24 $10.81 $10.05 $10.00
----------------------------------------------
Income from investment operations:
Net investment income (loss) ......................... -- (.02) .18 .21 .15
Net realized and unrealized gains .................... 4.66 .93 3.59 .77 .01
----------------------------------------------
Total from investment operations ...................... 4.66 .91 3.77 .98 .16
----------------------------------------------
Less distributions from:
Net investment income ................................ -- (.05) (.21) (.20) (.08)
Net realized gains ................................... (.56) (1.76) (.13) (.02) (.03)
----------------------------------------------
Total distributions ................................... (.56) (1.81) (.34) (.22) (.11)
----------------------------------------------
Net asset value, end of year .......................... $17.44 $13.34 $14.24 $10.81 $10.05
==============================================
Total return* ......................................... 35.53% 6.31% 35.40% 10.06% 1.62%
Ratios/supplemental data
Net assets, end of year (000's) ....................... $29,864 $12,853 $7,575 $5,591 $5,079
Ratios to average net assets:
Expenses ............................................. 1.17% 1.07% .16% -- --
Expenses excluding waiver and payments by affiliate .. 1.17% 1.07% .96% .98% .91%***
Net investment income (loss) ......................... (.03%) (.22%) 1.42% 2.12% 2.21%***
Portfolio turnover rate ............................... 50.16% 76.35% 102.65% 163.54% 70.53%
Average commission rate paid** ........................ $.0621 $.0550 $.0467 -- --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Relates to purchases and sales of equity securities. Prior to fiscal year end
1996 disclosure of average commission rate was not required.
***Annualized
6For the period August 17, 1993 (effective date) to April 30, 1994.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 1998
Franklin MidCap Growth Fund SHARES VALUE
<S> <C> <C>
Common Stocks 86.2%
Commercial Services 5.6%
a Applied Graphic Technologies, Inc. ........................................ 7,000 $ 350,000
Norrell Corp. ............................................................. 2,600 54,763
a Robert Half International, Inc. ........................................... 6,900 373,463
a Sylvan Learning Systems, Inc. ............................................. 12,500 617,188
a Valassis Communications, Inc. ............................................. 7,000 274,750
-----------
1,670,164
-----------
Consumer Durables 4.3%
Callaway Golf Co. ........................................................ 9,300 253,425
Clayton Homes, Inc. ....................................................... 27,375 549,211
a Electronic Arts, Inc. ..................................................... 6,500 300,625
K2, Inc. .................................................................. 8,000 181,500
-----------
1,284,761
-----------
Consumer Non-Durables 5.6%
a Consolidated Cigar Holdings, Inc. ......................................... 11,200 154,700
a Jones Apparel Group, Inc. ................................................. 10,000 598,125
The Estee Lauder Cos., Inc., Class A ...................................... 8,300 551,431
a Tommy Hilfiger Corp. ...................................................... 5,900 359,900
-----------
1,664,156
-----------
Consumer Services 11.6%
a Apollo Group, Inc., Class A ............................................... 18,000 616,500
a CapStar Hotel Co. ......................................................... 8,600 276,275
a Chancellor Media Corp. .................................................... 5,500 260,906
a DeVry, Inc. ............................................................... 16,100 609,788
a Education Management Corp. ................................................ 7,900 274,525
a Host Marriott Corp. ....................................................... 13,000 252,688
a Mirage Resorts, Inc. ...................................................... 14,000 308,875
a Starbucks Corp. ........................................................... 5,500 264,688
Starwood Hotels & Resorts ................................................ 6,000 301,125
The McClatchy Co., Class A ................................................ 9,800 293,388
-----------
3,458,758
-----------
a Electronic Technology 5.5%
Computer Sciences Corp. ................................................... 5,000 263,750
ICG Communications, Inc. .................................................. 8,400 294,000
Komag, Inc. ............................................................... 13,600 210,800
Seagate Technology, Inc. .................................................. 4,800 128,100
Tellabs, Inc. ............................................................. 8,600 609,525
Western Digital Corp. ..................................................... 6,600 130,350
-----------
1,636,525
-----------
a Energy Minerals 1.0%
Barrett Resources Corp. ................................................... 8,000 297,000
-----------
Finance 9.1%
BankBoston Corp. .......................................................... 2,600 280,638
Countrywide Credit Industries, Inc. ....................................... 6,900 333,788
Finance (cont.)
a E*TRADE Group, Inc. ....................................................... 10,000 $ 249,375
Espirito Santo Financial Group, ADR (Luxembourg) .......................... 11,400 294,263
EVEREN Capital Corp. ...................................................... 5,000 265,938
Hartford Life, Inc., Class A .............................................. 7,600 375,725
a,bHeller Financial, Inc. .................................................... 1,600 43,200
Providian Financial Corp. ................................................. 4,700 282,881
Republic New York Corp. ................................................... 2,000 267,500
The PMI Group, Inc. ....................................................... 4,000 325,000
-----------
2,718,308
-----------
a Health Services 2.0%
HEALTHSOUTH Corp. ........................................................ 9,300 280,744
Total Renal Care Holdings, Inc. ........................................... 9,800 324,625
-----------
605,369
-----------
Health Technology .6%
Mentor Corp. .............................................................. 6,800 184,875
-----------
Industrial Services 7.9%
Diamond Offshore Drilling, Inc. ........................................... 6,000 303,750
a Ispat International, NV, New York Registered Shares ....................... 11,300 316,400
a The AES Corp. ............................................................. 7,200 397,350
Transocean Offshore, Inc. ................................................. 11,800 659,325
a USA Waste Services, Inc. .................................................. 6,500 318,906
a Varco International, Inc. ................................................. 12,400 381,300
-----------
2,377,031
-----------
Process Industries 1.1%
BetzDearborn, Inc. ........................................................ 2,600 139,425
Bowater, Inc. ............................................................. 3,200 179,000
-----------
318,425
-----------
Producer Manufacturing 3.8%
a EVI, Inc. ................................................................. 7,100 378,075
a Gentex Corp. .............................................................. 5,100 172,125
Mark IV Industries, Inc. .................................................. 13,450 283,291
a US Filter Corp. ........................................................... 9,500 309,930
-----------
1,143,421
-----------
Real Estate Investment Trusts 3.4%
Arden Realty, Inc. ........................................................ 10,300 289,044
Meridian Industrial Trust, Inc. ........................................... 10,300 238,188
a Security Capital Group, Inc., Class B ..................................... 16,200 490,050
-----------
1,017,282
-----------
Retail 8.2%
a Consolidated Stores Corp. ................................................. 8,000 320,000
a Cost Plus, Inc. ........................................................... 10,000 323,750
Family Dollar Stores, Inc. ................................................ 10,000 340,000
Retail (cont.)
a Guitar Center, Inc. ....................................................... 5,300 $ 151,050
a Safeway, Inc. ............................................................. 8,000 306,000
Talbots, Inc. ............................................................. 10,000 190,000
a Viking Office Products, Inc. .............................................. 21,000 507,938
a West Marine, Inc. ......................................................... 11,800 295,738
-----------
2,434,476
-----------
Semiconductors 4.8%
a Adaptec, Inc. ............................................................. 11,700 277,144
a Altera Corp. ............................................................. 6,900 279,450
a Analog Devices, Inc. ...................................................... 6,666 259,557
a Broadcom Corp., Class A ................................................... 100 4,800
Linear Technology Corp. .................................................. 3,800 305,900
a Xilinx, Inc. .............................................................. 6,600 301,950
-----------
1,428,801
-----------
a Technology Services 5.8%
Affiliated Computer Services, Inc., Class A ............................... 4,500 158,063
BMC Software, Inc. ....................................................... 3,000 280,688
Cambridge Technology Partners, Inc. ....................................... 7,200 376,200
Parametric Technology Corp. ............................................... 11,400 364,444
RELTEC Corp. .............................................................. 2,800 111,650
Sterling Commerce, Inc. ................................................... 4,711 200,512
Synopsys, Inc. ............................................................ 5,600 240,800
-----------
1,732,357
-----------
Transportation 2.9%
C.H. Robinson Worldwide, Inc. ............................................. 15,600 356,850
Expeditors International of Washington, Inc. .............................. 12,000 510,000
-----------
866,850
-----------
a Utilities 3.0%
Intermedia Communications, Inc. ........................................... 4,600 335,728
Millicom International Cellular, SA (Luxembourg) .......................... 6,800 266,050
Paging Network, Inc. ...................................................... 22,000 309,375
-----------
911,153
-----------
Total Long Term Investments (Cost $19,759,908) ............................ 25,749,712
-----------
e Repurchase Agreement 14.6%
Joint Repurchase Agreement, 5.487%, 5/01/98,
(Maturity Value $4,355,767) (Cost $4,355,103) ............................. $4,355,103 $ 4,355,103
BancAmerica Robertson Stephens (Maturity Value $388,360)
Barclays Capital Group, Inc. (Maturity Value $388,360)
Bear, Stearns & Co., Inc. (Maturity Value $211,821)
BT Alex Brown, Inc. (Maturity Value $388,360)
Chase Securities, Inc. (Maturity Value $260,346)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $388,360)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $388,360)
Greenwich Capital Markets, Inc. (Maturity Value $388,360)
Lehman Brothers, Inc. (Maturity Value $388,360)
Paribas Corp. (Maturity Value $388,360)
SBC Warburg Dillon Read, Inc. (Maturity Value $388,360)
UBS Securities, L.L.C. (Maturity Value $388,360)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $24,115,011) 100.8% ............................... 30,104,815
Other Assets, less Liabilities (.8%) ...................................... (241,153)
-----------
Net Assets 100.0% ......................................................... $29,863,662
===========
</TABLE>
aNon-income producing.
bSufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
eSee Note 1(c) regarding joint repurchase agreement.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Natural Resources Fund
Class I
-----------------------
Year Ended April 30,
-----------------------
1998 1997 19963
-----------------------
<S> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................................ $14.07 $13.14 $10.00
-----------------------
Income from investment operations:
Net investment income .................................................... .10 .09 .08
Net realized and unrealized gains ........................................ 2.26 1.25 3.22
-----------------------
Total from investment operations .......................................... 2.36 1.34 3.30
-----------------------
Less distributions from:
Net investment income .................................................... (.09) (.09) (.06)
Net realized gains ....................................................... (.88) (.32) (.10)
-----------------------
Total distributions ....................................................... (.97) (.41) (.16)
-----------------------
Net asset value, end of year .............................................. $15.46 $14.07 $13.14
=======================
Total return* ............................................................. 17.57% 10.23% 33.36%
Ratios/supplemental data
Net assets, end of year (000's) ........................................... $62,274 $45,386 $9,909
Ratios to average net assets:
Expenses ................................................................. .96% .98% .99%***
Expenses excluding waiver and payments by affiliate ...................... 1.31% 1.31% 1.77%***
Net investment income .................................................... .67% .72% 1.16%***
Portfolio turnover rate ................................................... 72.93% 46.31% 59.04%
Average commission rate paid** ............................................ $.0305 $.0331 $.0517
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Relates to purchases and sales of equity securities.
***Annualized
3For the period June 5, 1995 (effective date) to April 30, 1996.
<TABLE>
<CAPTION>
Advisor Class
---------------------
Year Ended April 30,
---------------------
1998 19978
---------------------
<S> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................................................. $14.07 $14.66
---------------------
Income from investment operations:
Net investment income .............................................................. .23 --
Net realized and unrealized gains (losses) ......................................... 2.20 (.59)
---------------------
Total from investment operations .................................................... 2.43 (.59)
---------------------
Less distributions from:
Net investment income .............................................................. (.14) --
Net realized gains ................................................................. (.88) --
---------------------
Total distributions ................................................................. (1.02) --
---------------------
Net asset value, end of year ........................................................ $15.48 $14.07
=====================
Total return* ....................................................................... 18.11% (4.02%)
Ratios/supplemental data
Net assets, end of year (000's) ..................................................... $892 $1,123
Ratios to average net assets:
Expenses ........................................................................... .64% .64%***
Expenses excluding waiver and payments by affiliate ................................ 1.03% .86%***
Net investment income .............................................................. 1.02% 1.03%***
Portfolio turnover rate ............................................................. 72.93% 46.31%
Average commission rate paid** ...................................................... $.0305 $.0331
</TABLE>
*Total return is not annualized.
**Relates to purchases and sales of equity securities.
***Annualized
8For the period January 2, 1997 (effective date) to April 30, 1997.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 1998
SHARES/
Franklin Natural Resources Fund COUNTRY WARRANTS VALUE
<S> <C> <C> <C>
Common Stocks and Warrants 87.7%
aCapital Goods/Containers 1.5%
Owens-Illinois, Inc. ...................................................... United States 12,500 $ 494,531
Pentacon, Inc. ............................................................. United States 18,000 238,500
Ritchie Bros. Auctioneers, Inc. ............................................ Canada 8,900 239,744
-------------
972,775
-------------
Chemicals 7.5%
aAirgas, Inc. .............................................................. United States 20,000 310,000
Avery Dennison Corp. ...................................................... United States 5,700 298,538
BetzDearborn, Inc. ......................................................... United States 9,000 482,625
Du Pont (EI) De Nemours and Co. ............................................ United States 4,000 291,250
Hanna (M.A.) Co. ........................................................... United States 40,000 917,500
IMC Global, Inc. ........................................................... United States 10,000 360,000
Monsanto Co. ............................................................... United States 3,000 158,625
Potash Corp. of Saskatchewan, Inc. ........................................ Canada 11,385 1,016,823
Praxair, Inc. ............................................................. United States 18,400 925,750
-------------
4,761,111
-------------
Forest Products and Paper 3.8%
Asia Pulp & Paper Co., Ltd., ADR ........................................... Singapore 55,800 812,588
Bowater, Inc. ............................................................. United States 5,600 313,250
Champion International Corp. ............................................... United States 7,400 398,213
Crown Cork & Seal Co., Inc. ................................................ United States 11,000 572,688
Willamette Industries, Inc. ................................................ United States 7,000 271,688
-------------
2,368,427
-------------
Iron/Steel 6.1%
Carpenter Technology Corp. ................................................. United States 12,900 749,006
Companhia Vale do Rio Doce, Sponsored ADR .................................. Brazil 22,000 519,231
aGibraltar Steel Corp. .................................................... United States 18,500 444,000
aIspat International, NV, New York Registered Shares ....................... Netherlands 18,700 523,600
Nucor Corp. ................................................................ United States 11,400 683,288
Pohang Iron & Steel Co., Ltd., Sponsored ADR .............................. South Korea 32,500 578,906
Worthington Industries, Inc. .............................................. United States 18,000 323,438
-------------
3,821,469
-------------
Metal - Diversified 2.3%
Austral Coal, Ltd. ........................................................ Australia 1,313,000 410,917
Freeport-McMoRan Copper & Gold, Inc., Class A .............................. United States 11,700 208,406
Freeport-McMoRan Copper & Gold, Inc., Class B .............................. United States 8,000 150,500
Rio Tinto, Plc. ............................................................ United Kingdom 46,000 661,054
aTenke Mining Corp., warrants .............................................. Canada 4,500 --
-------------
1,430,877
-------------
Mining - Precious Metals 8.9%
aAber Resources, Ltd. ...................................................... Canada 55,000 624,847
Barrick Gold Corp. ......................................................... Canada 28,000 628,250
aCanyon Resources Corp., warrants .......................................... United States 7,000 --
Compania de Minas Buenaventura, SA, Class B ................................ Peru 1,235 9,625
Mining - Precious Metals (cont.)
Compania de Minas Buenaventura, SA, Sponsored ADR .......................... Peru 17,149 $ 265,810
De Beers Consolidated Mines, AG, ADR ....................................... South Africa 32,000 824,000
aEquinox Resources, NL .................................................... Australia 330,000 34,426
Euro-Nevada Mining Corp. ................................................... Canada 53,900 970,339
Franco-Nevada Mining Corp. ................................................. Canada 36,000 880,903
aMinefinders Corp., Ltd. ................................................... Canada 124,300 171,197
Newmont Mining Corp. ...................................................... United States 18,735 603,033
Placer Dome, Inc. .......................................................... Canada 42,600 628,350
-------------
5,640,780
-------------
Oil/Gas Distribution 3.3%
Enron Corp. ................................................................ United States 20,300 998,506
aThe AES Corp. ............................................................. United States 19,460 1,073,949
-------------
2,072,455
-------------
Oil/Gas - Domestic 2.2%
Atlantic Richfield Co. (ARCO) .............................................. United States 10,000 780,000
Unocal Corp. ............................................................... United States 15,400 630,438
-------------
1,410,438
-------------
Oil/Gas - Equipment & Services 25.2%
aAtwood Oceanics, Inc. ..................................................... United States 17,800 973,438
Baker Hughes, Inc. ......................................................... United States 13,000 526,500
Coflexip, SA, Sponsored ADR ................................................ France 12,000 855,000
aCore Laboratories, NV ..................................................... Netherlands 16,100 456,838
Diamond Offshore Drilling, Inc. ............................................ United States 39,800 2,014,875
ENSCO International, Inc. .................................................. United States 11,000 310,750
aEVI, Inc. ................................................................. United States 36,000 1,917,000
Halliburton Co. ........................................................... United States 6,000 330,000
aMarine Drilling Cos., Inc. ................................................ United States 20,000 486,250
aR & B Falcon Corp. ........................................................ United States 16,800 538,650
aRowan Cos., Inc. .......................................................... United States 8,500 250,219
Schlumberger, Ltd. ......................................................... United States 2,500 207,188
aStolt Comex Seaway, SA .................................................... United Kingdom 16,600 539,500
aTesco Corp. .............................................................. Canada 27,000 439,822
Tidewater, Inc. ............................................................ United States 12,500 495,313
aTransCoastal Marine Services, Inc. ........................................ United States 40,000 460,000
Transocean Offshore, Inc. .................................................. United States 30,000 1,676,250
aTuboscope, Inc. ........................................................... United States 24,600 582,712
aVarco International, Inc. ................................................. United States 70,200 2,158,650
aWeatherford Enterra, Inc. ................................................ United States 14,500 725,906
-------------
15,944,861
-------------
Oil/Gas - Exploration 19.7%
aAbacan Resource Corp. .................................................... Canada 186,500 234,697
aBarrett Resources Corp. .................................................. United States 70,300 2,609,887
aBasin Exploration, Inc. ................................................... United States 39,000 775,125
aBenton Oil & Gas Co. ...................................................... United States 10,000 121,875
Oil/Gas - Exploration (cont.)
Devon Energy Corp. ......................................................... United States 21,800 $ 869,275
aGulf Canada Resources, Ltd. ............................................... Canada 311,500 1,654,843
aMagnum Hunter Resources, Inc. ............................................. United States 94,000 640,375
aNational Energy Group, Inc. ............................................... United States 130,000 320,943
aNewfield Exploration Co. .................................................. United States 42,000 1,018,500
aNuevo Energy Co. .......................................................... United States 36,500 1,300,313
aOcean Energy, Inc. ........................................................ United States 38,420 941,290
Patina Oil & Gas Corp. ..................................................... United States 69,500 486,500
aTitan Exploration, Inc. ................................................... United States 96,600 802,988
aTriton Energy, Ltd. ....................................................... United States 17,000 682,125
-------------
12,458,736
-------------
Oil/Gas - International 3.8%
Royal Dutch Petroleum Co., New York Shares ................................ Netherlands 8,400 475,125
Total, SA, Sponsored ADR .................................................. France 8,640 507,600
YPF, SA, Sponsored ADR .................................................... Argentina 40,500 1,412,437
-------------
2,395,162
-------------
Real Estate Investment Trusts 2.7%
Alexandria Real Estate Equities, Inc. ...................................... United States 11,300 372,193
Arden Realty, Inc. ......................................................... United States 15,000 420,937
Starwood Hotels & Resorts .................................................. United States 7,300 366,368
Storage Trust Realty ...................................................... United States 22,700 550,475
-------------
1,709,973
-------------
aWaste Management/Environmental Services .7%
American Disposal Services, Inc. ........................................... United States 10,700 429,004
-------------
Total Common Stocks and Warrants (Cost $48,831,413) ........................ 55,416,068
-------------
Convertible Preferred Stocks .8%
Timet Capital Trust, 6.625%, cvt., pfd., 144A .............................. United States 4,600 221,950
USX Corp., 6.75%, cvt., pfd. .............................................. United States 14,000 290,500
-------------
Total Convertible Preferred Stocks (Cost $526,650) ......................... 512,450
-------------
PRINCIPAL
AMOUNT*
aConvertible Bonds .9%
Dayton Mining Corp., cvt. sub. notes, 144A, 7.00%, 4/01/02 (Cost $800,000) . Canada $ 800,000 CAD552,000
-------------
Total Long Term Investments ($50,158,063) .................................. 56,480,518
-------------
eRepurchase Agreement 14.2%................................................. United Kingdom
Joint Repurchase Agreement, 5.487%, 5/01/98, (Maturity Value $8,988,996)
(Cost $8,987,626) ......................................................... United States $8,987,626 $ 8,987,626
BancAmerica Robertson Stephens (Maturity Value $801,459)
Barclays Capital Group, Inc. (Maturity Value $801,459)
Bear, Stearns & Co., Inc. (Maturity Value $437,135)
BT Alex Brown, Inc. (Maturity Value $801,459)
Chase Securities, Inc. (Maturity Value $537,271)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $801,459)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $801,459)
Greenwich Capital Markets, Inc. (Maturity Value $801,459)
Lehman Brothers, Inc. (Maturity Value $801,459)
Paribas Corp. (Maturity Value $801,459)
SBC Warburg Dillon Read, Inc. (Maturity Value $801,459)
UBS Securities, L.L.C. (Maturity Value $801,459)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $59,145,689) 103.6% ................................ 65,468,144
Other Assets, less Liabilities (3.6%) ...................................... (2,302,109)
-------------
Net Assets 100.0%........................................................... $63,166,035
=============
</TABLE>
See glossary of currency abbreviations on page 140.
*Securities traded in U.S. dollars unless otherwise indicated.
aNon-income producing.
eSee Note 1(c) regarding joint repurchase agreement.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Small Cap Growth Fund
Class I
------------------------------------------------
Year Ended April 30,
------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $18.96 $19.75 $14.90 $12.75 $10.22
------------------------------------------------
Income from investment operations:
Net investment income .............................. .07 .03 .01 .03 .03
Net realized and unrealized gains .................. 7.92 .04 6.23 3.14 2.94
------------------------------------------------
Total from investment operations .................... 7.99 .07 6.24 3.17 2.97
------------------------------------------------
Less distributions from:
Net investment income .............................. (.09) (.06) (.01) (.02) (.04)
Net realized gains ................................. (.93) (.80) (1.38) (1.00) (.40)
------------------------------------------------
Total distributions ................................. (1.02) (.86) (1.39) (1.02) (.44)
------------------------------------------------
Net asset value, end of year ........................ $25.93 $18.96 $19.75 $14.90 $12.75
================================================
Total return* ....................................... 43.09% 0.14% 44.06% 27.05% 29.26%
Ratios/supplemental data
Net assets, end of year (000's) ..................... $3,957,972 $1,071,352 $444,912 $63,010 $23,915
Ratios to average net assets:
Expenses ........................................... .89% .92% .97% .69% .30%
Expenses excluding waiver and payments by affiliate .89% .92% 1.00% 1.16% 1.58%
Net investment income .............................. .32% .10% .09% .25% .24%
Portfolio turnover rate ............................. 42.97% 55.27% 87.92% 104.84% 89.60%
Average commission rate paid** ...................... $.0535 $.0499 $.0505 -- --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Relates to purchases and sales of equity securities. Prior to fiscal year end
1996 disclosure of average commission rate was not required.
<TABLE>
<CAPTION>
Class II
----------------------------
Year Ended April 30,
----------------------------
1998 1997 19964
----------------------------
<S> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................................ $18.78 $19.66 $17.94
----------------------------
Income from investment operations:
Net investment income (loss) ............................................. (.02) (.05) (.03)
Net realized and unrealized gains (losses) ............................... 7.76 (.03) 2.71
----------------------------
Total from investment operations .......................................... 7.74 (.08) 2.68
----------------------------
Less distributions from:
Net realized gains ....................................................... (.93) (.80) (.96)
----------------------------
Total distributions ....................................................... (.93) (.80) (.96)
----------------------------
Net asset value, end of year .............................................. $25.59 $18.78 $19.66
============================
Total return* ............................................................. 42.06% (.65%) 15.98%
Ratios/supplemental data
Net assets, end of year (000's) ........................................... $731,707 $146,164 $24,102
Ratios to average net assets:
Expenses ................................................................. 1.64% 1.69% 1.76%***
Net investment loss ...................................................... (.42%) (.70%) (.69%)***
Portfolio turnover rate ................................................... 42.97% 55.27% 87.92%
Average commission rate paid** ............................................ $.0535 $.0499 $.0505
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Relates to purchases and sales of equity securities.
***Annualized
4For the period October 1, 1995 (effective date) to April 30, 1996.
<TABLE>
<CAPTION>
Advisor Class
------------------------
Year Ended April 30,
------------------------
1998 19978
------------------------
<S> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................................................. $18.97 $20.48
------------------------
Income from investment operations:
Net investment income .............................................................. .09 .01
Net realized and unrealized gains (losses) ......................................... 8.01 (1.52)
------------------------
Total from investment operations .................................................... 8.10 (1.51)
------------------------
Less distributions from:
Net investment income .............................................................. (.13) --
Net realized gains ................................................................. (0.93) --
------------------------
Total distributions ................................................................. (1.06) --
------------------------
Net asset value, end of year ........................................................ $26.01 $18.97
========================
Total return* ....................................................................... 43.68% (7.37%)
Ratios/supplemental data
Net assets, end of year (000's) ..................................................... $118,683 $18,777
Ratios to average net assets:
Expenses ........................................................................... .64% .69%***
Net investment income .............................................................. .58% .30%***
Portfolio turnover rate ............................................................. 42.97% 55.27%
Average commission rate paid** ...................................................... $.0535 $.0499
</TABLE>
*Total return is not annualized.
**Relates to purchases and sales of equity securities.
***Annualized
8For the period January 2, 1997 (effective date) to April 30, 1997.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 1998
SHARES/
Franklin Small Cap Growth Fund RIGHTS VALUE
<S> <C> <C>
Common Stocks and Rights 89.4%
Commercial Services 5.0%
a,fApplied Graphics Technologies, Inc. ...................................... 960,100 $ 48,005,000
a Charles River Associates, Inc. ............................................ 18,400 441,600
Norrell Corp. ............................................................. 931,100 19,611,294
a NOVA Corp. ................................................................ 486,500 16,541,000
a Paymentech, Inc. .......................................................... 730,000 14,006,875
a Pegasystems, Inc. ......................................................... 456,300 8,555,625
a,fRemedyTemp, Inc., Class A ................................................ 319,300 10,137,775
a,fSOS Staffing Services, Inc. .............................................. 872,400 19,192,800
a Sylvan Learning Systems, Inc. ............................................. 458,600 22,643,375
a Valassis Communications, Inc. ............................................. 1,042,400 40,914,200
Wallace Computer Services, Inc. ........................................... 1,040,600 37,526,638
----------------
237,576,182
----------------
Consumer Durables 1.5%
a,fActivision, Inc............................................................ 1,344,400 14,620,350
Electronic Arts, Inc. ..................................................... 200,000 9,250,000
f K2, Inc. .................................................................. 960,500 21,791,344
a,fRockShox, Inc. ......................................................... 965,800 5,432,625
a Sola International, Inc. .................................................. 534,800 22,729,000
----------------
73,823,319
----------------
Consumer Non-Durables 2.5%
Alberto-Culver Co. ........................................................ 793,100 21,215,425
a,fConsolidated Cigar Holdings, Inc. ........................................ 988,300 13,650,894
a North Face, Inc. .......................................................... 486,400 10,913,600
a Tommy Hilfiger Corp. ...................................................... 898,900 54,832,900
a,fTropical Sportswear International Corp. ................................... 413,200 7,024,400
a,fVans, Inc. ................................................................ 1,045,500 12,349,969
----------------
119,987,188
----------------
a Consumer Services 3.3%
AMF Bowling, Inc. ......................................................... 1,343,100 38,865,956
f CapStar Hotel Co. ......................................................... 1,330,000 42,726,250
DeVry, Inc. ............................................................... 532,400 20,164,650
Foodmaker, Inc. ........................................................... 100,000 1,900,000
f Marquee Group, Inc. ....................................................... 1,327,500 5,973,750
Prime Hospitality Corp. ................................................... 1,720,500 35,592,844
Rio Hotel and Casino, Inc. ................................................ 283,600 6,416,450
Vail Resorts, Inc. ........................................................ 295,800 8,652,150
----------------
160,292,050
----------------
a Electronic Technology 17.4%
f Advanced Energy Industries, Inc. .......................................... 1,374,300 20,442,713
Advanced Fibre Communications, Inc. ....................................... 100,000 4,237,500
Alliant Techsystems, Inc. ................................................. 271,200 17,339,850
Broadcom Corp., Class A ................................................... 18,300 878,400
f Coherent, Inc. ............................................................ 1,763,400 41,880,750
Etec Systems, Inc. ........................................................ 983,000 55,785,250
a Electronic Technology (cont.)
Flextronics International Ltd. ............................................ 200,000 $ 9,500,000
FLIR Systems, Inc. ........................................................ 184,800 3,811,500
FSI International, Inc. ................................................... 198,000 2,326,500
Gemstar International Group Ltd. .......................................... 527,300 20,366,963
f Harmonic Lightwaves, Inc. ................................................. 961,500 16,826,250
f H.T.E., Inc. .............................................................. 665,400 18,631,200
f Itron, Inc. ............................................................... 1,157,700 17,727,281
Jabil Circuit, Inc. ....................................................... 626,700 22,012,838
f Ladish Company, Inc. ...................................................... 802,300 12,435,650
Lattice Semiconductor Corp. ............................................... 706,500 32,234,063
Level One Communications, Inc. ............................................ 450,000 14,006,250
f Komag, Inc. ............................................................... 3,811,600 59,079,800
f Natural Microsystems Corp. ................................................ 646,600 20,852,850
Novellus Systems, Inc. .................................................... 500,000 23,937,500
f Perceptron, Inc. .......................................................... 793,500 12,100,875
PMC-Sierra, Inc. .......................................................... 1,065,300 48,471,150
PRI Automation, Inc. ...................................................... 162,000 4,333,500
f Rainbow Technologies, Inc. ................................................ 532,000 13,167,000
Read-Rite Corp. ........................................................... 1,903,700 26,294,856
RELTEC Corp. .............................................................. 470,000 18,741,250
Sanmina Corp. ............................................................. 209,100 18,819,000
Security Dynamics ......................................................... 650,000 15,681,250
f Spectra-Physics Lasers, Inc. .............................................. 1,016,300 18,166,363
f Spectralink Corp. ......................................................... 1,050,000 4,593,750
SpeedFam International, Inc. .............................................. 200,000 5,800,000
Synopsys, Inc. ............................................................ 1,305,000 56,115,000
Tekelec ................................................................... 1,111,800 55,867,950
Tracor, Inc. .............................................................. 1,209,500 47,548,469
f Transcrypt International, Inc. ............................................ 1,212,700 7,870,423
Trident Microsystems, Inc. ................................................ 539,600 4,131,339
TriStar Aerospace Co. ..................................................... 298,700 4,928,550
VLSI Technology, Inc. ..................................................... 200,000 4,125,000
Waters Corp. .............................................................. 869,800 46,534,300
Western Digital Corp. ..................................................... 375,000 7,406,250
----------------
835,009,383
----------------
Energy Minerals 4.2%
a Abacan Resource Corp. (Canada) ............................................ 2,356,400 2,965,372
a Abacan Resource Corp. ..................................................... 1,909,600 2,446,770
a,fBarrett Resources Corp. ................................................... 1,683,900 62,514,788
a Denbury Resources, Inc. ................................................... 1,003,800 16,813,650
Devon Energy Corp. ........................................................ 331,500 13,218,563
f Lomak Petroleum, Inc. ..................................................... 1,890,000 26,105,625
a Newfield Exploration Co. .................................................. 938,600 22,761,050
a Titan Exploration, Inc. ................................................... 1,645,700 13,679,881
a,fTom Brown, Inc. ........................................................... 2,095,800 43,225,875
----------------
203,731,574
----------------
Finance 9.8%
a Affiliated Managers Group, Inc. ........................................... 685,800 $ 25,460,325
a Amerin Corp. .............................................................. 583,500 18,562,594
Arden Realty, Inc. ........................................................ 1,330,400 37,334,350
CNB Bancshares, Inc. ...................................................... 47,000 2,303,000
Camden Property Trust ..................................................... 700,000 20,518,750
a E*TRADE Group, Inc. ....................................................... 700,000 17,456,250
Espirito Santo Financial Group, ADR (Luxembourg) .......................... 1,324,600 34,191,238
EVEREN Capital Corp. ...................................................... 350,000 18,615,625
Executive Risk, Inc. ...................................................... 426,400 28,435,550
FelCor Suite Hotels, Inc. ................................................. 637,300 22,305,500
Financial Security Assurance Holdings Ltd. ................................ 99,700 5,969,538
a Freedom Securities Corp. .................................................. 198,300 4,399,781
HCC Insurance Holdings, Inc. .............................................. 556,500 12,103,875
a HealthCare Financial Partners, Inc. ....................................... 288,900 14,553,338
a,bHeller Financial, Inc. .................................................... 267,400 7,219,800
f Innkeepers USA Trust ...................................................... 2,102,800 31,804,850
Life Real Estate Corp. .................................................... 265,600 19,123,200
Life USA Holding, Inc. .................................................... 586,100 8,864,763
Nationwide Financial Services, Inc., Class A .............................. 934,600 40,538,275
Omega Healthcare Investors, Inc. .......................................... 150,000 5,212,500
a Omega Worldwide, Inc. ..................................................... 39,787 335,703
a Omega Worldwide, Inc., rights ............................................. 9,946 9,324
a Risk Capital Holdings, Inc. ............................................... 761,900 19,095,119
Scor, Sponsored ADR (France) .............................................. 311,000 19,163,109
a Silicon Valley Bancshares ................................................. 490,600 32,011,650
Storage Trust Realty ...................................................... 597,400 14,486,950
Tower Realty Trust, Inc. .................................................. 120,900 2,856,263
Waddell and Reed Financial, Inc. .......................................... 98,400 2,435,400
Winston Hotels, Inc. ...................................................... 490,500 6,100,594
----------------
471,467,214
----------------
a Health Services 5.9%
f Access Health, Inc. ....................................................... 975,750 32,931,563
f Advanced Health Corp. ..................................................... 970,000 13,822,500
American Dental Partners, Inc. ............................................ 109,100 1,922,888
Medaphis Corp. ............................................................ 1,977,800 18,171,038
National Surgery Centers, Inc. ............................................ 336,500 9,548,188
PAREXEL International Corp. ............................................... 400,000 13,400,000
f Pediatrix Medical Group, Inc. ............................................. 1,101,500 46,469,531
Pharmaceutical Product Development, Inc. .................................. 1,000,000 25,062,500
PhyCor, Inc. .............................................................. 2,000,000 45,500,000
Renal Care Group, Inc. .................................................... 869,200 33,246,900
The Cooper Companies, Inc. ................................................ 250,000 9,609,375
Total Renal Care Holdings, Inc. ........................................... 791,666 26,223,936
Transitions Systems, Inc. ................................................. 307,300 6,914,250
----------------
282,822,669
----------------
Health Technology 3.9%
a,fDepoTech Corp. ............................................................ 995,700 $ 4,574,047
a Heska Corp. ............................................................... 620,100 8,061,300
a,fInhale Therapeutic Systems ................................................ 811,000 22,708,000
Mentor Corp. .............................................................. 496,200 13,490,437
a Neurogen Corp. ............................................................ 492,000 9,102,000
a OrthoLogic Corp. .......................................................... 1,250,000 7,500,000
a,fPenederm, Inc. ............................................................ 531,200 5,976,000
a,fSerologicals Corp. ........................................................ 1,381,800 41,454,000
a Uniphase Corp. ............................................................ 823,100 44,653,175
a Vertex Pharmaceuticals, Inc. .............................................. 499,200 15,537,600
a Zonagen, Inc. ............................................................. 448,800 15,595,800
----------------
188,652,359
----------------
a Industrial Services 6.7%
American Disposal Services, Inc. .......................................... 962,700 38,598,301
f Atwood Oceanics, Inc. ..................................................... 1,216,600 66,532,813
Catalytica, Inc. .......................................................... 2,058,633 29,850,178
f Core Laboratories, NV (Netherlands) ....................................... 1,700,900 48,263,038
Tuboscope, Inc. ........................................................... 678,400 16,069,600
f U.S. Liquids, Inc. ........................................................ 726,200 17,519,575
f Varco International, Inc. ................................................. 3,462,500 106,471,875
----------------
323,305,380
----------------
Non-Energy Minerals 1.1%
Carpenter Technology Corp. ................................................ 874,500 50,775,656
----------------
Process Industries .4%
ChemFirst, Inc. ........................................................... 715,000 19,036,875
----------------
Producer Manufacturing 3.0%
a Cable Design Technologies ................................................. 400,000 10,650,000
a Gentex Corp. .............................................................. 1,035,700 34,954,875
a,fGibraltar Steel Corp. ................................................... 1,012,800 24,307,200
JLG Industries, Inc. ...................................................... 1,262,700 20,597,794
Reliance Steel & Aluminum Co. ............................................. 580,000 23,417,500
Roper Industries, Inc. .................................................... 1,033,800 32,047,800
----------------
145,975,169
----------------
Retail Trade 1.6%
a Guitar Center, Inc. ....................................................... 556,800 15,868,800
a N2K, Inc. ................................................................. 55,100 1,384,388
Talbots, Inc. ............................................................. 1,254,700 23,839,300
a,fWest Marine, Inc........................................................... 1,474,800 36,962,175
----------------
78,054,663
----------------
a Technology Services 14.8%
Affiliated Computer Services, Inc., Class A ............................... 1,662,300 58,388,288
Arbor Software Corp. ...................................................... 306,800 14,438,775
Aspect Development, Inc. .................................................. 200,000 12,662,500
a Technology Services (cont.)
Aspen Technologies, Inc. .................................................. 489,200 $ 23,909,650
Borland International, Inc. ............................................... 1,200,000 12,000,000
b Brio Technology, Inc. ..................................................... 26,000 286,000
BroadVision, Inc. ......................................................... 223,100 4,127,350
Business Objects SA, ADR (France) ......................................... 806,200 15,217,025
Cambridge Technology Partners, Inc. ....................................... 322,100 16,829,725
Check Point Software Technologies, Ltd. ................................... 316,500 9,297,188
f Clarify, Inc. ............................................................. 1,297,200 17,836,500
Concord Communications, Inc. .............................................. 400,000 9,900,000
CSG Systems International, Inc. ........................................... 152,500 6,938,750
Documentum, Inc. .......................................................... 511,600 27,562,450
Envoy Corp. ............................................................... 605,800 25,519,325
Genesys Telecommunications Laboratories, Inc. ............................. 100,000 2,993,750
Harbinger Corp. ........................................................... 1,129,400 41,081,925
HNC Software, Inc. ........................................................ 1,079,900 42,116,100
Hyperion Software Corp. ................................................... 107,500 4,662,813
i2 Technologies, Inc. ..................................................... 348,800 23,282,400
Information Advantage, Inc. ............................................... 420,400 4,046,350
f Integrated Systems, Inc. .................................................. 2,091,300 39,473,288
International Network Services ............................................ 924,500 31,086,313
Intuit, Inc. .............................................................. 100,000 5,318,750
J.D. Edwards and Co. ...................................................... 400,000 14,250,000
MetaCreations Corp. ....................................................... 992,800 10,424,400
f Micromuse, Inc. ........................................................... 754,500 16,787,625
Network Associates, Inc. .................................................. 362,309 24,818,173
f Omtool, Ltd. .............................................................. 938,600 11,497,850
Sapient Corp. ............................................................. 200,800 9,914,500
Transaction Systems Architects, Inc. ...................................... 658,900 27,673,800
USCS International, Inc. .................................................. 941,800 18,953,725
Vanstar Corp. ............................................................. 500,000 6,656,250
Vantive Corp. ............................................................. 1,223,500 39,152,000
VERITAS Software Corp. .................................................... 407,800 22,327,050
Visio Corp. ............................................................... 350,000 17,325,000
Wind River Systems ........................................................ 834,000 28,877,250
f XcelleNet, Inc. ........................................................... 780,100 15,992,050
----------------
713,624,888
----------------
Transportation 3.2%
Air Express International Corp. ........................................... 911,000 23,913,750
a,fAtlantic Coast Airlines, Inc. ........................................... 700,000 39,593,750
C.H. Robinson Worldwide, Inc. ............................................. 1,046,200 23,931,825
Circle International Group, Inc. .......................................... 205,400 5,504,083
Expeditors International of Washington, Inc. .............................. 1,016,100 43,184,240
a,fMesa Air Group, Inc. ...................................................... 1,646,100 13,168,800
a Royal Olympic Cruise Lines, Inc. .......................................... 274,000 5,034,750
----------------
154,331,198
----------------
a Utilities 5.1%
f Arch Communications Group, Inc. ........................................... 2,000,000 $ 11,375,000
ICG Communications, Inc. .................................................. 1,399,100 48,968,500
Intermedia Communications, Inc. ........................................... 541,300 39,506,456
Millicom International Cellular, SA (Luxembourg ).......................... 865,200 33,850,950
Paging Network, Inc. ...................................................... 2,917,200 41,023,125
f Primus Telecommunications Group, Inc. ..................................... 1,003,000 23,946,625
f Rural Cellular Corp., Class A ............................................. 700,800 12,439,200
b,fWestern Wireless Corp., Class A ........................................... 1,719,200 33,524,400
----------------
244,634,256
----------------
Total Common Stocks and Rights (Cost $3,657,778,453) ...................... 4,303,100,023
----------------
PRINCIPAL
AMOUNT
-----------
Convertible Bonds .4%
Activision, Inc., cvt. sub. notes, 144A, 6.75%, 1/01/05 ................... $ 4,900,000 4,238,500
Atlantic Coast Airlines, cvt. sub. notes, 144A, 7.00%, 7/01/04 ............ 500,000 1,582,500
a Western Digital Corp., cvt. sub. debenture, 144A, zero coupon, 2/18/18 .... 23,800,000 8,865,500
Wind River Systems, cvt. sub. notes, 144A, 5.00%, 8/01/02 ................. 3,100,000 3,115,500
----------------
Total Convertible Bonds (Cost $17,121,500) ................................ 17,802,000
----------------
Total Long Term Investments (Cost $3,674,899,953) ......................... 4,320,902,023
----------------
e Repurchase Agreement 15.8%
Joint Repurchase Agreement, 5.487%, 5/01/98,
(Maturity Value $758,977,182) (Cost $758,861,509) ......................... 758,861,509 758,861,509
BancAmerica Robertson Stephens (Maturity Value $67,670,406)
Barclays Capital Group, Inc. (Maturity Value $67,670,406)
Bear, Stearns & Co., Inc. (Maturity Value $36,909,055)
BT Alex Brown, Inc. (Maturity Value $67,670,406)
Chase Securities, Inc. (Maturity Value $45,364,067)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $67,670,406)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $67,670,406)
Greenwich Capital Markets, Inc. (Maturity Value $67,670,406)
Lehman Brothers, Inc. (Maturity Value $67,670,406)
Paribas Corp. (Maturity Value $67,670,406)
SBC Warburg Dillon Read, Inc. (Maturity Value $67,670,406)
UBS Securities, L.L.C. (Maturity Value $67,670,406)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $4,433,761,462) 105.6% ............................ 5,079,763,532
Other Assets, less Liabilities (5.6%) ..................................... (271,400,744)
----------------
Net Assets 100.0% ......................................................... $4,808,362,788
----------------
</TABLE>
aNon-income producing.
bSufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
eSee Note 1(c) regarding joint repurchase agreement.
fSee Note 9 regarding holding of 5% voting securities.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Strategic Income Fund
Class I
-----------------------------------
Year Ended April 30, 1998
-----------------------------------
1998 1997 1996 19952
-----------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year $10.86 $10.77 $10.18 $10.00
-----------------------------------
Income from investment operations:
Net investment income .87 .93 .85 .70
Net realized and unrealized gains .50 .39 .67 .15
-----------------------------------
Total from investment operations 1.37 1.32 1.52 .85
-----------------------------------
Less distributions from:
Net investment income (.90) (.96) (.82) (.67)
Net realized gains (.09) (.27) (.11) --
-----------------------------------
Total distributions (.99) (1.23) (.93) (.67)
-----------------------------------
Net asset value, end of year $11.24 $10.86 $10.77 $10.18
===================================
Total return* 13.10% 12.64% 15.59% 8.94%
Ratios/supplemental data
Net assets, end of year (000's) $166,633 $34,864 $13,022 $6,736
Ratios to average net assets:
Expenses .25% .23% .25% .25%***
Expenses excluding waiver and payments by affiliate 1.05% 1.05% 1.08% 1.38%***
Net investment income 7.65% 8.60% 8.53% 7.93%***
Portfolio turnover rate 47.47% 114.26% 73.95% 68.43%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
***Annualized
2For the period May 24, 1994 (effective date) to April 30, 1995.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 1998
SHARES/
WARRANTS/
Franklin Strategic Income Fund COUNTRY RIGHTS VALUE
<S> <C> <C> <C>
a Common Stocks, Warrants, and Rights
Gulf States Steel, warrants ............................................ United States 200 $ 1,040
Orion Network Systems, Inc., SA, warrants .............................. United States 300 4,455
Sullivan Broadcast Holdings ............................................ United States 1,600 49,600
Venezuela Oil Value Recovery, rights ................................... Venezuela 3,035 --
Wireless One, Inc., warrants ........................................... United States 400 2
------------
Total Common Stocks, Warrants, and Rights (Cost $19,735) ............... 55,097
------------
Preferred Stocks .6%
California Federal Bank, 11.50%, pfd. .................................. United States 1,000 114,000
a CSC Holdings Inc., 11.125%, pfd. ....................................... United States 1,259 144,578
Fresenius Medical Care, 144A, 9.00%, pfd. .............................. Germany 100 103,250
Sinclair Capital, 11.625%, pfd. ........................................ United States 3,000 329,250
Time Warner, Inc., 10.25%, pfd. ........................................ United States 234 263,689
------------
Total Preferred Stocks (Cost $836,450).................................. 954,767
------------
Convertible Preferred Stocks 4.3%
CNF Trust I, 5.00%, cvt., pfd. ......................................... United States 5,700 336,300
El Paso Energy, 4.75%, cvt., pfd. ...................................... United States 32,000 1,682,000
Hilton Hotels, 8.00%, cvt., pfd. ....................................... United States 11,200 329,700
PLC Capital Trust II, 6.50%, cvt., pfd. ................................ United States 10,000 625,000
Ralston Purina Co., 7.00%, cvt., pfd. .................................. United States 9,300 566,138
Salomon, Inc., 6.25%, cvt., pfd. ....................................... United States 6,700 459,788
Triathlon Broadcasting, 9.00%, cvt., pfd. .............................. United States 20,000 217,500
Union Pacific Capital Trust, 144A, 6.25%, cvt., pfd. ................... United States 40,000 2,130,000
WBK Strypes Trust, 10.00%, cvt., pfd. .................................. United States 21,900 747,338
------------
Total Convertible Preferred Stocks (Cost $6,511,478).................... 7,093,764
------------
PRINCIPAL
AMOUNT*
------------
High Yield Corporate Bonds 28.0%
Automotive 1.4%
Advanced Accessory/AAS Cap, senior sub. notes, 144A, 9.75%, 10/01/07 ... United States $ 100,000 101,750
Aetna Industries, Inc., senior notes, 11.875%, 10/01/06 ................ United States 200,000 220,000
Cambridge Industries, Inc., senior sub. notes, 10.25%, 7/15/07 ......... United States 600,000 624,000
Collins & Aikman Products, senior sub. notes, 11.50%, 4/15/06 .......... United States 100,000 112,500
a,dHarvard Industries, Inc., senior notes, 11.125%, 8/01/05............... United States 300,000 117,000
Key Plastics, Inc., senior sub. notes, 10.25%, 3/15/07 ................. United States 100,000 106,375
LDM Technologies, Inc., senior sub. notes, 10.75%, 1/15/07 ............. United States 200,000 216,000
Talon Automotive Group, senior sub. notes, 144A, 9.625%, 5/01/08 ....... United States 800,000 804,000
------------
2,301,625
------------
Broadcasting 1.4%
Chancellor Media Corp., senior sub. notes, 8.75%, 6/15/07 .............. United States 500,000 520,000
Lin Holdings Corp., senior disc. notes, 144A, zero coupon to 3/1/03, 10.00%
thereafter, 3/01/08 ................................................... United States 1,500,000 941,250
Sinclair Broadcast Group Inc., senior sub notes, 8.75%, 12/15/07 ....... United States 700,000 712,250
Sullivan Broadcast Holdings, senior deb., 13.25%, 12/15/06 ............. United States 100,000 121,000
------------
2,294,500
------------
Cable Television 1.4%
CSC Holdings Inc., 9.875%, 4/01/23 ..................................... United States$ 1,000,00 $ 1,107,500
Diamond Cable Communications, senior notes, zero coupon to 12/15/00, 11.75%
thereafter, 12/15/05 .................................................. United Kingdom 150,000 120,000
Diamond Cable Communications, senior notes, zero coupon to 2/15/02, 10.75%
thereafter, 2/15/07 ................................................... United Kingdom 150,000 106,500
Diamond Holdings, Plc., senior notes, 144A, 9.125%, 2/01/08 ............ United Kingdom 1,000,000 1,025,000
------------
2,359,000
------------
Chemical .6%
Huntsman Corp., senior sub. notes, 144A, 9.50%, 7/01/07 ................ United States 1,000,000 1,007,500
------------
Consumer Products .9%
E&S Holdings Corp., senior sub. notes, 10.375%, 10/01/06 ............... United States 100,000 84,000
Revlon Consumer Products, senior sub. notes, 144A, 8.625%, 2/1/08 ...... United States 1,000,000 1,002,500
Sealy Corp., senior sub. notes, 144A, 9.875%, 12/15/07 ................. United States 200,000 212,000
Sealy Corp., senior disc. notes, 144A, zero coupon to 12/15/02, 10.925%
thereafter, 12/15/07 .................................................. United States 300,000 201,000
------------
1,499,500
------------
Containers and Packaging 1.0%
Anchor Glass, 11.25%, 4/01/05 .......................................... United States 300,000 331,500
Anchor Glass, 144A, 9.875%, 3/15/08 .................................... United States 700,000 712,250
Four M Corp., senior notes, Series B, 12.00%, 6/01/06 .................. United States 200,000 208,000
Graham Packaging Corp., senior sub. notes, 144A, 8.750%, 1/15/08 ....... United States 200,000 201,000
Graham Packaging Corp., senior disc. notes, 144A, zero coupon to 1/15/03, 10.75%
thereafter, 1/15/09 ................................................... United States 200,000 124,000
U.S. Can Corp., senior sub. notes, Series B, 10.125%, 10/15/06 ......... United States 100,000 107,000
------------
1,683,750
------------
Energy 1.8%
Abraxas Petroleum Corp., senior notes, Series B, 11.50%, 11/01/04 ...... United States 500,000 526,250
Abraxas Petroleum Corp., senior notes, Series B, 144A, 11.50%, 11/01/04 United States 380,000 398,050
Chesapeake Energy Corp., senior notes, 144A, 9.625%, 5/01/05 ........... United States 300,000 301,500
Clark R&M, Inc., senior sub. notes., 8.875%, 11/15/07 .................. United States 1,000,000 1,015,000
Dailey International, Inc., senior notes, 144A, 9.50%, 2/15/08 ......... United States 300,000 300,000
Dawson Production Services, senior notes, 9.375%, 2/01/07 .............. United States 100,000 102,000
Forcenergy, Inc., senior sub. notes, 9.50%, 11/01/06 ................... United States 100,000 103,500
Pride International, Inc., senior notes, 9.375%, 5/01/07 ............... United States 100,000 107,500
Rutherford-Moran Oil, senior sub. notes, 10.75%, 10/01/04 .............. United States 100,000 107,500
------------
2,961,300
------------
Financial .2%
First Nationwide Escrow Corp., senior sub. notes, 10.625%, 10/01/03 .... United States 200,000 224,500
HomeSide Finance, Inc., senior notes, 11.25%, 5/15/03 .................. United States 150,000 178,500
------------
403,000
------------
Food and Beverages .5%
Curtice-Burns Foods, Inc., senior sub. notes, 12.25%, 2/01/05 .......... United States $ 100,000 $ 110,000
Doane Products Co., senior notes, 10.625%, 3/01/06 ..................... United States 100,000 109,500
Purina Mills, Inc., senior sub notes, 144A, 9.00%, 3/15/10 ............. United States 600,000 616,500
------------
836,000
------------
Food Retailing .4%
Fleming Cos., Inc., senior sub. notes, 10.50%, 12/01/04 ................ United States 500,000 523,125
Shoppers Food Warehouse, senior notes, 9.75%, 6/15/04 .................. United States 125,000 138,750
------------
661,875
------------
Forest and Paper Products .4%
Doman Industries, Ltd., senior notes, 9.25%, 11/15/07 .................. Canada 200,000 202,000
Pindo Deli Finance Mauritius, Ltd., 10.75%, 10/01/07 ................... Indonesia 700,000 568,750
------------
770,750
------------
Gaming and Leisure .6%
AMF Group, Inc., senior disc. notes, zero coupon to 3/15/00, 12.25%
thereafter, 3/15/06 ................................................... United States 1,118,000 899,990
Showboat, Inc., senior sub. notes, 13.00%, 8/01/09 ..................... United States 100,000 120,500
------------
1,020,490
------------
Health Care 2.4%
Fresenius Medical Care, 144A, 7.875%, 2/01/08 .......................... Germany 1,000,000 980,000
Magellan Health Services, Inc., senior sub. notes, 144A, 9.00%, 2/15/08 United States 600,000 603,000
Pharmerica, Inc., senior sub notes, 144A, 8.375%, 4/1/08 ............... United States 350,000 350,000
Tenet Healthcare Corp., senior sub. notes, 10.125%, 3/01/05 ............ United States 100,000 111,500
Tenet Healthcare Corp., senior sub. notes, 8.625%, 1/15/07 ............. United States 200,000 208,250
Vencor, Inc., senior sub notes, 144A, 9.875%, 5/01/05 .................. United States 1,200,000 1,215,000
Vencor, Inc., senior sub. notes, 144A, 8.625%, 7/15/07 ................. United States 500,000 562,500
------------
4,030,250
------------
Industrial 2.0%
Allied Waste Industries, senior disc. notes, zero coupon to 6/01/02, 11.30%
thereafter, 6/01/07 ................................................... United States 500,000 371,250
American Standard, Inc., senior sub. deb., zero coupon to 6/01/98, 10.50%
thereafter, 6/01/05 ................................................... United States 150,000 156,563
Derlan Manufacturing, Inc., senior notes, 10.00%, 1/15/07 .............. Canada 150,000 157,500
Falcon Building Products, Inc., senior disc. notes, 10.50%, 6/15/07 .... United States 250,000 166,875
Intertek Finance, Plc., senior sub. notes, Series B, 10.25%, 11/01/06 .. United Kingdom 100,000 107,000
Neenah Corp., senior sub. notes, Series B, 11.125%, 5/01/07 ............ United States 100,000 110,625
Nortek, Inc., senior notes, 9.125%, 9/01/07 ............................ United States 300,000 307,500
OshKosh Truck Corp., senior sub notes, 144A, 8.750%, 3/01/08 ........... United States 400,000 403,500
Terex Corp., senior sub. notes, 144A, 8.875%, 4/01/08 .................. United States 850,000 843,625
Universal Compression Inc., senior disc. notes, 144A, zero coupon to 2/15/03,
9.875% thereafter, 2/15/08 ............................................ United States 1,250,000 793,750
------------
3,418,188
------------
Information Systems and Technology .2%
Iron Mountain, Inc., senior sub. notes, 8.75%, 9/30/09 ................. United States $ 350,000 $ 358,750
------------
Lodging .5%
HMH Properties, Inc., senior notes, 8.875%, 7/15/07 .................... United States 500,000 556,875
Prime Hospitality Corp., senior sub. notes, Series B, 9.75%, 4/01/07 ... United States 300,000 317,250
------------
874,125
------------
Media 2.0%
Big Flower Press Holdings, senior sub. notes, 8.875%, 7/01/07 .......... United States 300,000 309,000
Fox Kids Worldwide, Inc., senior disc. notes, 144A, zero coupon to 11/01/02,
10.25% thereafter, 11/01/07 ........................................... United States 600,000 387,000
Fox Kids Worldwide, Inc., senior notes, 144A, 9.25%, 11/01/07 .......... United States 200,000 198,250
Fox/Liberty Networks, L.L.C., senior disc. notes, zero coupon to 8/15/02, 9.75%
thereafter, 8/15/07 ................................................... United States 500,000 342,500
Outdoor Systems, Inc., senior sub. notes, 8.875%, 6/15/07 .............. United States 500,000 520,000
Six Flags Entertainment., senior notes, 8.875%, 4/01/06 ................ United States 600,000 607,500
United Artists Theaters, senior sub. notes, 144A, 9.75%, 4/15/08 ....... United States 1,000,000 1,005,000
------------
3,369,250
------------
Metals and Mining .6%
LTV Corp., senior notes, 8.20%, 9/15/07 ................................ United States 1,000,000 1,002,500
------------
Restaurants .6%
AmeriServ Food Co., senior sub. notes, 10.125%, 7/15/07 ................ United States 400,000 426,000
AmeriServ Food Distribution, senior notes, 8.875%, 10/15/06 ............ United States 500,000 512,500
------------
938,500
------------
Retail .2%
Specialty Retailers, Inc., senior notes, 8.50%, 7/15/05 ................ United States 250,000 256,875
------------
Telecommunications 3.4%
Flag, Ltd., senior notes, 144A, 8.250%, 1/30/08 ........................ Bermuda 200,000 203,500
Intelcom Group, Inc., senior disc. notes, zero coupon to 5/1/01, 12.50%
thereafter, 5/01/06 ................................................... United States 250,000 200,000
Intermedia Communication, senior disc. notes, 11.25%, 7/15/07 .......... United States 750,000 555,000
IXC Communications, Inc., senior sub. notes, 144A, 9.00%, 4/15/08 ...... United States 650,000 650,000
Level 3 Communications Corp., senior sub. notes, 144A, 9.125%, 5/01/08 . United States 1,500,000 1,485,000
Netia Holdings B.V., 144A, 10.25%, 11/01/07 ............................ Poland 200,000 208,500
Netia Holdings B.V., 144A, zero coupon to 11/01/01, 11.25% thereafter, 11/01/07 Poland 500,000 364,375
Nextlink Communications, Inc., senior notes, 9.625%, 10/01/07 .......... United States 250,000 263,125
Nextlink Communications, Inc., senior notes, 144A, 9.00%, 3/15/08 ...... United States 750,000 769,688
Nextlink Communications, Inc., senior notes, 144A, zero coupon, 4/15/08 United States 500,000 314,375
RSL Communications, Plc., senior disc. notes, 144A, zero coupon to 3/01/03,
10.125% thereafter, 3/01/08 ........................................... United States 1,000,000 620,000
------------
5,633,563
------------
Textiles and Apparel .6%
Collins & Aikman Floor Coverings, senior disc. sub. notes, Series B, 10.00%, 1/15/07 United States300,000 312,750
Pillowtex Corp., senior sub. notes, 9.00%, 12/18/07 .................... United States 600,000 623,250
------------
936,000
------------
Transportation .7%
L-3 Communications Corp., senior sub. notes, 10.375%, 5/01/07 .......... United States $ 100,000 $ 110,375
Loomis Fargo & Co., senior sub. notes, 10.00%, 1/15/04 ................. United States 100,000 101,500
Ultrapetrol, Ltd., 144A, 10.50%, 4/01/08 ............................... Bahamas 1,000,000 1,005,000
------------
1,216,875
------------
Utilities - Electric .7%
AES China Generating Co., Ltd., 10.125%, 12/15/06 ...................... China 100,000 94,000
AES Corp., senior sub. notes, 8.50%, 11/01/07 .......................... United States 750,000 772,500
ESI Tractebel Acquisition Corp., 144A, 7.99%, 12/31/11 ................. United States 250,000 248,750
------------
1,115,250
------------
Wireless Communications 3.5%
Arch Communications Group, senior discount notes, zero coupon to 3/15/01,
10.875% thereafter, 3/15/08 ........................................... United States 300,000 165,750
Comcast Cellular, senior notes, 9.50%, 5/01/07 ......................... United States 400,000 418,500
Metrocall, Inc., senior sub. notes, 9.75%, 11/01/07 .................... United States 1,000,000 1,020,000
Microcell Telecommunications Service, senior disc. notes, zero coupon to
12/01/01, 14.00% thereafter, 6/01/06 .................................. Canada 600,000 448,500
Millicom International Cellular, SA, senior disc. notes, zero coupon to 6/01/01,
13.50% thereafter, 6/01/06 ............................................ Luxembourg 300,000LUF 235,500
Nextel Communications, senior disc. notes, zero coupon to 2/15/99, 9.75%
thereafter, 8/15/04 ................................................... United States 500,000 483,750
Nextel Communications, senior disc. notes, zero coupon to 10/31/02, 9.75%
thereafter, 10/31/07 .................................................. United States 500,000 327,500
Nextel Communications, senior disc. notes, 144A, zero coupon to 2/15/03, 9.95%
thereafter, 2/15/08 ................................................... United States 300,000 192,000
Orion Network Systems, Inc., SA, senior disc. notes, zero coupon to 1/15/02, 12.50%
thereafter, 1/15/07 ................................................... United States 300,000 232,500
Paging Network, Inc., senior sub. notes, 10.125%, 8/01/07 .............. United States 400,000 422,000
Sprint Spectrum, L.P., senior disc. notes, zero coupon to 8/01/01, 12.50%
thereafter, 8/15/06 ................................................... United States 300,000 249,750
Sygnet Wireless, Inc., senior notes, 11.50%, 10/01/06 .................. United States 500,000 561,250
Triton Communications L.L.C., senior disc. notes, 144A, zero coupon to 5/1/03,
11.00% thereafter, 5/1/08 ............................................. United States 1,750,000 1,039,064
------------
5,796,064
------------
Total High Yield Corporate Bonds (Cost $45,420,799) .................... 46,745,480
------------
Convertible Bonds 5.8%
Energy .6%
Diamond Offshore Drilling, cvt., 3.75%, 2/15/07 ........................ United States 800,000 1,082,000
------------
Financial .6%
Leasing Solutions Inc., cvt., 6.875%, 10/01/03 ......................... United States 1,000,000 1,035,000
------------
Health Care .3%
Assisted Living Concepts, cvt., sub. deb., 6.00%, 11/01/02 ............. United States 400,000 429,000
------------
Information Technology 3.7%
Bay Networks, cvt., 144A, 5.25%, 5/15/03 ............................... United States $ 750,000 $ 710,625
Dovatron International, Inc., cvt., sub. notes, 144A, 6.00%, 10/15/02 .. United States 2,000,000 2,585,000
Kent Electronics, cvt., 4.50%, 9/01/04 ................................. United States 1,750,000 1,480,938
Motorola Inc., cvt., sub. deb., 0.00%, 9/27/13 ......................... United States 1,750,000 1,305,938
------------
6,082,501
------------
Real Estate Investment Trusts .6%
Macerich Co., cvt., sub. notes, 144A, 7.25%, 12/15/02 .................. United States 1,000,000 993,750
------------
Total Convertible Bonds (Cost $9,342,598)............................... 9,622,251
------------
Emerging Market Bonds 23.7%
Bepensa, SA, senior notes, 144A, 9.75%, 9/30/04 ........................ Mexico 150,000 151,688
Bridas Corp., senior notes, 12.50%, 11/15/99 ........................... Argentina 100,000 106,250
Cemex, SA, 144A, 10.75%, 7/15/00 ....................................... Mexico 100,000 106,370
Centrais Eletricas Brasileiras, SA, 144A, 10.00%, 10/30/98 ............. Brazil 120,000 120,600
Government of Jamaica, 9.625%, 7/02/02 ................................. Jamaica 1,250,000 1,257,813
Pera Financial Services, secured notes, 144A, 9.375%, 10/15/02 ......... Turkey 160,000 152,000
Pera Financial Services, secured notes, 144A, 9.375%, 10/15/02 ......... Turkey 1,000,000 950,000
Poland Communications, Inc., senior notes, 9.875%, 11/01/03 ............ Poland 200,000 199,500
Republic of Argentina, 9.25%, 2/23/01 .................................. Argentina 275,000 284,109
Republic of Argentina, 11.00%, 10/09/06 ................................ Argentina 1,000,000 1,101,250
Republic of Argentina, 9.75%, 9/19/27 .................................. Argentina 730,000 706,275
Republic of Argentina, Bonos Del Tesoro, 8.75%, 5/09/02 ................ Argentina 3,300,000 3,235,650
Republic of Argentina, Global, 11.375%, 1/30/17 ........................ Argentina 160,000 177,500
Republic of Brazil, 8.875%, 11/05/01 ................................... Brazil 2,295,000 2,360,981
Republic of Brazil, 9.375%, 4/07/08 .................................... Brazil 3,000,000 2,992,500
Republic of Brazil, 6.688%, 4/15/12 .................................... Brazil 835,000 662,781
Republic of Brazil, 10.125%, 5/15/27 ................................... Brazil 2,200,000 2,147,750
Republic of Brazil, C Bond, 8.00%, 4/15/14 ............................. Brazil 2,065,181 1,715,459
Republic of Bulgaria, floating rate deb., 6.563%, 7/28/11 .............. Bulgaria 2,220,000 1,753,800
Republic of Ecuador, unsub., 11.25%, 4/25/02 ........................... Ecuador 1,000,000 1,031,250
Republic of Ecuador, unsub., 144A, 11.25%, 4/25/02 ..................... Ecuador 750,000 773,438
Republic of Panama, 8.875%, 9/30/27 .................................... Panama 1,500,000 1,473,750
Republic of Turkey, 144A, 9.875%, 2/23/05 .............................. Turkey 750,000 761,813
Republic of Turkey, 144A, 10.00%, 9/19/07 .............................. Turkey 650,000 664,219
Republic of Venezuela, 6.812%, 12/18/07 ................................ Venezuela 952,380 855,357
Republic of Venezuela, 9.25%, 9/15/27 .................................. Venezuela 3,643,000 3,226,332
Republic of Venezuela, Disc. W-A, 6.563%, 3/31/20 ...................... Venezuela 250,000 220,156
Republic of Venezuela, senior unsub. notes, 9.125%, 6/18/07 ............ Venezuela 1,200,000 1,201,560
Republic of Venezuela, senior unsub. notes, 144A, 9.125%, 6/18/07 ...... Venezuela 100,000 100,130
SEI Holdings IX, Inc., senior notes, 144A, 11.00%, 11/30/00 ............ Trinidad 125,000 134,376
United Mexican States, 9.75%, 2/06/01 .................................. Mexico 1,950,000 2,069,438
United Mexican States, 9.875%, 1/15/07 ................................. Mexico 415,000 445,606
United Mexican States, 8.625%, 3/12/08 ................................. Mexico 4,250,000 4,228,750
United Mexican States, 11.375%, 9/15/16 ................................ Mexico 800,000 940,000
United Mexican States, 11.50%, 5/15/26 ................................. Mexico 950,000 1,147,125
------------
Total Emerging Market Bonds (Cost $38,938,942) ......................... 39,455,576
------------
a Foreign Government Bonds 15.9%.......................................... United Kingdom
Australian Government, 9.50%, 8/15/03 .................................. Australia $ 2,457,000 AUD $ 1,889,391
Belgium Kingdom, 5.00%, 3/28/01 ........................................ Belgium 20,000,000 BEF 548,106
Belgium Kingdom, 6.25%, 3/28/07 ........................................ Belgium 20,000,000 BEF 584,884
Bundesobligation, Series 110, 5.375%, 2/22/99 .......................... Germany 1,205,000 DEM 679,286
Bundesobligation, Series 118, 5.25%, 2/21/01 ........................... Germany 865,000 DEM 492,633
Bundesschatzanweisungen, 6.875%, 2/24/99 ............................... Germany 1,035,000 DEM 590,086
Buoni Poliennali del Tesoro, 10.50%, 7/15/00 ........................... Italy 2,055,000,000 ITL 1,298,096
Buoni Poliennali del Tesoro, 7.75%, 11/01/06 ........................... Italy 2,815,000,000 ITL 1,870,312
Deutschland Republic, 6.00%, 1/05/06 ................................... Germany 1,175,000 DEM 696,291
German Unity Fund, 8.75%, 8/20/01 ...................................... Germany 1,580,000 DEM 992,640
Government of Canada, 10.50%, 7/01/00 .................................. Canada 935,000 CAD 724,320
Government of Canada, 10.50%, 3/01/01 .................................. Canada 1,645,000 CAD 1,308,237
Government of Canada, 10.00%, 5/01/02 .................................. Canada 1,515,000 CAD 1,238,871
Government of Canada, 6.50%, 6/01/04 ................................... Canada 1,000,000 CAD 742,175
Government of Canada, 10.00%, 6/01/08 .................................. Canada 700,000 CAD 662,126
Kingdom of Denmark, 9.00%, 11/15/00 .................................... Denmark 1,785,000 DKK 287,321
Kingdom of Denmark, 8.00%, 5/15/03 ..................................... Denmark 5,630,000 DKK 930,003
Kingdom of Denmark, 7.00%, 12/15/04 .................................... Denmark 6,000,000 DKK 968,063
New Zealand Government, 6.50%, 2/15/00 ................................. New Zealand 1,295,000 NZD 704,591
Spanish Government, 12.25%, 3/25/00 .................................... Spain 176,680,000 ESP 1,320,449
Spanish Government, 8.80%, 4/30/06 ..................................... Spain 235,150,000 ESP 1,903,077
Swedish Government, 13.00%, 6/15/01 .................................... Sweden 6,200,000 SEK 985,713
Swedish Government, 10.25%, 5/05/03 .................................... Sweden 11,700,000 SEK 1,860,347
Treuhandanstalt, 7.75%, 10/02/02 ....................................... Germany 1,530,000 DEM 955,174
U.K. Treasury, 8.00%, 12/07/00 ......................................... United Kingdom 1,070,000 GBP 1,860,031
World Bank IBRD-Global Bond, 4.50%, 3/20/03 ............................ Japan 45,000,000 JPY 395,704
------------
Total Foreign Government Bonds (Cost $26,827,137) ...................... 26,487,927
------------
U.S. Government Securities 4.8%
U.S. Treasury Bonds, 7.125%, 2/15/23 ................................... United States 400,000 455,750
U.S. Treasury Notes, 5.875%, 9/30/02 ................................... United States 5,000,000 5,037,505
U.S. Treasury Notes, 5.625%, 12/31/02 .................................. United States 2,500,000 2,495,315
------------
Total U.S. Government Securities (Cost $7,945,016) ..................... 7,988,570
------------
Mortgages 7.6%
Miscellaneous Mortgages 2.4%
Morgan Stanley Capital I, 6.55%, 12/15/07 .............................. United States 2,000,000 2,020,781
Nomura Asset Securities Corp., Series 1998 D-6, 6.77%, 3/17/28 ......... United States 2,000,000 2,007,500
------------
4,028,281
------------
U.S. Government Agencies/Mortgages 5.2%
FHLMC, 7.00%, 1/01/09 .................................................. United States 18,969 19,361
FHLMC, 6.00%, 4/01/09 .................................................. United States 20,720 20,553
FHLMC, 6.00%, 1/01/11 .................................................. United States 20,932 20,704
FHLMC, 6.50%, 4/01/11 .................................................. United States 32,629 32,864
FHLMC, 7.00%, 9/01/11 .................................................. United States 42,127 43,003
FHLMC, 7.00%, 4/01/24 .................................................. United States 48,179 48,967
FHLMC, 7.50%, 4/01/24 .................................................. United States 36,549 37,536
FHLMC, 8.50%, 12/01/24 ................................................. United States 19,942 20,908
U.S. Government Agencies/Mortgages (cont.)
FHLMC, 9.00%, 12/01/24 ................................................. United States $ 12,926 $ 13,709
FHLMC, 7.00%, 11/01/25 ................................................. United States 26,497 26,876
FHLMC, 8.00%, 11/01/25 ................................................. United States 22,864 23,736
FHLMC, 6.50%, 12/01/25 ................................................. United States 35,735 35,562
FHLMC, 7.50%, 1/01/26 .................................................. United States 30,573 31,396
FHLMC, 8.00%, 1/01/26 .................................................. United States 19,527 20,271
FHLMC, 6.50%, 3/01/26 .................................................. United States 47,584 47,308
FHLMC, 7.00%, 9/01/26 .................................................. United States 26,783 27,164
FHLMC, 7.50%, 1/01/27 .................................................. United States 61,782 63,438
b FHLMC, 7.00%, 5/01/28 .................................................. United States 1,000,000 1,011,250
FNMA, 7.50%, 10/01/07 .................................................. United States 27,957 28,812
FNMA, 2.125%, 10/09/07 ................................................. United States50,000,000 JPY 390,827
FNMA, 6.50%, 2/01/09 ................................................... United States 28,219 28,397
FNMA, 6.50%, 4/01/11 ................................................... United States 21,529 21,652
FNMA, 6.50%, 1/01/24 ................................................... United States 35,452 35,297
FNMA, 7.00%, 5/01/24 ................................................... United States 21,115 21,434
FNMA, 8.00%, 1/01/25 ................................................... United States 25,621 26,621
FNMA, 9.00%, 3/01/25 ................................................... United States 20,482 21,701
FNMA, 9.00%, 5/01/25 ................................................... United States 4,978 5,274
FNMA, 8.50%, 7/01/25 ................................................... United States 18,639 19,570
FNMA, 8.00%,12/01/25 ................................................... United States 839,149 871,641
FNMA, 7.00%, 1/01/26 ................................................... United States 46,575 47,180
FNMA, 7.00%, 3/01/26 ................................................... United States 51,786 52,449
FNMA, 7.50%, 3/01/26 ................................................... United States 37,547 38,587
FNMA, 8.00%, 5/01/26 ................................................... United States 21,096 21,880
FNMA, 8.00%, 6/01/26 ................................................... United States 15,643 16,225
FNMA, 7.50%, 8/01/26 ................................................... United States 34,087 35,032
FNMA, 7.50%, 10/01/26 .................................................. United States 18,890 19,413
FNMA, 8.00%, 1/01/27 ................................................... United States 52,269 54,211
FNMA, 7.00%, 4/01/27 ................................................... United States 990,931 1,003,542
FNMA, 6.50%, 3/01/28 ................................................... United States 3,027,284 3,000,795
GNMA, SF, 7.50%, 9/15/23 ............................................... United States 17,571 18,107
GNMA, SF, 6.50%, 3/15/24 ............................................... United States 47,723 47,528
GNMA, SF, 8.00%, 6/15/24 ............................................... United States 39,401 40,924
GNMA, SF, 8.50%, 8/15/24 ............................................... United States 12,960 13,712
GNMA, SF, 9.00%, 1/15/25 ............................................... United States 4,896 5,257
GNMA, SF, 8.00%, 2/15/25 ............................................... United States 17,928 18,660
GNMA, SF, 9.50%, 6/15/25 ............................................... United States 11,873 12,884
GNMA, SF, 7.50%, 1/15/26 ............................................... United States 22,189 22,823
GNMA, SF, 7.50%, 1/15/26 ............................................... United States 21,245 21,852
GNMA, SF, 7.50%, 2/15/26 ............................................... United States 22,524 23,168
GNMA, SF, 7.00%, 3/15/26 ............................................... United States 24,067 24,401
GNMA, SF, 9.00%, 3/15/26 ............................................... United States 39,749 42,627
GNMA, SF, 8.00%, 6/15/26 ............................................... United States 55,964 58,121
GNMA, SF, 8.50%, 7/15/26 ............................................... United States 21,098 22,277
U.S. Government Agencies/Mortgages (cont.)
GNMA, SF, 7.50%, 9/15/27 ............................................... United States $ 984,559 $ 1,012,537
GNMA II, 7.00%, 9/20/25 ................................................ United States 51,288 51,906
------------
8,741,930
------------
Total Mortgages (Cost $12,759,657) ..................................... 12,770,211
------------
Total Long Term Investments (Cost $148,601,812) ........................ 151,173,643
------------
e Repurchase Agreement 9.7%
Joint Repurchase Agreement, 5.487%, 5/01/98, (Maturity Value $16,204,390)
(Cost $16,201,920) .................................................... United States16,201,920 16,201,920
BancAmerica Robertson Stephens (Maturity Value $1,422,908)
Barclays Capital Group, Inc. (Maturity Value $1,422,908)
Bear, Stearns & Co., Inc. (Maturity Value $776,190)
BT Alex Brown, Inc. (Maturity Value $1,668,400)
Chase Securities, Inc. (Maturity Value $953,628)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $1,422,908)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $1,422,908)
Greenwich Capital Markets, Inc. (Maturity Value $1,422,908)
Lehman Brothers, Inc. (Maturity Value $1,422,908)
Paribas Corp. (Maturity Value $1,422,908)
SBC Warburg Dillon Read, Inc. (Maturity Value $1,422,908)
UBS Securities, L.L.C. (Maturity Value $1,422,908)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $164,803,732) 100.4% ........................... 167,375,563
Other Assets, Less Liabilities (.4%) ................................... (742,165)
------------
Net Assets 100.0%....................................................... $166,633,398
------------
</TABLE>
Currency Abbreviations
AUD - Australian Dollar
BEF - Belgium Franc
CAD - Canadian Dollar
DEM - German Mark
DKK - Danish Krone
ESP - Spanish Peseta
GBP - British Pound
ITL - Italian Lira
JPY - Japanese Yen
LUF - Luxembourg Franc
NZD - New Zealand Dollar
SEK - Swedish Krona
*Securities traded in U.S. dollars unless otherwise indicated.
aNon-income producing.
bSufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
dSee Note 7 regarding defaulted securities.
eSee Note 1(c) regarding joint repurchase agreement.
FRANKLIN STRATEGIC SERIES
Financial Statements
Statements of Assets and Liabilities
April 30, 1998
<TABLE>
<CAPTION>
Franklin Franklin
Biotechnology Franklin California
Discovery Fund Blue Chip Fund Growth Fund
--------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................... $60,702,665 $13,431,295 $653,105,078
Cost - Non-controlled affiliated issuers .................. -- -- 13,388,521
--------------------------------------------------
Value - Unaffiliated issuers .............................. 62,998,977 15,743,335 765,862,178
Value - Non-controlled affiliated issuers ................. -- -- 14,432,813
Repurchase agreements, at value and cost ................... 6,573,605 990,256 66,057,064
Cash ....................................................... 554,836 68,397 630,597
Receivables:
Investment securities sold ................................ 7,204,919 135,125 3,154,676
Capital shares sold ....................................... 308,797 6,735 3,860,727
Dividends and interest .................................... -- 26,332 546,238
Affiliates ................................................ -- 12,705 --
Deposits with brokers for securities sold short ............ 3,001,001 -- --
Other assets ............................................... 19,669 -- --
--------------------------------------------------
Total assets .......................................... 80,661,804 16,982,885 854,544,293
--------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ........................... 310,000 97,544 8,445,755
Capital shares redeemed ................................... 80,936 -- 335,802
Affiliates ................................................ 149,913 28,537 1,114,919
Shareholders .............................................. 21,446 5,812 655,822
Securities sold short, at value
(proceeds $6,874,305) ...................................... 6,519,963 -- --
Other liabilities .......................................... 33,389 14,872 36,911
--------------------------------------------------
Total liabilities ..................................... 7,115,647 146,765 10,589,209
--------------------------------------------------
Net assets, at value ................................. $73,546,157 $16,836,120 $843,955,084
==================================================
Franklin Franklin
Biotechnology Franklin California
Discovery Fund Blue Chip Fund Growth Fund
--------------------------------------------------
<S> <C> <C> <C>
Net assets consist of:
Undistributed net investment income (loss) ................. $-- $ 51,383 $ 1,171,577
Net unrealized appreciation ................................ 2,650,654 2,308,083 113,801,392
Accumulated net realized gain (loss) ....................... (89,289) (428,215) 21,746,042
Capital shares ............................................. 70,984,792 14,904,869 707,236,073
--------------------------------------------------
Net assets, at value .................................. $73,546,157 $16,836,120 $843,955,084
==================================================
Class I:
Net assets, at value ....................................... $73,546,157 $16,836,120 $721,254,298
==================================================
Shares outstanding ......................................... 2,735,059 1,351,240 28,882,609
==================================================
Net asset value per share* ................................. $26.89 $12.46 $24.97
==================================================
Maximum offering price per share
(net asset value per share O 95.50%) ....................... $28.16 $13.05 $26.15
==================================================
Class II:
Net assets, at value ....................................... -- -- $122,700,786
==================================================
Shares outstanding ......................................... -- -- 4,944,822
==================================================
Net asset value per share* ................................. -- -- $24.81
==================================================
Maximum offering price per share
(net asset value per share O 99.00%) ....................... -- -- $25.06
==================================================
*Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
Franklin
Global Health Franklin Global Franklin MidCap
Care Fund Utilities Fund Growth Fund
--------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................... $147,700,628 $182,174,689 $19,759,908
Cost - Non-controlled affiliated issuers .................. 18,457,780 -- --
--------------------------------------------------
Value - Unaffiliated issuers .............................. 178,015,889 236,649,027 25,749,712
Value - Non-controlled affiliated issuers ................. 11,652,341 -- --
Repurchase agreements, at value and cost ................... 6,442,276 9,251,867 4,355,103
Cash ....................................................... 226,198 -- 95,250
Receivables:
Investment securities sold ................................ 5,759,899 -- 1,787
Capital shares sold ....................................... 416,679 691,002 51,169
Dividends and interest .................................... 3,000 637,050 7,970
Affiliates ................................................ -- -- 348
--------------------------------------------------
Total assets .......................................... 202,516,282 247,228,946 30,261,339
--------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ........................... -- 3,607,970 349,895
Capital shares redeemed ................................... 144,353 199,387 --
Affiliates ................................................ 316,421 299,799 35,743
Shareholders .............................................. 171,530 171,765 6,915
Other liabilities .......................................... 18,343 32,038 5,124
--------------------------------------------------
Total liabilities ..................................... 650,647 4,310,959 397,677
--------------------------------------------------
Net assets, at value ................................. $201,865,635 $242,917,987 $29,863,662
==================================================
Franklin
Global Health Franklin Global Franklin MidCap
Care Fund Utilities Fund Growth Fund
--------------------------------------------------
<S> <C> <C> <C>
Net assets consist of:
Undistributed net investment income ........................ $-- $ 1,555,065 $--
Net unrealized appreciation ................................ 23,509,822 54,474,242 5,989,804
Accumulated net realized gain .............................. 116,079 11,322,847 319,578
Capital shares ............................................. 178,239,734 175,565,833 23,554,280
--------------------------------------------------
Net assets, at value .................................. $201,865,635 $242,917,987 $29,863,662
==================================================
Class I:
Net assets, at value ....................................... $176,545,075 $226,593,935 $29,863,662
==================================================
Shares outstanding ......................................... 9,156,408 13,050,797 1,711,958
==================================================
Net asset value per share* ................................. $19.28 $17.36 $17.44
==================================================
Maximum offering price per share
(net asset value per share O 95.50%) ....................... $20.19 $18.18 $18.26
==================================================
Class II:
Net assets, at value ....................................... $ 25,320,560 $ 16,324,052 --
==================================================
Shares outstanding ......................................... 1,321,101 946,226 --
==================================================
Net asset value per share* ................................. $19.17 $17.25 --
==================================================
Maximum offering price per share
(net asset value per share O 99.00%) ....................... $19.36 $17.42 --
==================================================
*Redemption price is equal to net asset value less any applicable contingent deferred sales charge.
Franklin Franklin
Franklin Natural Small Cap Strategic
Resources Fund Growth Fund Income Fund
--------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................... $50,158,063 $2,480,319,729 $148,601,812
Cost - Non-controlled affiliated issuers .................. -- 1,194,580,224 --
--------------------------------------------------
Value - Unaffiliated issuers .............................. 56,480,518 2,988,943,418 151,173,643
Value - Non-controlled affiliated issuers ................. -- 1,331,958,605 --
Repurchase agreements, at value and cost ................... 8,987,626 758,861,509 16,201,920
Cash ....................................................... 34,450 14,884,021 816,352
Receivables:
Investment securities sold ................................ 7,265 2,011,770 901,418
Capital shares sold ....................................... 143,156 25,658,027 1,509,379
Dividends and interest .................................... 103,925 347,502 2,768,455
Affiliates ................................................ 16,929 -- 160,222
Unrealized gain on forward
exchange contracts (Note 6) ................................ -- -- 54,246
--------------------------------------------------
Total assets .......................................... 65,773,869 5,122,664,852 173,585,635
--------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ........................... -- 86,784,575 6,305,465
Capital shares redeemed ................................... 427 2,558,612 73,749
Affiliates ................................................ 57,058 5,954,813 96,365
Shareholders .............................................. 61,526 11,226,579 85,744
Payable upon return of
securities loaned (Note 10) ................................ 2,322,000 207,631,985 --
Unrealized loss on forward
exchange contracts (Note 6) ................................ -- -- 379,760
Other liabilities .......................................... 166,823 145,500 11,154
--------------------------------------------------
Total liabilities ..................................... 2,607,834 314,302,064 6,952,237
--------------------------------------------------
Net assets, at value ................................. $63,166,035 $4,808,362,788 $166,633,398
==================================================
Franklin Franklin
Franklin Natural Small Cap Strategic
Resources Fund Growth Fund Income Fund
--------------------------------------------------
<S> <C> <C> <C>
Net assets consist of:
Undistributed net investment income ........................ $ 293,376 $ -- $ 131,047
Net unrealized appreciation ................................ 6,322,455 646,002,070 2,252,475
Accumulated net realized gain (loss) ....................... (612,877) 62,459,516 (134,177)
Capital shares ............................................. 57,163,081 4,099,901,202 164,384,053
--------------------------------------------------
Net assets, at value .................................. $63,166,035 $4,808,362,788 $166,633,398
==================================================
Class I:
Net assets, at value ....................................... $62,273,906 $3,957,972,469 $166,633,398
==================================================
Shares outstanding ......................................... 4,028,477 152,638,807 14,831,268
==================================================
Net assets value per share* ................................ $15.46 $25.93 $11.24
==================================================
Maximum offering price per share
(net asset value per share O 95.50%, 95.50%, 95.75%,
respectively) .............................................. $16.19 $27.15 $11.74
==================================================
Class II:
Net assets, at value ....................................... -- $ 731,707,459 --
==================================================
Shares outstanding ......................................... -- 28,598,878 --
==================================================
Net asset value per share* ................................. -- $25.59 --
==================================================
Maximum offering price per share
(net asset value per share O 99.00%) ....................... -- $25.85 --
==================================================
Advisor Class:
Net assets, at value ....................................... $ 892,129 $ 118,682,860 --
==================================================
Shares outstanding ......................................... 57,638 4,563,483 --
==================================================
Net asset value and maximum offering price per share ....... $15.48 $26.01 --
==================================================
</TABLE>
*Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Operations
for the year ended April 30, 1998
<TABLE>
<CAPTION>
Franklin Franklin
Biotechnology Franklin California
Discovery Fund** Blue Chip Fund Growth Fund
--------------------------------------------------
<S> <C> <C> <C>
Investment income:*
Dividends .................................................. $-- $ 130,525 $ 5,006,474
Interest ................................................... 328,275 110,911 4,606,211
--------------------------------------------------
Total investment income ............................... 328,275 241,436 9,612,685
--------------------------------------------------
Expenses:
Management fees (Note 3) ................................... 196,583 91,184 2,866,217
Administrative fees (Note 3) ............................... 44,500 -- --
Distribution fees (Note 3)
Class I ................................................... 104,362 26,000 1,300,088
Class II .................................................. -- -- 687,671
Transfer agent fees (Note 3) ............................... 79,420 34,500 982,605
Custodian fees ............................................. 9,943 5,156 7,473
Reports to shareholders .................................... 10,430 10,327 257,967
Registration and filing fees ............................... 1,250 16,375 68,708
Professional fees .......................................... 12,971 1,841 19,784
Trustees' fees and expenses ................................ 120 42 4,469
Amortization of offering costs (Note 1) .................... 32,782 -- --
Pricing fees ............................................... -- 13,732 1,415
Other ...................................................... 8,454 5,725 77,661
--------------------------------------------------
Total expenses ........................................ 500,815 204,882 6,274,058
Expenses waived/paid by affiliate (Note 3) ............ (35,315) (73,186) --
--------------------------------------------------
Net expenses ......................................... 465,500 131,696 6,274,058
--------------------------------------------------
Net investment income (loss) ........................ (137,225) 109,740 3,338,627
--------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ............................................... (362,395) (362,701) 42,533,146
Foreign currency transactions ............................. 2,676 (8,732) --
Securities sold short ..................................... 438,271 -- --
--------------------------------------------------
Net realized gain (loss) ................................. 78,552 (371,433) 42,533,146
Net unrealized appreciation (depreciation) on:
Investments ............................................... 2,650,654 2,024,983 104,216,403
Translation of assets and liabilities
denominated in foreign currencies ........................... -- (3,920) --
--------------------------------------------------
Net unrealized appreciation .............................. 2,650,654 2,021,063 104,216,403
--------------------------------------------------
Net realized and unrealized gain ............................ 2,729,206 1,649,630 146,749,549
--------------------------------------------------
Net increase in net assets resulting from operations ........ $2,591,981 $1,759,370 $150,088,176
==================================================
*Net of foreign taxes of $12,590 for the Franklin Blue Chip Fund.
**For the period September 15, 1997 (effective date) to April 30, 1998.
Franklin
Global Health Franklin Global Franklin MidCap
Care Fund Utilities Fund Growth Fund
--------------------------------------------------
<S> <C> <C> <C>
Investment income:*
Dividends .................................................. $ 219,084 $5,674,618 $ 91,792
Interest ................................................... 753,241 762,319 146,256
--------------------------------------------------
Total investment income ............................... 972,325 6,436,937 238,048
--------------------------------------------------
Expenses:
Management fees (Note 3) ................................... 1,141,626 1,179,477 135,485
Distribution fees (Note 3)
Class I ................................................... 469,000 502,459 44,768
Class II .................................................. 188,100 121,500 --
Transfer agent fees (Note 3) ............................... 466,405 291,025 31,574
Custodian fees ............................................. 14,568 33,815 296
Reports to shareholders .................................... 122,578 76,956 9,450
Registration and filing fees ............................... 63,953 32,452 17,537
Professional fees .......................................... 7,472 7,684 4,228
Trustees' fees and expenses ................................ 1,805 1,843 185
Pricing fees ............................................... 1,240 4,645 117
Other ...................................................... 5,870 6,425 500
--------------------------------------------------
Total expenses ........................................ 2,482,617 2,258,281 244,140
--------------------------------------------------
Net investment income (loss) ......................... (1,510,292) 4,178,656 (6,092)
--------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ............................................... 7,408,991 22,104,757 900,767
Foreign currency transactions ............................. (65,505) (36,764) (1,488)
--------------------------------------------------
Net realized gain ........................................ 7,343,486 22,067,993 899,279
Net unrealized appreciation on:
Investments ............................................... 39,298,346 39,396,011 4,795,383
Translation of assets and liabilities
denominated in foreign currencies .......................... 826 229 --
--------------------------------------------------
Net unrealized appreciation .............................. 39,299,172 39,396,240 4,795,383
--------------------------------------------------
Net realized and unrealized gain ............................ 46,642,658 61,464,233 5,694,662
--------------------------------------------------
Net increase in net assets resulting from operations ........ $45,132,366 $65,642,889 $5,688,570
==================================================
*Net of foreign taxes of $45,298, $183,892, and $1,486 for the Franklin Global
Health Care Fund, the Franklin Global Utilities Fund, and the Franklin MidCap
Growth Fund, respectively.
Franklin Franklin
Franklin Natural Small Cap Strategic
Resources Fund Growth Fund Income Fund
--------------------------------------------------
<S> <C> <C> <C>
Investment income:*
Dividends (Note 9) ......................................... $ 553,710 $ 9,764,392 $ 271,509
Interest ................................................... 383,110 25,927,842 6,533,406
--------------------------------------------------
Total investment income ............................... 936,820 35,692,234 6,804,915
--------------------------------------------------
Expenses:
Management fees (Note 3) ................................... 357,984 13,566,077 527,061
Distribution fees (Note 3)
Class I ................................................... 181,570 6,173,460 222,922
Class II .................................................. -- 4,283,103 --
Transfer agent fees (Note 3) ............................... 113,674 3,755,444 66,796
Custodian fees ............................................. 8,187 50,895 11,527
Reports to shareholders .................................... 34,867 742,709 19,266
Registration and filing fees ............................... 41,738 595,799 40,100
Professional fees .......................................... 3,165 89,388 3,994
Trustees' fees and expenses ................................ 593 21,703 692
Pricing fees ............................................... 4,783 5,997 1,430
Other ...................................................... 1,087 40,447 8,029
--------------------------------------------------
Total expenses ........................................ 747,648 29,325,022 901,817
Expenses waived/paid by affiliate (Note 3) ............ (198,780) -- (687,283)
--------------------------------------------------
Net expenses ......................................... 548,868 29,325,022 214,534
--------------------------------------------------
Net investment income ............................... 387,952 6,367,212 6,590,381
--------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ............................................... 3,242,908 168,904,266 343,200
Foreign currency transactions ............................. 26,123 1,316 (7,888)
--------------------------------------------------
Net realized gain ........................................ 3,269,031 168,905,582 335,312
Net unrealized appreciation on:
Investments ............................................... 4,698,227 660,877,005 2,122,179
Translation of assets and liabilities
denominated in foreign currencies .......................... 18 -- --
--------------------------------------------------
Net unrealized appreciation .............................. 4,698,245 660,877,005 2,122,179
--------------------------------------------------
Net realized and unrealized gain ............................ 7,967,276 829,782,587 2,457,491
--------------------------------------------------
Net increase in net assets resulting from operations ........ $8,355,228 $836,149,799 $9,047,872
==================================================
*Net of foreign taxes of $14,839 and $133,122 for the Franklin Natural Resources
Fund and the Franklin Small Cap Growth Fund, respectively.
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Changes in Net Assets
for the years ended April 30, 1998 and 1997
Franklin
Biotechnology Franklin
Discovery Fund* Blue Chip Fund
-------------------------------------------------
1998 1998 1997**
-------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) .............................. $ (137,225) $ 109,740 $ 35,615
Net realized gain (loss) from
investments and foreign currency
transactions ............................................... 78,552 (371,433) 15,018
Net unrealized appreciation on
investments and translation of assets
and liabilities denominated in foreign currencies .......... 2,650,654 2,021,063 287,020
-------------------------------------------------
Net increase in net assets
resulting from operations .................................. 2,591,981 1,759,370 337,653
Distributions to shareholders from:
Net investment income:
Class I ................................................... -- (61,919) (22,820)
Net realized gains:
Class I ................................................... (92,644) (81,033) --
-------------------------------------------------
Total distributions to shareholders ......................... (92,644) (142,952) (22,820)
Capital share transactions: (Note 2)
Class I ................................................... 71,046,820 9,619,758 5,285,111
-------------------------------------------------
Net increase in net assets ............................ 73,546,157 11,236,176 5,599,944
Net assets:
Beginning of year .......................................... -- 5,599,944 --
-------------------------------------------------
End of year ................................................ $73,546,157 $16,836,120 $5,599,944
=================================================
Undistributed net investment income
(loss) included in net assets
End of year ................................................ $-- $ 51,383 $ 12,294
=================================================
*For the period September 15, 1997 (effective date) to April 30, 1998.
**For the period June 3, 1996 (effective date) to April 30, 1997.
Franklin Franklin
California Growth Fund Global Health Care Fund
-----------------------------------------------------------
1998 1997 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) .............................. $ 3,338,627 $ 1,347,123 $ (1,510,292) $ (615,092)
Net realized gain from
investments and foreign
currency transactions ...................................... 42,533,146 5,419,170 7,343,486 9,002,325
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies .............. 104,216,403 (1,845,799) 39,299,172 (33,436,572)
-----------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations .................................. 150,088,176 4,920,494 45,132,366 (25,049,339)
Distributions to shareholders from:
Net investment income:
Class I ................................................... (2,778,436) (856,516) (839,395) (288,917)
Class II .................................................. (56,235) (15,424) -- --
Net realized gains:
Class I ................................................... (20,449,548) (3,662,883) (10,783,573) (3,142,405)
Class II .................................................. (2,848,861) (130,572) (1,181,824) (90,072)
-----------------------------------------------------------
Total distributions to shareholders ......................... (26,133,080) (4,665,395) (12,804,792) (3,521,394)
Capital share transactions: (Note 2)
Class I ................................................... 328,134,373 200,527,555 (4,628,248) 69,202,314
Class II .................................................. 84,411,109 25,497,086 13,414,237 11,206,101
-----------------------------------------------------------
Total capital share transactions ............................ 412,545,482 226,024,641 8,785,989 80,408,415
-----------------------------------------------------------
Net increase in net assets ............................ 536,500,578 226,279,740 41,113,563 51,837,682
Net assets:
Beginning of year .......................................... 307,454,506 81,174,766 160,752,072 108,914,390
-----------------------------------------------------------
End of year ................................................$843,955,084 $307,454,506 $201,865,635 $160,752,072
===========================================================
Undistributed net investment income included in
net assets
End of year ............................................... $ 1,171,577 $ 667,621 $-- $--
===========================================================
Franklin Franklin
Global Utilities Fund MidCap Growth Fund
-----------------------------------------------------------
1998 1997 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) .............................. $ 4,178,656 $ 4,919,700 $ (6,092) $ (22,588)
Net realized gain from investments
and foreign currency transactions .......................... 22,067,993 20,104,534 899,279 545,132
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies .............. 39,396,240 (3,808,807) 4,795,383 (3,730)
-----------------------------------------------------------
Net increase in net assets resulting
from operations ............................................ 65,642,889 21,215,427 5,688,570 518,814
Distributions to shareholders from:
Net investment income:
Class I ................................................... (4,337,700) (4,357,887) -- (26,689)
Class II .................................................. (173,616) (103,773) -- --
Net realized gains:
Class I ................................................... (20,433,197) (13,464,544) (759,611) (1,366,521)
Class II .................................................. (1,296,647) (541,655) -- --
Total distributions to shareholders ......................... (26,241,160) (18,467,859) (759,611) (1,393,210)
Capital share transactions: (Note 2)
Class I ................................................... 15,321,019 4,024,519 12,082,084 6,152,403
Class II .................................................. 5,705,054 5,766,591 -- --
-----------------------------------------------------------
Total capital share transactions ............................ 21,026,073 9,791,110 12,082,084 6,152,403
-----------------------------------------------------------
Net increase in net assets ............................ 60,427,802 12,538,678 17,011,043 5,278,007
Net assets:
Beginning of year .......................................... 182,490,185 169,951,507 12,852,619 7,574,612
-----------------------------------------------------------
End of year ................................................$242,917,987 $182,490,185 $29,863,662 $12,852,619
===========================================================
Undistributed net investment income included in
net assets
End of year ............................................... $ 1,555,065 $ 1,924,489 $-- $--
===========================================================
Franklin Franklin
Natural Resources Fund Small Cap Growth Fund
-----------------------------------------------------------
1998 1997 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ..................................... $ 387,952 $ 201,953 $ 6,367,212 $ 176,656
Net realized gain from investments and foreign
currency transactions ...................................... 3,269,031 52,954 168,905,582 40,556,983
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies .............. 4,698,245 442,249 660,877,005 (72,391,160)
-----------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations .................................. 8,355,228 697,156 836,149,799 (31,657,521)
Distributions to shareholders from:
Net investment income:
Class I ................................................... (290,715) (151,754) (10,251,644) (2,394,321)
Advisor Class ............................................. (11,637) -- (376,164) --
Net realized gains:
Class I ................................................... (3,235,588) (678,900) (103,290,267) (28,319,877)
Class II .................................................. -- -- (19,206,121) (3,174,405)
Advisor Class ............................................. (65,092) -- (2,705,237) --
-----------------------------------------------------------
Total distributions to shareholders ......................... (3,603,032) (830,654) (135,829,433) (33,888,603)
Capital share transactions: (Note 2)
Class I ................................................... 12,387,988 35,584,860 2,294,635,207 681,937,816
Class II .................................................. -- -- 492,492,347 130,927,016
Advisor Class ............................................. (483,354) 1,148,975 84,621,122 19,961,079
-----------------------------------------------------------
Total capital share transactions ............................ 11,904,634 36,733,835 2,871,748,676 832,825,911
-----------------------------------------------------------
Net increase in net assets ............................ 16,656,830 36,600,337 3,572,069,042 767,279,787
Net assets:
Beginning of year .......................................... 46,509,205 9,908,868 1,236,293,746 469,013,959
-----------------------------------------------------------
End of year ................................................ $63,166,035 $46,509,205 $4,808,362,788 $1,236,293,746
===========================================================
Undistributed net investment income included in
net assets
End of year ............................................... $ 293,376 $ 227,995 $ -- $ --
===========================================================
Franklin
Strategic Income Fund
-------------------------
1998 1997
-------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income .................................................... $ 6,590,381 $ 1,782,592
Net realized gain from investments
and foreign currency transactions .......................................... 335,312 632,481
Net unrealized appreciation (depreciation)
on investments and translation of assets and
liabilities denominated in foreign currencies ............................. 2,122,179 (329,459)
-------------------------
Net increase in net assets resulting from operations ................. 9,047,872 2,085,614
Distributions to shareholders from:
Net investment income:
Class I .................................................................. (6,541,159) (1,770,285)
Net realized gains:
Class I .................................................................. (692,982) (519,339)
-------------------------
Total distributions to shareholders ........................................ (7,234,141) (2,289,624)
Capital share transactions: (Note 2)
Class I .................................................................. 129,955,768 22,046,373
-------------------------
Net increase in net assets ........................................... 131,769,499 21,842,363
Net assets:
Beginning of year ......................................................... 34,863,899 13,021,536
-------------------------
End of year ............................................................... $166,633,398 $34,863,899
=========================
Undistributed net investment income included in net assets
End of year ............................................................... $ 131,047 $ 141,184
=========================
</TABLE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (the Trust) is registered under the Investment Company
Act of 1940 as an open-ended investment company, consisting of nine separate
series (the Funds). All Funds are non-diversified except the Franklin Blue Chip
Fund, the Franklin MidCap Growth Fund, and the Franklin Small Cap Growth Fund.
The Funds and their investment objectives are:
Capital Growth Growth and Income Total Return
- --------------------------------------------------------------------------------
Biotechnology Discovery Fund Strategic Income Fund Global Utilities Fund
Blue Chip Fund Natural Resources Fund
California Growth Fund
Global Health Care Fund
MidCap Growth Fund
Small Cap Growth Fund
The following summarizes the Funds' significant accounting policies.
a. Security Valuation:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Trustees.
b. Foreign Currency Translation:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. Joint Repurchase Agreement:
The Funds may enter into a joint repurchase agreement whereby their uninvested
cash balance is deposited into a joint cash account to be used to invest in one
or more repurchase agreements. The value and face amount of the joint repurchase
agreement are allocated to the Funds based on their pro-rata interest. A
repurchase agreement is accounted for as a loan by the Funds to the seller,
collateralized by securities which are delivered to the Funds' custodian. The
market value, including accrued interest, of the initial collateralization is
required to be at least 102% of the dollar amount invested by the Funds, with
the value of the underlying securities marked to market daily to maintain
coverage of at least 100%. At April 30, 1998, all outstanding repurchase
agreements had been entered into on that date.
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)
d. Forward Exchange Contracts:
The Strategic Income Fund may enter into forward exchange contracts to hedge
against foreign exchange risks. These contracts are valued daily and the Fund's
equity therein is included in the Statement of Assets and Liabilities. Realized
and unrealized gains and losses are included in the Statement of Operations (see
Note 6 for details).
e. Securities Sold Short:
The Biotechnology Discovery Fund is engaged in selling securities short, which
obligates the Fund to replace a security borrowed by purchasing the same
security at the current market value. The Fund would incur a loss if the price
of the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund would realize a gain if
the price of the security declines between those dates. These instruments
involve market risk
in excess of the amount recognized on the Statement of Assets and Liabilities.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit for the broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short.
f. Income Taxes:
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
g. Security Transactions, Investment Income, Expenses and Distributions:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount is
amortized on an income tax basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.
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. Other expenses are
charged to each Fund on a specific identification basis.
Distributions received by the Trust from securities may be a return of capital
(ROC). Such distributions reduce the cost basis of the securities, and any
distributions in excess of the cost basis are recognized as capital gains.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
h. Offering Costs:
Offering costs are amortized on a straight-line basis over twelve months.
i. Accounting Estimates:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the Funds are indicated below. The
shares have the same rights except for their initial sales load, distribution
fees, voting rights on matters affecting a single class and the exchange
privilege of each class.
<TABLE>
<CAPTION>
Class I Class I & Class II Class I & Advisor Class Class I, Class II,& Advisor Class
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Biotechnology Discovery Fund California Growth Fund Natural Resources Fund Small Cap Growth Fund
Blue Chip Fund Global Health Care Fund
MidCap Growth Fund Global Utilities Fund
Strategic Income Fund
</TABLE>
At April 30, 1998, there were an unlimited number of shares authorized ($.01 par
value). On February 26, 1998, the Board approved the establishment of a second
class of shares, Class II, for the Franklin Strategic Income Fund. Class II
shares will become available for sale on May 1, 1998. Transactions in the Funds'
shares were as follows:
<TABLE>
<CAPTION>
Franklin Biotechnology Franklin Franklin
Discovery Fund Blue Chip Fund California Growth Fund
----------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class I
Year ended April 30, 19981
Shares sold ................. 3,010,054 $77,917,478 1,118,441 $12,925,246 20,145,768 $465,817,703
Shares issued in reinvestment
of distributions ............ 3,075 72,075 12,437 135,809 978,677 21,399,872
Shares redeemed ............. (278,070) (6,942,733) (295,806) (3,441,297) (6,859,634) (159,083,202)
----------------------------------------------------------------------------------------
Net increase ................ 2,735,059 $71,046,820 835,072 $ 9,619,758 14,264,811 $328,134,373
========================================================================================
Year ended April 30, 19972
Shares sold ................................................. 612,646 $ 6,294,403 13,366,627 $262,790,549
Shares issued in reinvestment of distributions .............. 2,160 22,245 210,190 4,152,217
Shares redeemed ............................................. (98,638) (1,031,537) (3,404,453) (66,415,211)
-------------------------------------------------------
Net increase ................................................ 516,168 $ 5,285,111 10,172,364 $200,527,555
=======================================================
Class II
Year ended April 30, 1998
Shares sold ................................................................... 4,008,172 $ 92,395,912
Shares issued in reinvestment of distributions ................................ 122,953 2,681,530
Shares redeemed ............................................................... (460,393) (10,666,333)
----------------------------
Net increase .................................................................. 3,670,732 $ 84,411,109
============================
Year ended April 30, 19973
Shares sold ................................................................... 1,316,359 $ 26,332,041
Shares issued in reinvestment of distributions ................................ 6,813 135,235
Shares redeemed ............................................................... (49,082) (970,190)
----------------------------
Net increase .................................................................. 1,274,090 $ 25,497,086
============================
</TABLE>
1For the Biotechnology Fund, for the period September 15,1997 (effective date)
to April 30, 1998.
2For the Blue Chip Fund, for the period June 3, 1996 (effective date) to April
30, 1997.
3For the California Growth Fund, for the period September 3, 1996 (effective
date) to April 30, 1997.
2. SHARES OF BENEFICIAL INTEREST (cont.)
<TABLE>
<CAPTION>
Franklin Franklin Franklin
Global Health Care Fund Global Utilities Fund MidCap Growth Fund
---------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class I
Year ended April 30, 1998
Shares sold ................. 5,859,007 $114,702,245 3,212,803 $52,323,466 1,253,115 $20,195,538
Shares issued in reinvestment
of distributions ............ 579,437 10,337,126 1,370,293 20,834,692 47,614 724,287
Shares redeemed ............. (6,631,021) (129,667,619) (3,569,029) (57,837,139) (551,956) (8,837,741)
---------------------------------------------------------------------------------------------
Net increase (decrease) ..... (192,577) $ (4,628,248) 1,014,067 $15,321,019 748,773 $12,082,084
=============================================================================================
Year ended April 30, 1997
Shares sold ................. 9,894,341 $179,514,277 2,133,940 $31,224,215 436,500 $ 6,261,329
Shares issued in reinvestment
of distributions ............ 173,822 3,042,776 1,052,925 14,710,262 99,179 1,337,419
Shares redeemed ............. (6,350,088) (113,354,739) (2,859,257) (41,909,958) (104,275) (1,446,345)
---------------------------------------------------------------------------------------------
Net increase ................ 3,718,075 $ 69,202,314 327,608 $ 4,024,519 431,404 $ 6,152,403
=============================================================================================
Class II
Year ended April 30, 1998
Shares sold ................. 977,854 $ 18,978,351 374,083 $ 6,062,631
Shares issued in reinvestment
of distributions ............ 59,618 1,060,013 83,729 1,266,098
Shares redeemed ............. (344,952) (6,624,127) (100,619) (1,623,675)
------------------------------------------------------------
Net increase ................ 692,520 $ 13,414,237 357,193 $ 5,705,054
============================================================
Year ended April 30, 19974
Shares sold ................. 642,015 $ 11,438,930 476,121 $ 6,947,138
Shares issued in reinvestment
of distributions ............ 4,570 79,609 38,768 539,298
Shares redeemed ............. (18,004) (312,438) (117,318) (1,719,845)
------------------------------------------------------------
Net increase ................ 628,581 $ 11,206,101 397,571 $ 5,766,591
============================================================
Franklin Franklin Franklin
Natural Resources Fund Small Cap Growth Fund Strategic Income Fund
---------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class I
Year ended April 30, 1998
Shares sold ................. 3,460,003 $53,383,689 136,826,460 $3,281,727,105 13,008,094 $145,482,936
Shares issued in reinvestment
of distributions ............ 233,153 3,232,567 4,660,368 102,667,738 433,246 4,823,299
Shares redeemed ............. (2,890,715) (44,228,268) (45,358,271) (1,089,759,636) (1,820,464) (20,350,467)
---------------------------------------------------------------------------------------------
Net increase ................ 802,441 $12,387,988 96,128,557 $2,294,635,207 11,620,876 $129,955,768
=============================================================================================
4For the Global Health Care Fund, for the period September 3, 1996 (effective
date) to April 30, 1997.
2. SHARESOFBENEFICIALINTEREST (cont.)
Franklin Franklin Franklin
Natural Resources Fund Small Cap Growth Fund Strategic Income Fund
--------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class I
Year ended April 30, 1997
Shares sold ................. 4,011,712 $57,583,589 53,625,870 $1,076,021,349 2,512,297 $ 27,651,501
Shares issued in reinvestment
of distributions ............ 53,467 756,742 1,361,841 27,277,285 157,746 1,730,372
Shares redeemed ............. (1,593,404) (22,755,471) (21,003,120) (421,360,818) (668,531) (7,335,500)
--------------------------------------------------------------------------------------------
Net increase ................ 2,471,775 $35,584,860 33,984,591 $ 681,937,816 2,001,512 $ 22,046,373
============================================================================================
Class II
Year ended April 30, 1998
Shares sold ................. 22,584,756 $ 535,761,867
Shares issued in reinvestment of distributions 771,371 16,815,889
Shares redeemed ............. (2,541,642) (60,085,409)
-----------------------------
Net increase ................ 20,814,485 $ 492,492,347
=============================
Year ended April 30, 1997
Shares sold ................. 7,092,087 $ 141,500,263
Shares issued in reinvestment of distributions 141,513 2,814,592
Shares redeemed ............. (674,976) (13,387,839)
-----------------------------
Net increase ................ 6,558,624 $ 130,927,016
=============================
Advisor Class
Year ended April 30, 1998
Shares sold ................. 477,715 $ 7,274,080 3,919,786 $ 93,330,082
Shares issued in reinvestment
of distributions ............ 5,516 76,729 90,328 1,991,723
Shares redeemed ............. (505,389) (7,834,163) (436,261) (10,700,683)
------------------------------------------------------------
Net increase (decrease) ..... (22,158) $ (483,354) 3,573,853 $ 84,621,122
============================================================
Year ended April 30, 19975
Shares sold ................. 147,426 $ 2,125,208 1,065,131 $ 22,124,188
Shares redeemed ............. (67,630) (976,233) (75,501) (2,163,109)
------------------------------------------------------------
Net increase ................ 79,796 $ 1,148,975 989,630 $ 19,961,079
============================================================
</TABLE>
5For the Natural Resources Fund and the Small Cap Growth Fund, for the period
January 2, 1997 (effective date) to April 30, 1997.
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers and/or directors of
Franklin Advisers, Inc. (Advisers), Franklin/Templeton Distributors, Inc.
(Distributors), Franklin Templeton Services, Inc. (FT Services), and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Funds'
investment manager, principal underwriter, administrative manager and transfer
agent, respectively.
All Funds, except the Blue Chip Fund and the MidCap Growth Fund, pay an
investment management fee to Advisers based on the average net assets of the
Funds as follows:
Annualized
Fee Rate Average Daily Net Assets
-----------------------------------------------------------------
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% Over $250 million, up to and including $10 billion
Fees are further reduced on net assets over $10 billion.
The Blue Chip Fund pays an investment management fee to Advisers based on the
average net assets of the Fund as follows:
Annualized
Fee Rate Average Daily Net Assets
-----------------------------------------------------------------
.750% First $500 million
.625% Over $500 million, up to and including $1 billion
.500% Over $1 billion
The MidCap Growth Fund pays an investment management fee to Advisers of .650%
per year of the average daily net assets of the Fund.
The Biotechnology Discovery Fund pays an administrative fee to FT Services based
on the Fund's average net assets as follows:
Annualized
Fee Rate Average Daily Net Assets
-----------------------------------------------------------------
.150% First $200 million
.135% Over $200 million, up to and including $700 million
.100% Over $700 million, up to and including $1.2 billion
.075% Over $1.2 billion
Under a subadvisory agreement, Templeton Investment Counsel, Inc. provides
subadvisory services to the Strategic Income Fund and receives from Advisers
fees based on the average daily net assets of the Fund.
Under an agreement with Advisers, FT Services provides administrative services
to the Funds, except the Biotechnology Discovery Fund. The fee is paid by
Advisers based on the average daily net assets, and is not an additional expense
of the Funds.
Advisers agreed in advance to waive management fees and assume payment of other
expenses for the Biotechnology Discovery Fund, the Blue Chip Fund, the Natural
Resources Fund, and the Strategic Income Fund, as noted in the Statements of
Operations.
The Funds reimburse Distributors annually based on their average daily net
assets for the costs incurred in marketing the Funds' shares as follows:
<TABLE>
<CAPTION>
Biotechnology Discovery Fund California Growth Fund
Blue Chip Fund Global Health Care Fund
MidCap Growth Fund Global Utilities Fund
Strategic Income Fund Natural Resources Fund Small Cap Growth Fund
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Class I .............. .25% .35% .25%
Class II ............. -- -- 1.00%
</TABLE>
3. TRANSACTIONS WITH AFFILIATES (cont.)
Distributors received (paid) net commissions on sales of the Funds' shares, and
received contingent deferred sales charges for the year as follows:
<TABLE>
<CAPTION>
Franklin Franklin Franklin Franklin Franklin
Biotechnology Blue California Global Health Global
Discovery Fund*Chip Fund Growth Fund Care Fund Utilities Fund
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net commissions received (paid) .......... $272,305 $25,642 $(726,970) $ (70,943) $(23,094)
Contingent deferred sales charges ........ $ -- $ -- $ 10,657 $-- $ 2,786
Franklin Franklin Franklin Franklin
MidCap Natural Small Cap Strategic
Growth FundResources Fund Growth Fund Income Fund
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net commissions received (paid) .......... $16,788 $50,410 $(5,536,874) $66,433
Contingent deferred sales charges ........ $ -- $ -- $ 64,163 $ --
</TABLE>
The Funds paid transfer agent fees of $5,821,443, of which $5,029,590 was paid
to Investor Services.
*For the period September 15, 1997 (effective date) to April 30, 1998.
4. INCOME TAXES
At April 30, 1998, the Blue Chip Fund, the Natural Resources Fund and the
Strategic Income Fund have deferred capital losses occurring subsequent to
October 31, 1997 of $428,215, $542,930 and $132,813, respectively. For tax
purposes, such losses will be reflected in the year ending April 30, 1999.
At April 30, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
Franklin Franklin Franklin Franklin Franklin
Biotechnology Blue California Global Health Global
Discovery Fund Chip Fund Growth Fund Care Fund Utilities Fund
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at cost ..........$61,763,876 $14,421,551 $732,735,898 $172,600,684 $191,523,890
===============================================================================
Unrealized appreciation ......$ 6,902,785 $ 2,400,570 $144,134,795 $ 42,717,184 $ 66,404,306
Unrealized depreciation ...... (5,614,042) (88,530) (30,518,638) (19,207,362) (12,027,302)
-------------------------------------------------------------------------------
Net unrealized appreciation ..$ 1,288,743 $ 2,312,040 $113,616,157 $ 23,509,822 $ 54,377,004
===============================================================================
Franklin Franklin Franklin Franklin
MidCap Natural Small Cap Strategic
Growth Fund Resources Fund Growth Fund Income Fund
------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments at cost ..........$24,142,100 $59,222,861 $4,436,303,105 $164,815,201
============================================================
Unrealized appreciation ......$ 6,439,210 $ 9,976,327 $ 849,144,383 $ 3,710,313
Unrealized depreciation ...... (476,495) (3,731,044) (205,683,956) (1,149,951)
------------------------------------------------------------
Net unrealized appreciation ..$ 5,962,715 $ 6,245,283 $ 643,460,427 $ 2,560,362
============================================================
</TABLE>
4. INCOME TAXES (cont.)
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions and
passive foreign investment company shares.
Net realized capital gains (losses) differ for financial statement and tax
purposes primarily due to differing treatments of wash sales, foreign currency
transactions, and passive foreign investment company shares.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended April 30, 1998 were as follows:
<TABLE>
<CAPTION>
Franklin Franklin Franklin Franklin Franklin
Biotechnology Blue California Global Health Global
Discovery Fund* Chip Fund Growth Fund Care Fund Utilities Fund
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases ....................$86,228,321 $14,229,894 $620,237,006 $125,092,238 $95,009,650
Sales ........................$32,475,837 $ 5,056,902 $247,716,955 $124,527,129 $90,143,474
Franklin Franklin Franklin Franklin
MidCap Natural Small Cap Strategic
Growth Fund Resources Fund Growth Fund Income Fund
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases ....................$18,462,611 $42,831,565 $3,496,054,678 $155,514,695
Sales ........................$ 9,172,563 $38,188,590 $1,104,486,467 $ 35,367,419
</TABLE>
*For the period September 15, 1997 (effective date) to April 30, 1998.
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Strategic Income Fund has been a party to financial instruments with
off-balance sheet risk, primarily forward exchange contracts, in order to
minimize the impact on the Fund from adverse changes in the relationship between
the U.S. dollar and foreign currencies and interest rates. These instruments
involve market risk in excess of the amount recognized on the Statement of
Assets and Liabilities. Some of these risks have been minimized by offsetting
contracts. Risks arise from the possible inability of counterparties to meet the
terms of their contracts, future movement in currency values and interest rates
and contract positions that are not exact offsets. The contract amount indicates
the extent of the Fund's involvement in such contracts.
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. At April 30,
1998, the Strategic Income Fund has outstanding forward exchange contracts for
the sale of currencies as set out below. The contracts are reported in the
financial statements at the Fund's net equity, as measured by the difference
between the forward exchange rates at the reporting date and the forward
exchange rates at the day of entry into the contracts.
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (cont.)
<TABLE>
<CAPTION>
In Unrealized
Contracts to Sell (Foreign exchange currency) Exchange for Settlement Date Gain (loss)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
107,000 Australian Dollar........................ U.S. $ 72,066 5/18/98 U.S. $ 2,281
110,000 Australian Dollar ....................... 72,083 5/07/98 356
483,000 Australian Dollar ....................... 320,096 5/04/98 5,168
325,000 Canadian Dollar ......................... 229,520 5/04/98 2,292
1,376,000 Canadian Dollar ......................... 972,094 5/04/98 10,046
914,000 Deutschemark ............................ 510,614 5/26/98 517
914,000 Deutschemark ............................ 510,843 5/28/98 683
50,400,000 Japanese Yen ............................ 393,136 5/13/98 10,996
52,000,000 Japanese Yen ............................ 396,644 5/13/98 2,372
460,000 New Zealand Dollar ...................... 267,536 5/12/98 12,181
187,000 New Zealand Dollar ...................... 108,273 5/18/98 4,525
100,000 New Zealand Dollar ...................... 55,970 5/26/98 533
----------- ----------
U.S. $ 3,908,875 51,950
=========== ----------
Contracts to Buy (Foreign exchange currency)
110,000 Australian Dollar........................ U.S. $ 71,319 5/07/98 408
601,000 Canadian Dollar ......................... 418,961 5/04/98 1,236
100,000 New Zealand Dollar ...................... 54,785 5/26/98 652
----------- ----------
U.S. $ 545,065 2,296
=========== ----------
Unrealized gain on forward foreign currency contracts .... 54,246
----------
Contracts to Sell (Foreign exchange currency)
15,000,000 Deutschemark............................. U.S. $ 8,126,998 5/07/98 (234,484)
1,828,000 Deutschemark ............................ 991,216 5/06/98 (27,706)
1,828,000 Deutschemark ............................ 991,232 5/05/98 (27,627)
914,000 Deutschemark ............................ 495,176 5/07/98 (14,317)
914,000 Deutschemark ............................ 495,213 5/07/98 (14,280)
914,000 Deutschemark ............................ 497,090 5/11/98 (12,530)
4,450,000 Deutschemark ............................ 2,454,766 5/15/98 (27,045)
2,113,000 Deutschemark ............................ 1,170,961 5/22/98 (7,995)
----------- ----------
U.S. $15,222,652 (365,984)
=========== ----------
Contracts to Buy (Foreign exchange currency)
107,000 Australian Dollar........................ U.S. $ 71,382 5/18/98 (1,597)
1,828,000 Deutschemark ............................ 1,020,830 5/06/98 (1,908)
5,000,000 Deutschemark ............................ 2,795,014 5/07/98 (7,853)
460,000 New Zealand Dollar ...................... 257,577 5/12/98 (2,222)
187,000 New Zealand Dollar ...................... 103,944 5/18/98 (196)
----------- ----------
U.S. $ 4,248,747 (13,776)
=========== ----------
Unrealized loss on forward foreign currency contracts .... (379,760)
----------
Net unrealized loss on forward foreign currency contracts. U.S. $(325,514)
==========
</TABLE>
7. CREDIT RISK AND DEFAULTED SECURITIES
The Strategic Income Fund has 56.2% of its portfolio invested in lower rated and
comparable quality unrated high yield securities, which tend to be more
sensitive to economic conditions than higher rated securities. 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. At April 30, 1998, the Fund
held defaulted securities with a value aggregating $117,000 representing 0.07%
of the Fund's net assets. For information as to specific securities, see the
accompanying Statement of Investments.
For financial reporting purposes, the Fund discontinues accruing income on
defaulted bonds and provides an estimate for losses on interest receivable.
The Strategic Income Fund has investments in excess of 10% of its total net
assets in Emerging Market Bonds and Foreign Government Bonds. Such concentration
may subject the Fund more significantly to economic changes occurring within
those sectors.
8. RESTRICTED SECURITIES
The Funds may purchase securities through a private offering that generally
cannot be resold to the public without prior registration under the Securities
Act of 1933. The cost of registering such securities are paid by the issuer.
Restricted securities held at April 30, 1998 were as follows:
<TABLE>
<CAPTION>
Acquisition
Shares Issuer Date Cost Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Franklin California Growth Fund
359,922 Pacific Retail Trust (.55% of Net Assets) ............... 8/30/96 - 12/16/97 $4,276,861 $4,678,986
Franklin Global Utilities Fund
35,000 CMS Energy Corp., cvt. pfd. (.86% of Net Assets) ........ 6/18/97 $1,750,000 $2,091,250
</TABLE>
9. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" as investments
in portfolio companies in which the Fund owns 5% or more of the outstanding
voting securities. Investments in "affiliated companies" at April 30, 1998 were
as shown below. For the year ended April 30, 1998, dividends and interest income
from "affiliated companies" were $1,915,550.
<TABLE>
<CAPTION>
Number of Number of
Shares Held At Gross Gross Shares Held At Value At Dividend
Name of Issuer Beginning of Year Additions Reductions End of Year End of Year Income
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Franklin California Growth Fund:
Cohr, Inc. ............................ -- 425,000 -- 425,000 $ 3,320,313 $--
RemedyTemp, Inc., Class A ............. 175,000 175,000 -- 350,000 11,112,500 --
---------------------------
Total non-controlled affiliated issuers $ 14,432,813 $ --
===========================
Franklin Global Health Care Fund:
CIMA Labs, Inc. ....................... 575,000 50,000 -- 625,000 $ 2,578,122 $--
Cohr, Inc. ............................ -- 405,500 -- 405,500 3,167,969 --
Penederm, Inc. ........................ 410,000 115,000 -- 525,000 5,906,250 --
---------------------------
Total non-controlled affiliated issuers $ 11,652,341 $ --
===========================
Franklin Small Cap Growth Fund:
Access Health, Inc. ................... 509,950 465,800 -- 975,750 $ 32,931,563 $--
Activision, Inc. ...................... -- 1,344,400 -- 1,344,400 14,620,350 --
Advanced Health Corp. ................. -- 1,259,300 289,300 970,000 13,822,500 --
Advanced Energy Industries, Inc. ...... -- 1,575,300 201,000 1,374,300 20,442,713 --
Applied Graphics Technologies, Inc. ... -- 960,100 -- 960,100 48,005,000 --
Arch Communications Group, Inc. ....... -- 2,000,000 -- 2,000,000 11,375,000 --
Atlantic Coast Airlines, Inc. ......... 280,500 448,000 28,500 700,000 39,593,750 --
Atwood Oceanics, Inc. ................. 309,500 933,300 26,200 1,216,600 66,532,813 --
Barrett Resources Corp. ............... 540,000 1,143,900 -- 1,683,900 62,514,788 --
CapStar Hotel Co. ..................... 614,900 715,100 -- 1,330,000 42,726,250 --
Clarify, Inc. ......................... -- 1,297,200 -- 1,297,200 17,836,500 --
Coherent, Inc. ........................ 360,000 1,403,400 -- 1,763,400 41,880,750 --
Consolidated Cigar Holdings, Inc. ..... 574,000 414,300 -- 988,300 13,650,894 --
Core Laboratories, NV (Netherlands) ... -- 1,760,100 59,200 1,700,900 48,263,038 --
DepoTech Corp. ........................ 537,800 457,900 -- 995,700 4,574,047 --
Gibraltar Steel Corp. ................. 663,800 349,000 -- 1,012,800 24,307,200 --
Harmonic Lightwaves, Inc. ............. -- 961,500 -- 961,500 16,826,250 --
H.T.E., Inc. .......................... -- 665,400 -- 665,400 18,631,200 --
Inhale Therapeutic Systems ............ 399,200 411,800 -- 811,000 22,708,000 --
Innkeepers USA Trust .................. -- 2,102,800 -- 2,102,800 31,804,850 1,500,240
Integrated Systems, Inc. .............. 611,300 1,480,000 -- 2,091,300 39,473,288 --
Itron, Inc. ........................... -- 1,157,700 -- 1,157,700 17,727,281 --
K2, Inc. .............................. 405,000 555,500 -- 960,500 21,791,344 316,910
Komag, Inc. ........................... 301,000 3,510,600 -- 3,811,600 59,079,800 --
Ladish Company, Inc. .................. -- 802,300 -- 802,300 12,435,650 --
Lomak Petroleum, Inc. ................. -- 1,890,000 -- 1,890,000 26,105,625 98,400
Marquee Group, Inc. ................... -- 1,327,500 -- 1,327,500 5,973,750 --
Mesa Air Group, Inc. .................. -- 1,650,000 3,900 1,646,100 13,168,800 --
Micromuse, Inc. ....................... -- 754,500 -- 754,500 16,787,625 --
Natural Microsystems Corp. ............ 346,600 300,000 -- 646,600 20,852,850 --
Omtool, Ltd. .......................... -- 984,600 46,000 938,600 11,497,850 --
Pediatrix Medical Group, Inc. ......... -- 1,101,500 -- 1,101,500 46,469,531 --
Penederm, Inc. ........................ 531,200 -- -- 531,200 5,976,000 --
Perceptron, Inc. ...................... -- 793,500 -- 793,500 12,100,875 --
Primus Telecommunications Group, Inc. . 513,300 569,500 79,800 1,003,000 23,946,625 --
Franklin Small Cap Growth Fund: (cont.)
Rainbow Technologies, Inc. ............ -- 532,000 -- 532,000 $ 13,167,000 $--
RemedyTemp, Inc., Class A ............. -- 319,300 -- 319,300 10,137,775 --
RockShox, Inc. ........................ 435,500 530,300 -- 965,800 5,432,625 --
Rural Cellular Corp., Class A ......... 528,000 172,800 -- 700,800 12,439,200 --
Serologicals Corp. .................... 738,900 642,900 -- 1,381,800 41,454,000 --
SOS Staffing Services, Inc. ........... -- 872,400 -- 872,400 19,192,800 --
Spectra-Physics Lasers, Inc. .......... -- 1,016,300 -- 1,016,300 18,166,363 --
Spectralink Corp. ..................... 1,050,000 -- -- 1,050,000 4,593,750 --
Tom Brown, Inc. ....................... -- 2,095,800 -- 2,095,800 43,225,875 --
Transcrypt International, Inc. ........ -- 1,212,700 -- 1,212,700 7,870,423 --
Tropical Sportswear International Corp. -- 413,200 -- 413,200 7,024,400 --
U.S. Liquids, Inc. .................... -- 726,200 -- 726,200 17,519,575 --
Vans, Inc. ............................ -- 1,045,500 -- 1,045,500 12,349,969 --
Varco International, Inc. ............. 780,000 2,682,500 -- 3,462,500 106,471,875 --
West Marine, Inc. ..................... -- 1,474,800 -- 1,474,800 36,962,175 --
Western Wireless Corp., Class A ....... 1,094,800 934,400 310,000 1,719,200 33,524,400 --
XcelleNet, Inc. ....................... 75,000 705,100 -- 780,100 15,992,050 --
-----------------------------
Total non-controlled affiliated issuers $1,331,958,605 $1,915,550
=============================
</TABLE>
10. LENDING OF PORTFOLIO SECURITIES
The Global Utilities Fund, the Natural Resources Fund and the Small Cap Growth
Fund loan securities to certain brokers for which they receive cash collateral
against the loaned securities in an amount equal to at least 102% of the market
value of the loaned securities. Net interest income from the investment of the
cash collateral received for the Global Utilities Fund, the Natural Resources
Fund and the Small Cap Growth Fund was $31,243, $38,535 and $2,288,479,
respectively, for the year ended April 30, 1998. The value of the loaned
securities for the Natural Resources Fund and the Small Cap Growth Fund was
$2,260,625 and $200,943,638, respectively, at April 30, 1998.
FRANKLIN STRATEGIC SERIES
Independent Auditors' Report
To the Shareholders and Board of Trustees
of Franklin Strategic Series:
We have audited the accompanying statements of assets and liabilities of each of
the nine funds comprising the Franklin Strategic Series, including each Fund's
statement of investments, as of April 30, 1998, and the related statements of
operations, the statements of changes in net assets and the financial highlights
for each of the periods presented. 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, 1998, by correspondence with the custodians 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 each
of the nine funds comprising the Franklin Strategic Series as of April 30, 1998,
the results of their operations, the changes in their net assets, and their
financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
June 4, 1998
FRANKLIN STRATEGIC SERIES
Tax Information
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Trust hereby
designates the following amounts as capital gain dividends for the fiscal year
ended April 30, 1998:
<TABLE>
<CAPTION>
Capital Gains
-----------------------------------------
28% Rate Gain 20% Rate Gain Total
-----------------------------------------
<S> <C> <C> <C>
Franklin Blue Chip Fund ....................................... $ -- $ 14,109 $ 14,109
Franklin California Growth Fund ............................... 8,273,760 6,937,083 15,210,843
Franklin Global Health Care Fund .............................. 704,196 104,965 809,161
Franklin Global Utilities Fund ................................ 2,747,311 12,787,525 15,534,836
Franklin MidCap Growth Fund ................................... 57,674 527,290 584,964
Franklin Natural Resources Fund ............................... 374,040 1,112,029 1,486,069
Franklin Small Cap Growth Fund ................................ 36,673,768 33,530,806 70,204,574
Franklin Strategic Income Fund ................................ 35,273 34,714 69,987
</TABLE>
Under Section 854(b)(2) of the Internal Revenue Code, the Trust hereby
designates the following percentage amounts of the ordinary income dividends as
income qualifying for the dividends received deduction for the fiscal year ended
April 30, 1998:
Franklin Blue Chip Fund ............... 33.53%
Franklin California Growth Fund ....... 18.81%
Franklin Global Health Care Fund ...... .47%
Franklin Global Utilities Fund ........ 31.10%
Franklin MidCap Growth Fund ........... 18.05%
Franklin Natural Resources Fund ....... 12.59%
Franklin Small Cap Growth Fund ........ 4.32%
Franklin Strategic Income Fund ........ 3.78%
FRANKLIN BLUE CHIP ANNUAL REPORT
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM
304 (a) OF REGULATION S-T)
GRAPHIC MATERIAL (1)
This chart shows in pie format the portfolio Industry breakdown as of April
30, 1998, based on total net assets.
Portfolio Industry breakdown April 30, 1998
Drugs 43.0%
Delivery Systems 14.9%
Biomedical 8.1%
Therapeutics 5.4%
Animal Health 3.0%
Diagnostics 2.5%
Cash & Equivalents 23.1%
GRAPHIC MATERIAL (2)
This chart shows in pie format the geographic distribution breakdown of the
fund's securities on April 30, 1998, based on total net assets.
Geographic Distribution
United States 59.7%
Europe 22.0%
Japan 5.6%
Latin America 2.8%
Pacific Rim (excluding Japan) 2.2%
Other 1.2%
Cash & Equivalents 6.5%
GRAPHIC MATERIAL (3)
This chart shows in bar format the portfolio breakdown of the fund's securities
on April 30, 1998, based on total net assets.
Portfolio Breakdown
Consumer Staples 17.8%
Healthcare 11.9%
Technology 11.9%
Financial Services 11.8%
Services 10.3%
Industrial Cyclicals 9.4%
Energy 9.2%
Utilities & Telecommunications 6.0%
Consumer Durables 4.4%
Retail 0.8%
Cash & Equivalents 6.5%
GRAPHIC MATERIAL (4)
The following line graph hypothetically compares the performance of the
Franklin Blue Chip Fund to that of the MSCI World Index, based on a $10,000
investment from 6/3/96 to 4/30/98.
Total Return Index Comparison
DATE FRANKLIN BLUE CHIP FUND MSCI WORLD INDEX
6/3/96 $9,551 $10,000
6/30/96 $9,675 $10,052
7/31/96 $9,398 $9,698
8/31/96 $9,484 $9,812
9/30/96 $9,780 $10,197
10/31/96 $9,780 $10,271
11/30/96 $10,162 $10,848
12/31/96 $10,088 $10,676
1/31/97 $10,261 $10,807
2/28/97 $10,319 $10,933
3/31/97 $10,155 $10,719
4/30/97 $10,424 $11,072
5/31/97 $11,116 $11,757
6/30/97 $11,510 $12,345
7/31/97 $11,981 $12,915
8/31/97 $11,030 $12,054
9/30/97 $11,510 $12,711
10/31/97 $10,578 $12,043
11/30/97 $10,684 $12,259
12/31/97 $10,839 $12,410
1/31/98 $10,946 $12,757
2/28/98 $11,599 $13,622
3/31/98 $11,920 $14,200
4/30/98 $12,134 $14,340
GRAPHIC MATERIAL (5)
This chart shows, in bar format, the sector distribution of total net assets
for the Franklin California Growth Fund as of April 30, 1998.
Electronic Technology 15.7%
Technology Services 14.1%
Finance 8.4%
Real Estate 6.9%
Semiconductors 6.0%
Energy/Minerals 5.7%
Health Technology 5.2%
Retail 5.2%
Other 25.3%
Cash & Equivalents 7.5%
100.0%
GRAPHIC MATERIAL (6)
The following line graph hypothetically compares the performance of the
Franklin California Growth Fund - Class I to that of the Franklin California
250 Growth Index and the S&P 500 Stock Index, based on a $10,000 investment
from October 30, 1991 to April 30, 1998.
FRANKLIN CALIFORNIA FRANKLIN CA 250 GROWTH
DATE GROWTH FUND - CLASS S&P 500 STOCK INDEX
I INDEX
- -------------------------------------------------------------------------------
10/30/91 $9,550 $10,000 $10,000
10/31/91 $9,550 $10,004 $10,000
11/30/91 $8,861 $9,601 $9,185
12/31/91 $9,845 $10,699 $10,285
1/31/92 $10,548 $10,500 $11,084
2/28/92 $10,683 $10,636 $11,254
3/31/92 $9,960 $10,428 $10,511
4/30/92 $9,517 $10,735 $10,078
5/31/92 $9,546 $10,787 $10,140
6/30/92 $8,953 $10,627 $9,563
7/31/92 $9,215 $11,061 $9,883
8/31/92 $8,808 $10,835 $9,450
9/30/92 $8,914 $10,961 $9,539
10/31/92 $9,341 $10,999 $10,068
11/30/92 $10,176 $11,373 $11,000
12/31/92 $10,386 $11,512 $11,285
1/31/93 $10,718 $11,609 $11,701
2/28/93 $10,279 $11,767 $11,220
3/31/93 $10,396 $12,015 $11,332
4/30/93 $9,966 $11,725 $10,906
5/31/93 $10,689 $12,038 $11,728
6/30/93 $10,665 $12,072 $11,693
7/31/93 $10,419 $12,024 $11,725
8/31/93 $11,117 $12,480 $12,301
9/30/93 $11,578 $12,384 $12,587
10/31/93 $11,735 $12,640 $12,769
11/30/93 $11,706 $12,520 $12,610
12/31/93 $12,211 $12,672 $12,991
1/31/94 $12,751 $13,102 $13,432
2/28/94 $12,917 $12,747 $13,321
3/31/94 $12,627 $12,192 $12,557
4/30/94 $12,513 $12,348 $12,506
5/31/94 $12,585 $12,550 $12,459
6/30/94 $12,218 $12,243 $11,905
7/31/94 $12,658 $12,644 $12,299
8/31/94 $13,493 $13,163 $13,458
9/30/94 $13,592 $12,841 $13,402
10/31/94 $14,053 $13,130 $13,669
11/30/94 $14,097 $12,652 $13,269
12/31/94 $14,230 $12,840 $13,455
1/31/95 $14,218 $13,172 $13,782
2/28/95 $15,208 $13,686 $14,477
3/31/95 $15,784 $14,090 $15,087
4/30/95 $16,152 $14,504 $15,576
5/31/95 $16,797 $15,084 $16,039
6/30/95 $17,927 $15,434 $17,203
7/31/95 $19,454 $15,946 $18,645
8/31/95 $19,895 $15,986 $19,036
9/30/95 $20,384 $16,661 $19,425
10/31/95 $20,420 $16,601 $18,991
11/30/95 $21,064 $17,330 $19,750
12/31/95 $21,008 $17,664 $19,511
1/31/96 $21,255 $18,265 $19,684
2/29/96 $21,973 $18,435 $20,405
3/31/96 $22,155 $18,612 $20,106
4/30/96 $23,824 $18,885 $22,130
5/31/96 $24,359 $19,372 $22,815
6/30/96 $23,627 $19,446 $21,267
7/31/96 $22,227 $18,587 $19,536
8/31/96 $23,614 $18,979 $21,098
9/30/96 $25,132 $20,047 $22,732
10/31/96 $25,446 $20,600 $22,715
11/30/96 $27,290 $22,158 $24,246
12/31/96 $27,401 $21,719 $24,539
1/31/97 $27,844 $23,077 $25,858
2/28/97 $27,066 $23,257 $24,747
3/31/97 $25,498 $22,301 $23,462
4/30/97 $25,940 $23,632 $23,541
5/31/97 $28,433 $25,071 $26,178
6/30/97 $28,492 $26,195 $27,108
7/31/97 $30,967 $28,280 $29,933
8/31/97 $30,779 $26,696 $30,624
9/30/97 $32,958 $28,159 $32,561
10/31/97 $31,882 $27,218 $30,436
11/30/97 $32,218 $28,479 $30,138
12/31/97 $31,705 $28,968 $28,776
1/31/98 $31,242 $29,290 $30,730
2/28/98 $33,710 $31,402 $33,426
3/31/98 $34,411 $33,010 $33,992
4/30/98 $35,028 $33,343 $35,026
GRAPHIC MATERIAL (7)
The following line graph hypothetically compares the performance of the
Franklin California Growth Fund - Class II to that of the Franklin California
250 Growth Index and the S&P 500 Stock Index, based on a $10,000 investment
from September 3, 1996 to April 30, 1998.
FRANKLIN CALIFORNIA FRANKLIN CA 250 GROWTH
DATE GROWTH FUND - CLASS S&P 500 STOCK INDEX
II INDEX
- -------------------------------------------------------------------------------
9/3/96 $9,901 $10,000 $10,000
9/30/96 $10,520 $10,563 $10,774
10/31/96 $10,641 $10,855 $10,766
11/30/96 $11,407 $11,675 $11,492
12/31/96 $11,446 $11,444 $11,631
1/31/97 $11,619 $12,159 $12,256
2/28/97 $11,289 $12,254 $11,729
3/31/97 $10,627 $11,750 $11,120
4/30/97 $10,806 $12,452 $11,158
5/31/97 $11,833 $13,210 $12,408
6/30/97 $11,854 $13,802 $12,849
7/31/97 $12,876 $14,901 $14,188
8/31/97 $12,787 $14,066 $14,515
9/30/97 $13,730 $14,837 $15,433
10/31/97 $13,230 $14,342 $14,426
11/30/97 $13,359 $15,006 $14,285
12/31/97 $13,140 $15,264 $13,639
1/31/98 $12,947 $15,433 $14,565
2/28/98 $13,963 $16,546 $15,843
3/31/98 $14,237 $17,393 $16,111
4/30/98 $14,490 $17,569 $16,602
GRAPHIC MATERIAL (8)
This chart illustrates in bar format the geographic breakdown of holdings of
Franklin Global Health Care Fund, based on total net assets as of April 30,
1998.
United States 81.6%
Israel 7.8%
Switzerland 3.2%
Mexico 0.7%
Australia 0.5%
United Kingdom 0.1%
Cash & Equivalents 6.1%
GRAPHIC MATERIAL (9)
This chart illustrates in bar format the portfolio breakdown by industry of
holdings of Franklin Global Health Care Fund, based on total net assets as of
April 30, 1998.
Specialty Pharmaceuticals 21.3%
Medical Technology and Supplies 20.2%
Biotechnology 13.0%
Alternate Site Providers 11.8%
Miscellaneous 5.0%
Physician Practice Management 5.0%
Software and Information Systems 4.6%
Managed Care and HMOs 3.5%
Nursing Homes 3.3%
Pharmaceuticals 3.2%
Hospitals 2.3%
Wholesalers/Distributors 0.7%
Cash & Equivalents 6.1%
GRAHPIC MATERIAL (10)
The following line graph compares the performance of Franklin Global Health
Care Fund - Class I with that of the Standard & Poor's 500 Stock Index (S&P
500), based on a hypothetical $10,000 investment from 2/14/92 to 4/30/98.
Franklin Global Health Care
Fund - Class I S&P 500 Index
2/14/92 $9,551 $10,000 S&P 500 $T
2/28/92 $9,790 $10,065 0.65%
3/31/92 $9,083 $9,868 -1.95%
4/30/92 $8,443 $10,158 2.94%
5/29/92 $8,663 $10,208 0.49%
6/30/92 $8,339 $10,056 -1.49%
7/31/92 $8,896 $10,467 4.09%
8/31/92 $8,598 $10,253 -2.05%
9/30/92 $8,407 $10,373 1.17%
10/30/92 $8,810 $10,408 0.34%
11/30/92 $9,453 $10,762 3.40%
12/31/92 $9,603 $10,894 1.23%
1/29/93 $9,603 $10,986 0.84%
2/26/93 $8,321 $11,135 1.36%
3/31/93 $8,417 $11,370 2.11%
4/30/93 $8,562 $11,095 -2.42%
5/30/93 $8,996 $11,391 2.67%
6/30/93 $9,294 $11,424 0.29%
7/30/93 $8,801 $11,379 -0.40%
8/31/93 $8,955 $11,810 3.79%
9/30/93 $9,178 $11,719 -0.77%
10/29/93 $9,749 $11,961 2.07%
11/30/93 $10,049 $11,848 -0.95%
12/31/93 $10,200 $11,991 1.21%
1/31/94 $11,211 $12,399 3.40%
2/28/94 $11,121 $12,063 -2.71%
3/31/94 $10,550 $11,537 -4.36%
4/29/94 $10,440 $11,685 1.28%
5/31/94 $10,560 $11,876 1.64%
6/30/94 $10,098 $11,585 -2.45%
7/29/94 $10,546 $11,965 3.28%
8/31/94 $11,584 $12,456 4.10%
9/30/94 $11,777 $12,152 -2.44%
10/31/94 $12,052 $12,425 2.25%
11/30/94 $11,940 $11,973 -3.64%
12/30/94 $11,657 $12,150 1.48%
1/31/95 $11,721 $12,465 2.59%
2/28/95 $12,188 $12,951 3.90%
3/31/95 $12,729 $13,333 2.95%
4/28/95 $12,145 $13,725 2.94%
5/31/95 $12,506 $14,274 4.00%
6/30/95 $12,911 $14,605 2.32%
7/31/95 $14,107 $15,090 3.32%
8/31/95 $14,897 $15,128 0.25%
9/29/95 $15,773 $15,766 4.22%
10/31/95 $15,688 $15,709 -0.36%
11/30/95 $16,467 $16,399 4.39%
12/29/95 $18,021 $16,716 1.93%
1/31/96 $19,352 $17,284 3.40%
2/29/96 $20,305 $17,445 0.93%
3/29/96 $21,051 $17,612 0.96%
4/30/96 $22,187 $17,871 1.47%
5/31/96 $22,543 $18,332 2.58%
6/28/96 $21,453 $18,402 0.38%
7/31/96 $18,511 $17,588 -4.42%
8/30/96 $19,959 $17,960 2.11%
9/30/96 $21,556 $18,971 5.63%
10/31/96 $19,775 $19,494 2.76%
11/29/96 $20,235 $20,968 7.56%
12/31/96 $20,989 $20,553 -1.98%
1/31/97 $21,670 $21,837 6.25%
2/28/97 $21,670 $22,008 0.78%
3/31/97 $19,802 $21,103 -4.11%
4/30/97 $18,932 $22,363 5.97%
5/31/97 $21,177 $23,725 6.09%
6/30/97 $22,987 $24,788 4.48%
7/31/97 $23,645 $26,761 7.96%
8/31/97 $23,445 $25,262 -5.60%
9/30/97 $26,007 $26,647 5.48%
10/31/97 $24,467 $25,757 -3.34%
11/30/97 $23,551 $26,949 4.63%
12/31/97 $23,130 $27,413 1.72%
1/31/98 $23,105 $27,717 1.11%
2/28/98 $23,659 $29,716 7.21%
3/31/98 $24,439 $31,237 5.12%
4/30/98 $24,276 $31,552 1.01%
GRAPHIC MATERIAL (11)
The following line graph compares the performance of Franklin Global Health
Care Fund - Class II with that of the Standard & Poor's 500 Stock Index (S&P
500), based on a hypothetical $10,000 investment from 9/3/96 to 4/30/98.
Franklin Global Health Care
Fund - Class II S&P 500 Index
9/3/96 $9,897 $10,000 S&P 500 $T
9/30/96 $10,720 $10,563 5.63%
10/31/96 $9,823 $10,855 2.76%
11/29/96 $10,040 $11,675 7.56%
12/31/96 $10,417 $11,444 -1.98%
1/31/97 $10,743 $12,159 6.25%
2/28/97 $10,738 $12,254 0.78%
3/31/97 $9,810 $11,750 -4.11%
4/30/97 $9,378 $12,452 5.97%
5/31/97 $10,475 $13,210 6.09%
6/30/97 $11,368 $13,802 4.48%
7/31/97 $11,683 $14,901 7.96%
8/31/97 $11,578 $14,066 -5.60%
9/30/97 $12,838 $14,837 5.48%
10/31/97 $12,062 $14,342 -3.34%
11/30/97 $11,601 $15,006 4.63%
12/31/97 $11,389 $15,264 1.72%
1/31/98 $11,370 $15,433 1.11%
2/28/98 $11,632 $16,546 7.21%
3/31/98 $12,011 $17,393 5.12%
4/30/98 $11,931 $17,569 1.01%
GRAPHIC MATERIAL (12)
This chart shows in pie format the geographic distribution breakdown of the
fund's securities on April 30, 1998, based on total net assets.
Geographic Distribution on April 30, 1998
United States 62.8%
Continental Europe 15.9%
Latin America 8.7%
Asia 7.4%
United Kingdom 2.6%
Cash & Equivalents 2.6%
GRAPHIC MATERIAL (13)
The following line graph hypothetically compares the performance of the
Franklin Global Utilities Fund Class I shares to that of the S&P 500 Stock
Index, based on a $10,000 investment from 7/2/92 to 4/30/98.
Total Return Index Comparison
FRANKLIN GLOBAL UTILITIES
FUND- S&P 500 STOCK INDEX
CLASS I
-----------------------------------------------------------------
7/ 2/92 $9,551 $10,000
7/31/92 $9,637 $10,409
8/31/92 $9,618 $10,196
9/30/92 $9,580 $10,315
10/30/92 $9,656 $10,350
11/30/92 $9,809 $10,702
12/31/92 $10,076 $10,834
1/29/93 $10,260 $10,925
2/26/93 $10,646 $11,073
3/31/93 $10,908 $11,307
4/30/93 $10,985 $11,033
5/31/93 $11,111 $11,328
6/30/93 $11,283 $11,361
7/30/93 $11,509 $11,315
8/31/93 $12,245 $11,744
9/30/93 $12,372 $11,654
10/29/93 $12,951 $11,895
11/30/93 $12,461 $11,782
12/31/93 $13,243 $11,924
1/31/94 $13,462 $12,330
2/28/94 $12,756 $11,996
3/31/94 $12,358 $11,473
4/29/94 $12,527 $11,619
5/31/94 $12,527 $11,810
6/30/94 $12,040 $11,521
7/29/94 $12,579 $11,899
8/31/94 $12,870 $12,386
9/30/94 $12,683 $12,084
10/31/94 $12,787 $12,356
11/30/94 $12,299 $11,906
12/30/94 $12,079 $12,082
1/31/95 $12,343 $12,395
2/28/95 $12,449 $12,879
3/31/95 $12,586 $13,259
4/28/95 $12,924 $13,649
5/31/95 $13,653 $14,195
6/30/95 $13,588 $14,524
7/31/95 $13,859 $15,006
8/31/95 $13,686 $15,044
9/29/95 $14,336 $15,678
10/31/95 $14,358 $15,622
11/30/95 $14,835 $16,308
12/29/95 $15,396 $16,622
1/31/96 $15,687 $17,188
2/29/96 $15,709 $17,347
3/29/96 $15,675 $17,514
4/30/96 $15,932 $17,771
5/31/96 $16,244 $18,230
6/28/96 $16,524 $18,299
7/31/96 $15,855 $17,490
8/30/96 $16,331 $17,859
9/30/96 $16,546 $18,865
10/31/96 $16,965 $19,386
11/29/96 $17,611 $20,851
12/31/96 $17,708 $20,438
1/31/97 $18,616 $21,716
2/28/97 $18,529 $21,885
3/31/97 $17,857 $20,986
4/30/97 $17,994 $22,238
5/30/97 $19,338 $23,593
6/30/97 $20,046 $24,650
7/31/97 $20,652 $26,612
8/29/97 $19,705 $25,122
9/30/97 $21,056 $26,498
10/31/97 $20,185 $25,613
11/28/97 $21,195 $26,799
12/31/97 $22,482 $27,260
1/30/98 $22,226 $27,563
2/27/98 $23,377 $29,550
3/31/98 $25,095 $31,063
4/30/98 $24,655 $31,377
GRAPHIC MATERIAL (14)
The following line graph hypothetically compares the performance of the
Franklin Global Utilities Fund Class II shares to that of the S&P 500 Stock
Index, based on a $10,000 investment from 5/1/95 to 4/30/98.
Total Return Index Comparison
FRANKLIN GLOBAL UTILITIES
FUND- S&P 500 STOCK INDEX
CLASS II
-----------------------------------------------------------------
5/ 1/95 $9,902 $10,000
5/31/95 $10,504 $10,400
6/30/95 $10,449 $10,641
7/31/95 $10,641 $10,995
8/31/95 $10,507 $11,022
9/29/95 $10,991 $11,487
10/31/95 $11,008 $11,446
11/30/95 $11,358 $11,948
12/29/95 $11,825 $12,179
1/31/96 $12,030 $12,593
2/29/96 $12,039 $12,710
3/29/96 $12,004 $12,832
4/30/96 $12,193 $13,021
5/31/96 $12,424 $13,357
6/28/96 $12,628 $13,407
7/31/96 $12,116 $12,815
8/30/96 $12,472 $13,085
9/30/96 $12,619 $13,822
10/31/96 $12,932 $14,203
11/29/96 $13,409 $15,277
12/31/96 $13,480 $14,975
1/31/97 $14,155 $15,911
2/28/97 $14,089 $16,035
3/31/97 $13,566 $15,376
4/30/97 $13,661 $16,294
5/30/97 $14,678 $17,286
6/30/97 $15,221 $18,060
7/31/97 $15,663 $19,498
8/29/97 $14,942 $18,406
9/30/97 $15,951 $19,415
10/31/97 $15,278 $18,766
11/28/97 $16,038 $19,635
12/31/97 $17,000 $19,973
1/30/98 $16,806 $20,195
2/27/98 $17,658 $21,651
3/31/98 $18,952 $22,759
4/30/98 $18,607 $22,989
FRANKLIN MIDCAP GROWTH FUND
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM
304 (a) OF REGULATION S-T)
GRAPHIC MATERIAL (15)
This chart shows in bar format the portfolio breakdown of the fund's securities
on April 30, 1998, based on total net assets.
Portfolio Breakdown
Consumer Services 11.6%
Finance 9.1%
Retail 8.2%
Industrial Services 7.9%
Technology Services 5.8%
Commercial Services 5.6%
Consumer Non-Durables 5.6%
Electronic Technology 5.5%
Semiconductors 4.8%
Consumer Durables 4.3%
Other 17.8%
Cash & Equivalents 13.8%
GRAPHIC MATERIAL (16)
The following line graph hypothetically compares the performance of the
Franklin MidCap Growth Fund to that of the S&P MidCap 400 Index, based on a
$10,000 investment from 8/17/93 to 4/30/98.
Total Return Index Comparison
FRANKLIN MIDCAP GROWTH
DATE FUND S&P MIDCAP 400 INDEX
- -------------------------------------------------------------------------
8/17/93 $9,551 $10,000
8/31/93 $9,551 $10,187
9/30/93 $9,914 $10,295
10/31/93 $9,828 $10,329
11/30/93 $9,542 $10,101
12/31/93 $10,015 $10,569
1/31/94 $10,237 $10,816
2/28/94 $10,025 $10,662
3/31/94 $9,581 $10,168
4/30/94 $9,706 $10,244
5/31/94 $9,571 $10,146
6/30/94 $9,232 $9,797
7/31/94 $9,507 $10,129
8/31/94 $10,076 $10,660
9/30/94 $9,821 $10,461
10/31/94 $9,978 $10,575
11/30/94 $9,585 $10,098
12/31/94 $9,724 $10,191
1/31/95 $9,784 $10,298
2/28/95 $10,258 $10,837
3/31/95 $10,466 $11,026
4/30/95 $10,683 $11,248
5/31/95 $10,960 $11,519
6/30/95 $11,545 $11,988
7/31/95 $12,233 $12,613
8/31/95 $12,503 $12,847
9/30/95 $12,792 $13,158
10/31/95 $12,653 $12,819
11/30/95 $13,052 $13,380
12/31/95 $12,941 $13,346
1/31/96 $13,155 $13,540
2/29/96 $13,368 $14,000
3/31/96 $13,480 $14,168
4/30/96 $14,465 $14,600
5/31/96 $14,760 $14,797
6/30/96 $14,302 $14,575
7/31/96 $13,262 $13,590
8/31/96 $14,302 $14,374
9/30/96 $15,260 $15,001
10/31/96 $15,056 $15,044
11/30/96 $16,249 $15,891
12/31/96 $15,977 $15,909
1/31/97 $16,623 $16,505
2/28/97 $15,943 $16,370
3/31/97 $15,067 $15,673
4/30/97 $15,401 $16,079
5/31/97 $16,796 $17,484
6/30/97 $17,188 $17,975
7/31/97 $18,433 $19,755
8/31/97 $18,456 $19,731
9/30/97 $20,012 $20,866
10/31/97 $19,090 $19,958
11/30/97 $18,848 $20,253
12/31/97 $18,763 $21,039
1/31/98 $18,213 $20,639
2/28/98 $19,934 $22,348
3/31/98 $20,603 $23,356
4/30/98 $20,842 $23,784
GRAPHIC MATERIAL (17)
This chart shows in pie format the portfolio breakdown of the fund's securities
on April 30, 1998, based on total net assets.
Portfolio Breakdown
Energy 54.2%
Gold & Precious Metals 9.8%
Chemicals 7.5%
Iron/Steel 6.1%
Forest Products & Paper 3.8%
Service/Related Industries 3.0%
REITs 2.7%
Base Metals 2.3%
Cash & Equivalents 10.6%
GRAPHIC MATERIAL (18)
This chart shows in bar format the geographic distribution breakdown of the
fund's securities on April 30, 1998, based on total net assets.
Geographic Distribution
United States 62.6%
Canada 12.7%
Europe 6.4%
South America 3.5%
Asia 2.2%
Africa 1.3%
Australia 0.7%
Cash & Equivalents 10.6%
GRAPHIC MATERIAL (19)
The following line graph hypothetically compares the performance of the
Franklin Natural Resources Fund Class I shares to that of the S&P 500 Stock
Index, based on a $10,000 investment from 6/5/95 to 4/30/98.
Total Return Index Comparison
FRANKLIN NATURAL
RESOURCES FUND -
DATE CLASS I S&P 500 STOCK INDEX
----
6/5/95 $9,551 $10,000
6/30/95 $9,666 $10,193
7/31/95 $9,857 $10,531
8/31/95 $9,895 $10,558
9/30/95 $9,828 $11,003
10/31/95 $9,446 $10,964
11/30/95 $9,914 $11,445
12/31/95 $10,575 $11,666
1/31/96 $11,089 $12,062
2/29/96 $11,196 $12,175
3/31/96 $11,894 $12,292
4/30/96 $12,737 $12,472
5/31/96 $12,970 $12,794
6/30/96 $12,967 $12,843
7/31/96 $12,111 $12,275
8/31/96 $12,889 $12,534
9/30/96 $13,346 $13,240
10/31/96 $13,861 $13,605
11/30/96 $14,687 $14,634
12/31/96 $14,769 $14,344
1/31/97 $15,168 $15,240
2/28/97 $14,609 $15,359
3/31/97 $13,980 $14,728
4/30/97 $14,040 $15,607
5/31/97 $15,278 $16,558
6/30/97 $15,435 $17,299
7/31/97 $15,926 $18,677
8/31/97 $16,508 $17,631
9/30/97 $17,731 $18,597
10/31/97 $17,130 $17,976
11/30/97 $15,385 $18,808
12/31/97 $15,311 $19,131
1/31/98 $14,382 $19,344
2/28/98 $15,150 $20,738
3/31/98 $15,898 $21,800
4/30/98 $16,506 $22,020
GRAPHIC MATERIAL (20)
The following line graph hypothetically compares the performance of the
Franklin Natural Resources Fund Advisor Class shares to that of the S&P 500
Stock Index, based on a $10,000 investment from 6/5/95 to 4/30/98.
Total Return Index Comparison
FRANKLIN NATURAL
RESOURCES FUND -
DATE ADVISOR S&P 500 STOCK INDEX
CLASS
6/5/95 $10,000 $10,000
6/30/95 $10,120 $10,193
7/31/95 $10,320 $10,531
8/31/95 $10,360 $10,558
9/30/95 $10,290 $11,003
10/31/95 $9,890 $10,964
11/30/95 $10,380 $11,445
12/31/95 $11,072 $11,666
1/31/96 $11,610 $12,062
2/29/96 $11,722 $12,175
3/31/96 $12,453 $12,292
4/30/96 $13,336 $12,472
5/31/96 $13,579 $12,794
6/30/96 $13,576 $12,843
7/31/96 $12,681 $12,275
8/31/96 $13,495 $12,534
9/30/96 $13,973 $13,240
10/31/96 $14,513 $13,605
11/30/96 $15,378 $14,634
12/31/96 $15,463 $14,344
1/31/97 $15,870 $15,240
2/28/97 $15,285 $15,359
3/31/97 $14,637 $14,728
4/30/97 $14,700 $15,607
5/31/97 $16,006 $16,558
6/30/97 $16,163 $17,299
7/31/97 $16,689 $18,677
8/31/97 $17,320 $17,631
9/30/97 $18,592 $18,597
10/31/97 $17,972 $17,976
11/30/97 $16,153 $18,808
12/31/97 $16,061 $19,131
1/31/98 $15,096 $19,344
2/28/98 $15,915 $20,738
3/31/98 $16,722 $21,800
4/30/98 $17,362 $22,020
GRAPHIC MATERIAL (21)
This chart shows in pie format the portfolio breakdown of the Fund's securities
on April 30, 1998, based on total net assets.
Portfolio Breakdown
Electronic Technology 17.4%
Technology Services 14.8%
Financials 9.8%
Industrial Services 6.7%
Health Services 5.9%
Utilities 5.1%
Commercial Services 5.0%
Other 19.5%
Cash & Equivalents 15.8%
GRAPHIC MATERIAL (22)
The following line graph hypothetically compares the performance of the
Franklin Small Cap Growth Fund Class I shares to that of the S&P 500 Stock
Index and Russell 2500 Index, based on a $10,000 investment from 2/14/92 to
4/30/98.
Total Return Index Comparison
FRANKLIN SMALL CAP
DATE GROWTH FUND - CLASS I S&P 500 STOCK INDEX RUSSELL 2500 INDEX
2/14/92 $9,551 $10,000 $10,000
2/29/92 $9,694 $10,067 $10,137
3/31/92 $9,417 $9,871 $9,813
4/30/92 $9,150 $10,161 $9,617
5/31/92 $9,112 $10,211 $9,705
6/30/92 $8,889 $10,059 $9,367
7/31/92 $9,043 $10,470 $9,717
8/31/92 $8,908 $10,255 $9,462
9/30/92 $8,927 $10,375 $9,623
10/31/92 $9,379 $10,411 $9,911
11/30/92 $10,148 $10,765 $10,564
12/31/92 $10,612 $10,897 $10,933
1/31/93 $10,901 $10,988 $11,196
2/28/93 $9,937 $11,138 $11,039
3/31/93 $10,410 $11,373 $11,452
4/30/93 $9,851 $11,098 $11,125
5/31/93 $10,776 $11,394 $11,572
6/30/93 $10,733 $11,427 $11,692
7/31/93 $10,733 $11,381 $11,767
8/31/93 $11,641 $11,813 $12,288
9/30/93 $12,076 $11,722 $12,519
10/31/93 $12,298 $11,964 $12,669
11/30/93 $12,356 $11,851 $12,263
12/31/93 $12,922 $11,994 $12,742
1/31/94 $13,432 $12,402 $13,145
2/28/94 $13,571 $12,066 $13,097
3/31/94 $12,902 $11,540 $12,461
4/30/94 $12,733 $11,687 $12,533
5/31/94 $12,503 $11,879 $12,404
6/30/94 $12,067 $11,588 $12,020
7/31/94 $12,519 $11,968 $12,345
8/31/94 $13,495 $12,459 $13,012
9/30/94 $13,662 $12,155 $12,880
10/31/94 $14,313 $12,428 $12,901
11/30/94 $13,988 $11,976 $12,341
12/31/94 $14,114 $12,153 $12,608
1/31/95 $13,853 $12,468 $12,583
2/28/95 $15,113 $12,954 $13,215
3/31/95 $15,884 $13,336 $13,539
4/30/95 $16,177 $13,728 $13,780
5/31/95 $16,546 $14,278 $14,071
6/30/95 $17,886 $14,609 $14,746
7/31/95 $19,391 $15,094 $15,616
8/31/95 $19,859 $15,132 $15,866
9/30/95 $20,004 $15,770 $16,163
10/31/95 $19,224 $15,713 $15,657
11/30/95 $19,848 $16,403 $16,326
12/31/95 $20,071 $16,720 $16,605
1/31/96 $19,894 $17,288 $16,723
2/29/96 $20,991 $17,449 $17,226
3/31/96 $21,498 $17,617 $17,577
4/30/96 $23,304 $17,875 $18,390
5/31/96 $24,401 $18,337 $18,888
6/30/96 $23,268 $18,406 $18,308
7/31/96 $21,180 $17,593 $16,968
8/31/96 $23,186 $17,964 $17,944
9/30/96 $24,448 $18,975 $18,720
10/31/96 $24,000 $19,499 $18,597
11/30/96 $25,121 $20,973 $19,495
12/31/96 $25,503 $20,558 $19,762
1/31/97 $26,020 $21,843 $20,308
2/28/97 $24,925 $22,013 $20,005
3/31/97 $23,177 $21,108 $19,099
4/30/97 $23,325 $22,369 $19,341
5/31/97 $26,611 $23,731 $21,123
6/30/97 $27,510 $24,794 $21,987
7/31/97 $29,171 $26,768 $23,275
8/31/97 $29,405 $25,269 $23,599
9/30/97 $32,138 $26,653 $25,142
10/31/97 $30,636 $25,763 $24,013
11/30/97 $29,885 $26,956 $24,121
12/31/97 $29,529 $27,420 $24,577
1/31/98 $29,310 $27,724 $24,201
2/28/98 $31,641 $29,723 $25,958
3/31/98 $32,826 $31,245 $27,098
4/30/98 $33,392 $31,560 $27,201
GRAPHIC MATERIAL (23)
The following line graph hypothetically compares the performance of the
Franklin Small Cap Growth Fund Class II shares to that of the S&P 500 Stock
Index and Russell 2500 Index, based on a $10,000 investment from 10/2/95 to
4/30/98.
Total Return Index Comparison
FRANKLIN SMALL CAP
DATE GROWTH FUND - CLASS II S&P 500 STOCK RUSSELL 2500 INDEX
INDEX
10/2/95 $9,899 $10,000 $10,000
10/31/95 $9,636 $9,964 $9,687
11/30/95 $9,938 $10,401 $10,101
12/31/95 $10,050 $10,602 $10,273
1/31/96 $9,961 $10,963 $10,346
2/29/96 $10,500 $11,065 $10,658
3/31/96 $10,749 $11,171 $10,875
4/30/96 $11,643 $11,335 $11,378
5/31/96 $12,188 $11,627 $11,686
6/30/96 $11,614 $11,672 $11,327
7/31/96 $10,565 $11,156 $10,498
8/31/96 $11,554 $11,391 $11,102
9/30/96 $12,182 $12,032 $11,582
10/31/96 $11,945 $12,365 $11,506
11/30/96 $12,490 $13,299 $12,062
12/31/96 $12,670 $13,036 $12,227
1/31/97 $12,923 $13,851 $12,564
2/28/97 $12,369 $13,959 $12,377
3/31/97 $11,494 $13,385 $11,816
4/30/97 $11,562 $14,184 $11,967
5/31/97 $13,182 $15,048 $13,069
6/30/97 $13,613 $15,722 $13,603
7/31/97 $14,432 $16,974 $14,400
8/31/97 $14,537 $16,023 $14,600
9/30/97 $15,880 $16,901 $15,555
10/31/97 $15,128 $16,337 $14,857
11/30/97 $14,752 $17,093 $14,924
12/31/97 $14,558 $17,387 $15,206
1/31/98 $14,449 $17,580 $14,973
2/28/98 $15,585 $18,848 $16,060
3/31/98 $16,163 $19,813 $16,765
4/30/98 $16,426 $20,013 $16,829
GRAPHIC MATERIAL (24)
The following line graph hypothetically compares the performance of the
Franklin Small Cap Growth Fund Advisor Class shares to that of the S&P 500
Stock Index and Russell 2500, based on a $10,000 investment from 2/14/92 to
4/30/98.
Total Return Index Comparison
DATE FRANKLIN SMALL CAP S&P 500 STOCK RUSSELL 2500 INDEX
GROWTH FUND - ADVISOR INDEX
CLASS
2/14/92 $10,000 $10,000 $10,000
2/29/92 $10,150 $10,067 $10,137
3/31/92 $9,860 $9,871 $9,813
4/30/92 $9,580 $10,161 $9,617
5/31/92 $9,540 $10,211 $9,705
6/30/92 $9,307 $10,059 $9,367
7/31/92 $9,468 $10,470 $9,717
8/31/92 $9,327 $10,255 $9,462
9/30/92 $9,347 $10,375 $9,623
10/31/92 $9,820 $10,411 $9,911
11/30/92 $10,625 $10,765 $10,564
12/31/92 $11,111 $10,897 $10,933
1/31/93 $11,414 $10,988 $11,196
2/28/93 $10,404 $11,138 $11,039
3/31/93 $10,899 $11,373 $11,452
4/30/93 $10,314 $11,098 $11,125
5/31/93 $11,282 $11,394 $11,572
6/30/93 $11,237 $11,427 $11,692
7/31/93 $11,237 $11,381 $11,767
8/31/93 $12,188 $11,813 $12,288
9/30/93 $12,643 $11,722 $12,519
10/31/93 $12,876 $11,964 $12,669
11/30/93 $12,937 $11,851 $12,263
12/31/93 $13,530 $11,994 $12,742
1/31/94 $14,063 $12,402 $13,145
2/28/94 $14,209 $12,066 $13,097
3/31/94 $13,509 $11,540 $12,461
4/30/94 $13,331 $11,687 $12,533
5/31/94 $13,090 $11,879 $12,404
6/30/94 $12,635 $11,588 $12,020
7/31/94 $13,107 $11,968 $12,345
8/31/94 $14,129 $12,459 $13,012
9/30/94 $14,305 $12,155 $12,880
10/31/94 $14,986 $12,428 $12,901
11/30/94 $14,645 $11,976 $12,341
12/31/94 $14,777 $12,153 $12,608
1/31/95 $14,505 $12,468 $12,583
2/28/95 $15,823 $12,954 $13,215
3/31/95 $16,630 $13,336 $13,539
4/30/95 $16,937 $13,728 $13,780
5/31/95 $17,324 $14,278 $14,071
6/30/95 $18,726 $14,609 $14,746
7/31/95 $20,302 $15,094 $15,616
8/31/95 $20,793 $15,132 $15,866
9/30/95 $20,944 $15,770 $16,163
10/31/95 $20,127 $15,713 $15,657
11/30/95 $20,781 $16,403 $16,326
12/31/95 $21,014 $16,720 $16,605
1/31/96 $20,829 $17,288 $16,723
2/29/96 $21,978 $17,449 $17,226
3/31/96 $22,509 $17,617 $17,577
4/30/96 $24,399 $17,875 $18,390
5/31/96 $25,548 $18,337 $18,888
6/30/96 $24,362 $18,406 $18,308
7/31/96 $22,175 $17,593 $16,968
8/31/96 $24,275 $17,964 $17,944
9/30/96 $25,597 $18,975 $18,720
10/31/96 $25,128 $19,499 $18,597
11/30/96 $26,301 $20,973 $19,495
12/31/96 $26,702 $20,558 $19,762
1/31/97 $27,243 $21,843 $20,308
2/28/97 $26,109 $22,013 $20,005
3/31/97 $24,279 $21,108 $19,099
4/30/97 $24,447 $22,369 $19,341
5/31/97 $27,900 $23,731 $21,123
6/30/97 $28,841 $24,794 $21,987
7/31/97 $30,594 $26,768 $23,275
8/31/97 $30,839 $25,269 $23,599
9/30/97 $33,713 $26,653 $25,142
10/31/97 $32,140 $25,763 $24,013
11/30/97 $31,367 $26,956 $24,121
12/31/97 $30,992 $27,420 $24,577
1/31/98 $30,790 $27,724 $24,201
2/28/98 $33,234 $29,723 $25,958
3/31/98 $34,476 $31,245 $27,098
4/30/98 $35,111 $31,560 $27,201
Salomonic Salomon Non-US Salomon High Composite Index
Nono-eU.S. Wrld Gvt Bond Yield
Wrld Gvt
Bond
$10K Hypo % $10K Hypo % $10K Hypo % $10K
Return Return Return Hypo
------- ----------------- ------------- ----------------
6/1/94 9579 $10,000 $10,000 6/1/94 $10,000
6/30/94 9492 2.42% $10,242 0.11% $10,011 6/30/94 -0.92% $9,908
7/31/94 9617 0.26% $10,269 0.98% $10,109 7/31/94 1.66% $10,072
8/31/94 9761 -0.58% $10,209 0.56% $10,166 8/31/94 2.04% $10,278
9/30/94 9808 1.98% $10,411 -0.26%$10,139 9/30/94 -0.14% $10,264
10/31/94 9825 2.58% $10,680 0.02% $10,141 10/31/94-0.12% $10,251
11/30/94 9793 -2.01% $10,465 -1.10%$10,030 11/30/94-1.09% $10,140
12/31/94 9746 0.05% $10,470 1.12% $10,142 12/31/94-0.72% $10,067
1/31/95 9753 2.18% $10,699 1.44% $10,288 1/31/95 1.32% $10,199
2/28/95 10023 2.83% $11,001 3.33% $10,631 2/28/95 1.26% $10,328
3/31/95 10182 8.91% $11,982 1.04% $10,741 3/31/95 1.81% $10,515
4/30/95 10435 2.14% $12,238 2.35% $10,994 4/30/95 3.34% $10,866
5/31/95 10731 2.18% $12,505 2.98% $11,321 5/31/95 3.93% $11,293
6/30/95 10780 0.50% $12,567 0.71% $11,402 6/30/95 1.35% $11,446
7/31/95 11007 0.53% $12,634 1.20% $11,539 7/31/95 0.84% $11,542
8/31/95 11035 -5.72% $11,911 0.62% $11,610 8/31/95 0.00% $11,542
9/30/95 11180 2.95% $12,263 1.16% $11,745 9/30/95 1.90% $11,761
10/31/95 11273 0.32% $12,302 0.84% $11,843 10/31/95 0.06% $11,768
11/30/95 11366 0.87% $12,409 0.91% $11,951 11/30/95 1.91% $11,993
12/31/95 11566 0.87% $12,517 1.59% $12,141 12/31/95 2.17% $12,253
1/31/96 11771 -2.21% $12,240 1.47% $12,320 1/31/96 2.06% $12,505
2/29/96 11779 0.29% $12,276 0.62% $12,396 2/29/96 -1.06% $12,373
3/31/96 11864 0.25% $12,306 -0.50%$12,334 3/31/96 0.37% $12,419
4/30/96 12062 -0.20% $12,282 -0.03%$12,330 4/30/96 0.72% $12,508
5/31/96 12228 0.05% $12,288 0.56% $12,399 5/31/96 0.60% $12,583
6/30/96 12281 0.56% $12,357 0.77% $12,495 6/30/96 0.98% $12,706
7/31/96 12289 2.76% $12,698 0.65% $12,576 7/31/96 0.21% $12,733
8/31/96 12526 0.67% $12,783 1.04% $12,707 8/31/96 1.36% $12,906
9/30/96 12938 -0.19% $12,759 2.34% $13,004 9/30/96 2.48% $13,226
10/31/96 13063 1.69% $12,974 1.15% $13,154 10/31/96 1.17% $13,381
11/30/96 13419 1.15% $13,123 1.92% $13,406 11/30/96 2.48% $13,713
12/31/96 13538 -0.71% $13,030 0.79% $13,512 12/31/96-0.21% $13,684
1/31/97 13679 -4.06% $12,501 0.75% $13,614 1/31/97 0.55% $13,759
2/28/97 13759 -1.16% $12,356 1.70% $13,845 2/28/97 0.43% $13,819
3/31/97 13443 -0.64% $12,277 -1.03%$13,702 3/31/97 -1.37% $13,629
4/30/97 13587 -2.03% $12,028 0.72% $13,801 4/30/97 1.10% $13,779
5/31/97 13883 3.68% $12,471 2.02% $14,080 5/31/97 2.70% $14,151
6/30/97 14117 1.23% $12,624 1.69% $14,318 6/30/97 1.74% $14,397
7/31/97 14430 -2.61% $12,294 2.29% $14,646 7/31/97 2.48% $14,755
8/31/97 14437 0.45% $12,350 0.25% $14,682 8/31/97 -0.36% $14,701
9/30/97 14728 2.43% $12,650 1.75% $14,939 9/30/97 2.52% $15,072
10/31/97 14500 2.24% $12,933 0.80% $15,059 10/31/97-0.99% $14,923
11/30/97 14690 -2.56% $12,602 0.51% $15,136 11/30/97 0.52% $15,000
12/31/97 14895 -1.01% $12,475 1.05% $15,294 12/31/97 0.95% $15,143
1/31/98 15063 0.68% $12,560 2.26% $15,640 1/31/98 0.98% $15,291
2/28/98 15177 1.41% $12,737 0.67% $15,745 2/28/98 1.55% $15,528
3/31/98 15306 -1.65% $12,527 1.08% $15,915 3/31/98 1.02% $15,687
4/30/98 15368 0.40% 2.20% $12,802 0.54% $16,001 4/30/98 0.81% $15,814
------- ----------------- ------------- ----------------
EVERY SHAREHOLDER'S VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN
YOUR PROXY TODAY
Please detach at perforation before mailing.
PROXY PROXY
SPECIAL SHAREHOLDERS' MEETING OF
FRANKLIN INVESTMENT GRADE INCOME FUND
JULY 26, 1999
The undersigned hereby revokes all previous proxies for his shares and
appoints Rupert H. Johnson, Jr., Harmon E. Burns Deborah R. Gatzek, and
Leiann Nuzum, and each of them, proxies of the undersigned with full power of
substitution to vote all shares of Franklin Investment Grade Income Fund (the
"Investment Grade Fund") that the undersigned is entitled to vote at the
Investment Grade Fund's Special Meeting to be held at 777 Mariners Island
Boulevard, San Mateo, CA 94404 at 3:00 p.m., Pacific time on July 26, 1999,
including any adjournment thereof, upon such business as may properly be
brought before the Meeting.
IMPORTANT: PLEASE SEND IN YOUR PROXY TODAY.
YOU ARE URGED TO DATE AND SIGN THE ATTACHED PROXY AND RETURN IT PROMPTLY.
THIS WILL SAVE THE EXPENSE OF FOLLOW-UP LETTERS TO SHAREHOLDERS WHO HAVE NOT
RESPONDED.
Note: Please sign exactly as
your name appears on the
proxy. If signing for
estates, trusts or
corporations, title or
capacity should be stated.
If shares are held jointly,
each holder must sign.
______________________________
Signature
______________________________
Signature
______________________________
Date
(Please see reverse side)
EVERY SHAREHOLDER'S VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR
PROXY TODAY
Please detach at perforation before mailing.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF MANAGED TRUST,
ON BEHALF OF ITS SERIES, FRANKLIN INVESTMENT GRADE INCOME FUND. IT WILL BE
VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THIS PROXY SHALL BE VOTED
IN FAVOR OF PROPOSAL 1, REGARDING THE REORGANIZATION OF THE FRANKLIN
INVESTMENT GRADE INCOME FUND PURSUANT TO THE AGREEMENT AND PLAN OF
REORGANIZATION WITH FRANKLIN STRATEGIC SERIES. IF ANY OTHER MATTERS PROPERLY
COME BEFORE THE MEETING ABOUT WHICH THE PROXYHOLDERS WERE NOT AWARE PRIOR TO
THE TIME OF THE SOLICITATION, AUTHORIZATION IS GIVEN THE PROXYHOLDERS TO VOTE
IN ACCORDANCE WITH THE VIEWS OF MANAGEMENT ON SUCH MATTERS. MANAGEMENT IS
NOT AWARE OF ANY SUCH MATTERS.
THE BOARD OF TRUSTEES RECOMMENDS A VOTE FOR PROPOSAL 1.
FOR AGAINST ABSTAIN
1. To approve an Agreement and
Plan of Reorganization between |_| |_| |_|
Franklin Managed Trust, on
behalf of its series, Franklin
Investment Grade Income Fund
(the "Investment Grade Fund")
and Franklin Strategic Series,
on behalf of its series,
Franklin Strategic Income Fund
("Strategic Income Fund"),
that provides for the
acquisition of substantially
all of the assets of
Investment Grade Fund in
exchange for Class A and
Advisor Class shares of
Strategic Income Fund, the
distribution of such shares to
the shareholders of Investment
Grade Fund, and the
dissolution of the Investment
Grade Fund (the
"Reorganization").
GRANT WITHHOLD
2. To grant the proxyholders the
authority to vote upon any |_| |_|
other business which may
legally come before the
Special Meeting or any
adjournment thereof.
IMPORTANT: PLEASE SIGN AND MAIL IN YOUR PROXY. . . TODAY
PLEASE SIGN AND PROMPTLY RETURN IN THE ACCOMPANYING ENVELOPE. NO POSTAGE
REQUIRED IF MAILED IN THE U.S.
PART B
STATEMENT OF ADDITIONAL INFORMATION
FOR
FRANKLIN STRATEGIC SERIES
DATED MAY 28, 1999
Acquisition of the Assets of the
FRANKLIN INVESTMENT GRADE INCOME FUND
By and in exchange for Shares of the
FRANKLIN STRATEGIC INCOME FUND
This Statement of Additional Information (the "SAI") relates
specifically to the proposed delivery of substantially all of the assets of
the Franklin Investment Grade Income Fund (the "Investment Grade Fund") for
Class A and Advisor Class Shares of Franklin Strategic Income Fund.
This SAI consists of this Cover Page and the following documents. Each
of these documents is attached to is legally considered to be a part of this
SAI:
1. Statement of Additional Information of Franklin Strategic Income
Fund dated September 1, 1998.
2. Semi-Annual Report of Franklin Strategic Series for the fiscal
period ended October 31, 1998.
3. Annual Report of Franklin Managed Trust for the fiscal year ended
September 30, 1998.
4. Projected after Transaction financials
This SAI is not a Prospectus; you should read this SAI in conjunction
with the Prospectus/Proxy Statement dated May 28, 1999, relating to the
above-referenced transaction. You can request a copy of the Prospectus/Proxy
Statement by calling 1-800/DIAL BEN or by writing to Franklin Investment
Grade Income Fund, 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA
94403-7777, or to Franklin Strategic Income Fund, 777 Mariners Island
Boulevard, P.O. Box 7777, San Mateo, CA 94403-7777.
o 194*SA1
- --------------------------------------------------------------------------------
SHARE CLASS REDESIGNATION
EFFECTIVE JANUARY 1, 1999
Class A - Formerly Class I
Class B - New Share Class
Class C - Formerly Class II
- --------------------------------------------------------------------------------
SUPPLEMENT DATED APRIL 1, 1999
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN STRATEGIC INCOME FUND
DATED SEPTEMBER 1, 1998
The Statement of Additional Information is amended as follows:
I. As of January 1, 1999, the fund offers three classes of shares: Class A,
Class B and Class C. Before January 1, 1999, Class A shares were designated
Class I and Class C shares were designated Class II. All references in the
Statement of Additional Information to Class I shares are replaced with
Class A, and all references to Class II shares are replaced with Class C.
II. The following is added to the "Officers and Trustees" section:
As of November 25, 1998, the officers and Board members, as a group, owned
of record and beneficially the following shares of the fund: approximately
6,558 Class A shares, or less than 1% of the total outstanding Class A
shares of the fund.
III. The first sentence in the section "Additional Information on Exchanging
Shares," found under "How Do I Buy, Sell and Exchange Shares?", is replaced
with the following:
If you request the exchange of the total value of your account, declared
but unpaid income dividends and capital gain distributions will be
reinvested in the fund and exchanged into the new fund at Net Asset Value
when paid.
IV. The following is added to the section "Additional Information on Selling
Shares," found under "How Do I Buy, Sell and Exchange Shares?":
The contingent deferred sales charge will generally be waived for
redemptions of Class A shares by investors who purchased $1 million or more
without an initial sales charge if the Securities Dealer of record waived
its commission in connection with the purchase. V. In the section "The Rule
12b-1 Plans," found under "The Fund's Underwriter,"
(a) the first sentence is replaced with the following:
Each class has a separate distribution or "Rule 12b-1" plan that was
adopted pursuant to Rule 12b-1 of the 1940 Act.
(b) the following paragraphs are added after the section "The Class I
Plan":
THE CLASS B PLAN. Under the Class B plan, the fund pays Distributors up to
0.50% per year of the class' average daily net assets, payable quarterly,
to pay Distributors or others for providing distribution and related
services and bearing certain expenses. All distribution expenses over this
amount will be borne by those who have incurred them. The fund may also pay
a servicing fee of up to 0.15% per year of the class' average daily net
assets, payable quarterly. This fee may be used to pay Securities Dealers
or others for, among other things, helping to establish and maintain
customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend
payments from the fund on behalf of customers, and similar servicing and
account maintenance activities.
The expenses relating to the Class B plan are also used to pay Distributors
for advancing the commission costs to Securities Dealers with respect to
the initial sale of Class B shares. Further, the expenses relating to the
Class B plan may be used by Distributors to pay third party financing
entities that have provided financing to Distributors in connection with
advancing commission costs to Securities Dealers.
(c) and the section "The Class I and Class II Plans" is renamed "The Class
A, B and C Plans."
VI. Under "Miscellaneous Information," the following is added:
The Information Services & Technology division of Resources established a
Year 2000 Project Team in 1996. This team has already begun making
necessary software changes to help the computer systems that service the
fund and its shareholders to be Year 2000 compliant. After completing these
modifications, comprehensive tests are conducted in one of Resources' U.S.
test labs to verify their effectiveness. Resources continues to seek
reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis.
Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical
to develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use
of normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
VII. In the "Useful Terms and Definitions" section, the definitions of "Class
I and Class II" and "Offering Price" are replaced with the following:
CLASS A, CLASS B AND CLASS C - The fund offers three classes of shares,
designated "Class A," "Class B" and "Class C." The three classes have
proportionate interests in the fund's portfolio. They differ, however,
primarily in their sales charge structures and Rule 12b-1 plans.
OFFERING PRICE - The public offering price is based on the Net Asset Value
per share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class A and 1% for Class C. There is no
front-end sales charge for Class B. We calculate the offering price to two
decimal places using standard rounding criteria.
Please keep this supplement for future reference.
FRANKLIN
STRATEGIC
INCOME FUND
FRANKLIN STRATEGIC SERIES
STATEMENT OF
ADDITIONAL INFORMATION
SEPTEMBER 1, 1998
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)
TABLE OF CONTENTS PAGE
How Does the Fund Invest Its Assets?.............................. 2
What Are the Risks of Investing
in the Fund?..................................................... 13
Investment Restrictions........................................... 18
Officers and Trustees............................................. 19
Investment Management
and Other Services............................................... 23
How Does the Fund Buy
Securities for Its Portfolio?.................................... 24
How Do I Buy, Sell and Exchange Shares?........................... 25
How Are Fund Shares Valued?....................................... 28
Additional Information on
Distributions and Taxes.......................................... 29
The Fund's Underwriter............................................ 35
How Does the Fund Measure Performance?............................ 36
Miscellaneous Information......................................... 38
Financial Statements.............................................. 39
Useful Terms and Definitions...................................... 39
Appendix
Description of Ratings........................................... 40
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When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
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The fund is a non-diversified series of Franklin Strategic Series (the "Trust"),
an open-end management investment company. The Prospectus, dated September 1,
1998, which we may amend from time to time, contains the basic information you
should know before investing in the fund. For a free copy, call 1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
- ------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- ------------------------------------------------------------------------------
HOW DOES THE FUND INVEST ITS ASSETS?
WHAT IS THE FUND'S GOAL?
The primary investment goal of the fund is to obtain a high level of current
income, with capital appreciation over the long term as a secondary goal. These
goals are fundamental, which means that they may not be changed without
shareholder approval.
The following gives more detailed information about the fund's investment
policies and the types of securities that it may buy. Please read this
information together with the section "How Does the Fund Invest Its Assets?" in
the Prospectus.
MORE INFORMATION ABOUT THE
KINDS OF SECURITIES THE FUND BUYS
EQUITY SECURITIES. The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner of
an equity security may participate in a company's success through the receipt of
dividends, which are distributions of earnings by the company to its owners.
Equity security owners may also participate in a company's success or lack of
success through increases or decreases in the value of the company's shares as
traded in the public trading market for such shares. Equity securities generally
take the form of common stock or preferred stock. Preferred stockholders
typically receive greater dividends but may receive less appreciation than
common stockholders and may have greater voting rights as well. Equity
securities may also include convertible securities.
DEBT SECURITIES. A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain period of time. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividends to holders of its equity securities. Bonds, notes, and
commercial paper differ in the length of the issuer's payment schedule, with
bonds carrying the longest repayment schedule and commercial paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of these
securities generally declines. These changes in market value will be reflected
in the fund's Net Asset Value.
REPURCHASE AGREEMENTS. Repurchase agreements are contracts under which the buyer
of a security simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Under a repurchase agreement, the seller is required
to maintain the value of the securities subject to repurchase at not less than
their repurchase price. Advisers will monitor the value of such securities daily
to determine that the value equals or exceeds the repurchase price. Repurchase
agreements may involve risks in the event of default or insolvency of the
seller, including possible delays or restrictions upon the fund's ability to
dispose of the underlying securities. The fund will enter into repurchase
agreements only with parties who meet the creditworthiness standards approved by
the Board, i.e. banks or broker dealers which have been determined by Advisers
to present no serious risk of becoming involved in bankruptcy proceedings within
the time frame contemplated by the repurchase transaction.
LOANS OF PORTFOLIO SECURITIES. The fund may lend to banks and broker-dealers
portfolio securities with an aggregate market value of up to 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 an amount at least equal (on a daily marked-to-market basis) to the
current market value of the securities loaned. The fund retains all or a portion
of the interest received on investment of the cash collateral or receives a fee
from the borrower. The fund may terminate the loans at any time and obtain the
return of the securities loaned within five business days. The fund will
continue to receive any interest or dividends paid on the loaned securities and
will continue to have voting rights with respect to the securities. However, as
with other extensions of credit, there are risks of delay in recovery or even
loss of rights in collateral should the borrower fail.
MORTGAGE SECURITIES - GENERAL CHARACTERISTICS. The fund may invest in mortgage
securities issued or guaranteed by the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC"), adjustable rate mortgage securities
("ARMs"), collateralized mortgage obligations ("CMOs"), and stripped
mortgage-backed securities, any of which may be privately issued. The fund may
also invest in asset-backed securities. Please see the discussion below for a
description of the types of municipal or asset-backed securities in which the
fund may invest.
A mortgage security is an interest in a pool of mortgage loans. The primary
issuers or guarantors of mortgage securities are GNMA, FNMA and FHLMC. GNMA
creates mortgage securities from pools of government guaranteed or insured
(Federal Housing Authority or Veterans Administration) mortgages originated by
mortgage bankers, commercial banks, and savings and loan associations. FNMA and
FHLMC issue mortgage securities from pools of conventional and federally insured
and/or guaranteed residential mortgages obtained from various entities,
including savings and loan associations, savings banks, commercial banks, credit
unions, and mortgage bankers. The principal and interest on GNMA securities are
guaranteed by GNMA and backed by the full faith and credit of the U.S.
government. Mortgage securities from FNMA and FHLMC are not backed by the full
faith and credit of the U.S. government. FNMA guarantees full and timely payment
of all interest and principal, and FHLMC guarantees timely payment of interest
and the ultimate collection of principal. Securities issued by FNMA are
supported by the agency's right to borrow money from the U.S. Treasury under
certain circumstances. Securities issued by FHLMC are supported only by the
credit of the agency. There is no guarantee that the government would support
government agency securities and, accordingly, they may involve a risk of
non-payment of principal and interest. Nonetheless, because FNMA and FHLMC are
instrumentalities of the U.S. government, these securities are generally
considered to be high quality investments having minimal credit risks.
Most mortgage securities are pass-through securities, which means that they
provide investors with monthly payments consisting of a pro rata share of both
regular interest and principal payments, as well as unscheduled early
prepayments, on the underlying mortgage pool. The fund invests in both
"modified" and "straight" pass-through securities. For "modified pass-through"
type mortgage securities, principal and interest are guaranteed, whereas such
guarantee is not available for "straight pass-through" securities. CMOs and
stripped mortgage securities are not pass-through securities.
Guarantees as to the timely payment of principal and interest do not extend to
the value or yield of mortgage securities nor do they extend to the value of the
fund's shares. In general, the value of fixed-income securities varies with
changes in market interest rates. Fixed-rate mortgage securities generally
decline in value during periods of rising interest rates, whereas interest rates
of ARMS move with market interest rates, and thus their value tends to fluctuate
to a lesser degree. In view of these factors, the ability of the fund to obtain
a high level of total return may be limited under varying market conditions.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES ("GNMAS"). GNMAs are
mortgage backed securities representing part ownership of a pool of mortgage
loans. GNMAs differ from bonds in that principal is scheduled to be paid back by
the borrower over the length of the loan rather than returned in a lump sum at
maturity. The fund may buy GNMAs for which principal and interest are
guaranteed. The fund may also buy "variable rate" GNMAs and may buy other types
that may be issued with the guarantee of the Government National Mortgage
Association ("GNMA").
The GNMA guarantee of principal and interest on GNMAs is backed by the full
faith and credit of the U.S. government. However, these securities do involve
certain risks. For example, when mortgages in the pool underlying GNMAs are
prepaid, the principal payments are passed through to the certificate holders
(such as the fund). Scheduled and unscheduled prepayments of principal may
greatly change realized yields. In a period of declining interest rates it is
more likely that mortgages contained in GNMA pools will be prepaid thus reducing
the effective yield. Moreover, any premium paid on the purchase of GNMAs will be
lost if the obligation is prepaid. In periods of falling interest rates, this
potential for pre-payment may reduce the general upward price increase of GNMAs,
which might otherwise occur. As with other debt instruments, the price of GNMAs
is likely to decrease in times of rising interest rates. Price changes of GNMAs
held by the fund have a direct impact on the Net Asset Value per share of the
fund.
ADJUSTABLE RATE MORTGAGE SECURITIES. ARMs, like traditional mortgage securities,
are an interest in a pool of mortgage loans and are issued or guaranteed by a
federal agency or by private issuers. Unlike fixed-rate mortgages, which
generally decline in value during periods of rising interest rates, the interest
rates on the mortgages underlying ARMs are reset periodically and thus allow the
fund to participate in increases in interest rates, resulting in both higher
current yields and lower price fluctuations. During periods of declining
interest rates, of course, the coupon rates may readjust downward, resulting in
lower current yields. Because of this feature, the value of an ARM is unlikely
to rise during periods of declining interest rates to the same extent as a
fixed-rate instrument. The rate of amortization of principal, as well as
interest payments, for certain types of ARMs change in accordance with movements
in a pre-specified, published interest rate index. There are several categories
of indices, including those based on U.S. Treasury securities, those derived
from a calculated measure, such as a cost of funds index, or a moving average of
mortgage rates and actual market rates. The amount of interest due to an ARM
security holder is calculated by adding a specified additional amount, the
"margin," to the index, subject to limitations or "caps" on the maximum and
minimum interest that is charged to the mortgagor during the life of the
mortgage or to maximum and minimum changes to that interest rate during a given
period. The interest rates paid on the ARMs in which the fund may invest are
generally readjusted at intervals of one year or less, although instruments with
longer resets such as three years and five years are also permissible
investments.
The underlying mortgages that collateralize the ARMs in which the fund may
invest will frequently have caps and floors which limit the maximum amount by
which the loan rate to the residential borrower may change up or down (1) per
reset or adjustment interval and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting interest
rate changes. These payment caps may result in negative amortization, which can
extend the average life of the securities. Since most ARMs in the fund's
portfolio will generally have annual reset limits or caps of 100 to 200 basis
points, fluctuations in interest rates above these levels could cause the
mortgage securities to "cap out" and to behave more like long-term, fixed-rate
debt securities.
STRIPPED MORTGAGE-BACKED SECURITIES. The fund may invest in stripped
mortgage-backed securities to achieve a higher yield than may be available from
fixed-rate mortgage securities. The stripped mortgage securities in which the
fund may invest will not be limited to those issued or guaranteed by agencies or
instrumentalities of the U.S. government, although such securities are more
liquid than privately issued stripped mortgage securities. Stripped
mortgage-backed securities are usually structured with two classes, each
receiving different proportions of the interest and principal distributions on a
pool of mortgage assets. Typically, one class will receive some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity of an IO or PO class is
extremely sensitive not only to changes in prevailing interest rates but also to
the rate of principal payments (including prepayments) on the related underlying
mortgage assets.
Stripped mortgage-backed securities have greater market volatility than other
types of mortgage securities in which the fund invests and are purchased and
sold by institutional investors, such as the fund, through several investment
banking firms acting as brokers or dealers. As these securities were only
recently developed, traditional trading markets have not yet been established
for all stripped mortgage securities. Accordingly, some of these securities may
be illiquid. The staff of the SEC has indicated that only government-issued IO
or PO securities that are backed by fixed-rate mortgages may be deemed to be
liquid, if procedures with respect to determining liquidity are established by a
fund's board. The Board may, in the future, adopt procedures that would permit
the fund to acquire, hold, and treat as liquid government-issued IO and PO
securities. At the present time, however, all such securities will continue to
be treated as illiquid and will, together with any other illiquid investments,
not exceed 10% of the fund's net assets. This position may be changed in the
future, without notice to shareholders, in response to the staff's continued
reassessment of this matter, as well as to changing market conditions.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"), REAL ESTATE MORTGAGE INVESTMENT
CONDUITS ("REMICS"), AND MULTI-CLASS PASS-THROUGHS. The fund may invest in
certain debt obligations that are collateralized by mortgage loans or mortgage
pass-through securities. These obligations may be issued or guaranteed by U.S.
government agencies or issued by certain financial institutions and other
mortgage lenders. CMOs and REMICs are debt instruments issued by special purpose
entities and are secured by pools of mortgages backed by residential and various
types of commercial properties. Multi-class pass-through securities are equity
interests in a trust composed of mortgage loans or other mortgage-backed
securities. Payments of principal and interest on the underlying collateral
provides the funds to pay debt service on the CMO or REMIC or make scheduled
distributions on the multi-class pass-through securities.
CMOs are fixed-income securities that are collateralized by pools of mortgage
loans created by commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other issuers in the U.S. The
underlying mortgages are backed by residential and various types of commercial
properties. Timely payment of interest and principal (but not the market value)
of some of these pools is supported by various forms of insurance or guarantees
issued by private issuers, those who pool the mortgage assets and, in some
cases, by U.S. government agencies. The fund may buy CMOs that are rated in any
category by the rating agencies without insurance or guarantee if, in the
opinion of Advisers, the sponsor is creditworthy. Prepayments of the mortgages
underlying a CMO, which usually increase when interest rates decrease, will
generally reduce the life of the mortgage pool, thus impacting the CMO's yield.
Under these circumstances, the reinvestment of prepayments will generally be at
a rate lower than the rate applicable to the original CMO.
With a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of a CMO, often referred to as a "tranche," is issued at a specified
coupon rate or adjustable rate and has a stated maturity or final distribution
date. Principal prepayments on collateral underlying a CMO, however, may cause
it to be retired substantially earlier than the stated maturities or final
distribution dates. Interest is paid or accrues on all classes of a CMO on a
monthly, quarterly or semiannual basis. The principal and interest on the
underlying mortgages may be allocated among several classes of a series in many
ways. In a common structure, payments of principal, including any principal
prepayments, on the underlying mortgages are applied to the classes of a series
of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class of
a CMO until all other classes having an earlier stated maturity or final
distribution date have been paid in full.
To the extent any privately issued CMOs in which the fund invests are considered
by the SEC to be an investment company, the fund will limit its investments in
such securities in a manner consistent with the provisions of the 1940 Act.
REMICs, which are authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured by
an interest in real property. REMICs are similar to CMOs in that they issue
multiple classes of securities. As with CMOs, the mortgages that collateralize
the REMICs in which the fund may invest include mortgages backed by GNMAs or
other mortgage pass-throughs issued or guaranteed by the U.S. government, its
agencies or instrumentalities or issued by private entities, which are not
guaranteed by any government agency.
Yields on privately-issued CMOs have been historically higher than the yields on
CMOs issued or guaranteed by U.S. government agencies. However, the risk of loss
due to default on such instruments is higher since they are not guaranteed by
the U.S. government. The Board believes that accepting the risk of loss relating
to privately issued CMOs that the fund acquires is justified by the higher yield
the fund will earn in light of the historic loss experience on such instruments.
As new types of mortgage securities are developed and offered to investors, the
fund may invest in them if they are consistent with the fund's objectives,
policies, and quality standards.
ASSET-BACKED SECURITIES. The fund may invest in various asset-backed securities
rated in any category by the rating agencies. The underlying assets may include,
but are not limited to, receivables on home equity and credit card loans, and
automobile, mobile home, and recreational vehicle loans and leases. There may be
other types of asset-backed securities that are developed in the future in which
the fund may invest. Asset-backed securities are issued in either a pass-through
structure (similar to a mortgage pass-through structure) or in a pay-through
structure (similar to a CMO structure). In general, asset-backed securities
contain shorter maturities than bonds or mortgage loans and historically have
been less likely to experience substantial prepayment.
Asset-backed securities entail certain risks not presented by mortgage-backed
securities, as they do not have the benefit of the same type of security
interests in the underlying collateral. Credit card receivables are generally
unsecured, and a number of state and federal consumer credit laws give debtors
the right to set off certain amounts owed on the credit cards, thereby reducing
the outstanding balance. In the case of automobile receivables, there is a risk
that the holders may not have either a proper or first security interest in all
of the obligations backing such receivables due to the large number of vehicles
involved in a typical issuance and the technical requirements imposed under
state laws. Therefore, recoveries on repossessed collateral may not always be
available to support payments on securities backed by these receivables.
CONVERTIBLE SECURITIES. The fund may invest in convertible securities. A
convertible security is generally a debt obligation or preferred stock that may
be converted within a specified period of time into a certain amount of common
stock of the same or a different issuer. A convertible security provides a
fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance in
its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock, the
value of a convertible security also tends to increase as the market value of
the underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because both interest rate and market movements can
influence its value, a convertible security is not as sensitive to interest
rates as a similar fixed-income security, nor is it as sensitive to changes in
share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security. However, if the
parity price of the convertible security is less than the call price, the
operating company may pay out cash instead of common stock. If the convertible
security is issued by an investment bank, the security is an obligation of and
is convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
AMERICAN DEPOSITORY RECEIPTS ("ADRS"). ADRs represent the right to receive
securities of foreign issuers deposited in a domestic bank or a foreign
correspondent bank. The fund may invest in sponsored and unsponsored ADRs.
Prices of ADRs are quoted in U.S. dollars. They are traded in the U.S. on
exchanges or over-the-counter and are sponsored and issued by domestic banks.
ADRs do not eliminate all of the risk inherent in investing in the securities of
foreign issuers. To the extent that the fund acquires ADRs through banks that do
not have a contractual relationship with the foreign issuer of the security
underlying the ADR to issue and service the ADRs, there may be an increased
possibility that the fund would not become aware of and be able to respond to
corporate actions such as stock splits or rights offerings involving the foreign
issuer in a timely manner. In addition, the lack of information may result in
inefficiencies in the valuation of such instruments. To the extent the fund
invests in ADRs rather than directly in the stock of foreign issuers, it will
avoid currency risks during the settlement period for either purchases or sales.
In general, there is a large, liquid market in the U.S. for ADRs quoted on a
national securities exchange or the NASDAQ National Market System. The
information available for ADRs is subject to the accounting, auditing, and
financial reporting standards of the domestic market or exchange on which they
are traded. These standards are more uniform and more exacting than those to
which many foreign issuers may be subject.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS. The fund may buy U.S. government
obligations on a "when issued" or "delayed delivery" basis. These transactions
are arrangements under which the fund buys securities that have been authorized
but not yet issued with payment for and delivery of the security scheduled for a
future time, generally in 30 to 60 days. Purchases of U.S. government securities
on a when issued or delayed delivery basis 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 buy U.S. government securities on a when issued basis with the
intention of holding the securities, it may sell the securities before the
settlement date if it is deemed advisable. When the fund is the buyer in this
type of transaction, it will maintain, in a segregated account with its
custodian bank, cash or high-grade marketable securities having an aggregate
value equal to the amount of the fund's 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 objectives and policies, and not for
the purpose of investment leverage. In when issued and delayed delivery
transactions, the fund relies on the seller to complete the transaction. The
seller's failure to do so may cause the fund to miss a price or yield considered
advantageous to the fund. Securities purchased on a when issued or delayed
delivery basis do not generally earn interest until their scheduled delivery
date. Entering into a when issued or delayed delivery transaction is a form of
leverage that may affect changes in Net Asset Value to a greater extent.
MORTGAGE DOLLAR ROLLS. The fund may enter into mortgage dollar rolls in which
the fund sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (name, type,
coupon, and maturity) securities on a specified future date. During the period
between the sale and repurchase, the fund forgoes principal and interest paid on
the mortgage-backed securities. The fund is compensated by the difference
between the current sale price and the lower price for the future purchase
(often referred to as the "drop"), as well as by the interest earned on the cash
proceeds of the initial sale. A "covered roll" is a specific type of mortgage
dollar roll for which there is an offsetting cash position or a cash equivalent
security position. The fund could suffer a loss if the contracting party fails
to perform the future transaction in that the fund may not be able to buy back
the mortgage-backed securities it initially sold. The fund intends to enter into
mortgage dollar rolls only with government securities dealers recognized by the
Federal Reserve Board or with member banks of the Federal Reserve System.
OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES
CALL AND PUT OPTIONS ON SECURITIES. As noted in the Prospectus, the fund intends
to write (sell) covered put and call options and buy put and call options that
trade on securities exchanges and in the over-the-counter market.
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) 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 buyer 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.
In the case of a call option, 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 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 cancelled by the clearing corporation. However, a
writer may not effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, an investor who is the holder of an option may
liquidate its position by effecting a "closing sale transaction." This is
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, expiration date or both. In addition, effecting a
closing transaction will permit the cash or proceeds from the 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 at the
same time as 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 buy 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 buy the
option. Because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the 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.
BUYING CALL OPTIONS. The fund may buy call options on securities that it intends
to buy in order to limit the risk of a substantial increase in the market price
of the security. The fund may also buy call options on securities held in its
portfolio and on which it has written call options. A call option gives the
holder the right to buy the underlying securities from the option writer at a
stated exercise price. Prior to its expiration, a call option may be sold in a
closing sale transaction. Profit or loss from such a sale will depend on whether
the amount received is more or less than the premium paid for the call option
plus the related transaction costs.
WRITING PUT OPTIONS. Although the fund has no current intention of writing
covered put options, the fund reserves the right to do so.
A put option gives the buyer 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 the assets be deposited in escrow to
secure payment of the exercise price. The fund would generally write covered put
options in circumstances where Advisers wishes to buy 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 this type of transaction would be that the
market price of the underlying security or currency would decline below the
exercise price less the premiums received.
BUYING PUT OPTIONS. The fund may buy 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 put options, exercise them, or permit
them to expire.
The fund may buy a put option on an underlying security or currency owned by the
fund (a "protective put") as a hedging technique in order to protect against an
anticipated decline in the value of the security or currency. This 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 the 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 buy put options at a time when the fund does not own the
underlying security or currency. By buying 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.
The fund will commit no more than 5% of its assets to premiums when buying put
options. The premium paid by the fund when buying 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, the close of the NYSE, or, in the absence of a 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 ("OTC" OPTIONS). The fund intends to write covered put
and call options and buy put and call options that trade in the over-the-counter
market to the same extent that it will engage in exchange traded options. Just
as with exchange traded options, OTC call options give the option holder the
right to buy an underlying security from an option writer at a stated exercise
price; OTC put options give the holder the right to sell an underlying security
to an option writer at a stated exercise price. However, OTC options 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. However, OTC
options are available 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.
OPTIONS ON STOCK INDICES. The fund may also buy call and put options on stock
indices in order to hedge against the risk of market or industry-wide stock
price fluctuations. Call and put options on stock indices are similar to options
on securities except that, rather than the right to buy or sell stock at a
specified price, options on a stock index give the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the
underlying stock index is greater 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.
OPTIONS ON FOREIGN CURRENCIES. The fund may buy and write (sell) put and call
options on foreign currencies traded on U.S. exchanges or in the
over-the-counter markets. Like other kinds of options, the writing of an option
on foreign currency will be only a partial hedge, up to the amount of the
premium received, and the fund could be required to buy or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may be 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.
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 that 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" or "initial margin")
as a partial guarantee of its performance under the contract. 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. In addition, when the fund enters
into a futures contract, it will segregate assets or "cover" its position in
accordance with the 1940 Act.
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
buys 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 it intends to buy. The
fund will not enter into any stock index or financial futures contract or
related option if, immediately thereafter, more than one-third of the fund's net
assets would be represented by futures contracts or related options. In
addition, the fund may not buy or sell futures contracts or 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 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 the 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 SEC rules, assets in a segregated account to cover its
obligations with respect to the 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. A stock index futures contract obligates the seller to
deliver (and the buyer to take) an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made.
The fund may sell stock index futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of its equity
securities that might otherwise result. When the fund is not fully invested in
stocks and anticipates a significant market advance, it may buy stock index
futures in order to gain rapid market exposure that may in part or entirely
offset increases in the cost of common stocks that it intends to buy.
OPTIONS ON STOCK INDEX FUTURES. The fund may buy and sell call and put options
on stock index futures to hedge against risks of 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 buy or sell stock at a specified price,
options on stock index futures give the holder the right to receive cash. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents the
amount by which the market price of the futures contract, at exercise, exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. If an option is exercised on the last
trading day 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 RELATED OPTIONS. The fund may buy and sell futures
contracts based on an index of debt securities and options on such futures
contracts to the extent they currently exist and, in the future, may be
developed. The fund reserves the right to conduct futures and options
transactions based on an index that may be developed in the future to correlate
with price movements in certain categories of debt securities. The fund's
investment strategy in employing futures contracts based on an index of debt
securities will be similar to that used by it in other financial futures
transactions. The fund may also buy and write put and call options on 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 objectives and
legally permissible for the fund.
FORWARD CURRENCY EXCHANGE CONTRACTS. The fund may enter into forward currency
exchange contracts ("Forward Contract(s)") 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 buy 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 construct an investment position by combining a debt security
denominated in one currency with a Forward Contract calling for the exchange of
that currency for another currency. The investment position is not itself a
security but is a combined position (i.e., a debt security coupled with a
Forward Contract) that is intended to be similar in overall performance to a
debt security denominated in the same currency.
For example, an Italian lira-denominated position could be constructed by buying
a German mark-denominated debt security and simultaneously entering into a
Forward Contract to exchange an equal amount of marks for lira at a future date
and at a specified exchange rate. With such a transaction, the fund may be able
to receive a return that is substantially similar from a yield and currency
perspective to a direct investment in lira debt securities while achieving other
benefits from holding the underlying security. The fund may experience slightly
different results from its use of such combined investment positions as compared
to its purchase of a debt security denominated in the particular currency
subject to the Forward Contract. This difference may be enhanced or offset by
premiums that may be available in connection with the Forward Contract.
The fund may also 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.
The fund usually effects forward currency exchange contracts on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. Some
price spread on currency exchange (to cover service charges) will be incurred
when the fund converts assets from one currency to another.
To limit potential risks in connection with the purchase of currency under
Forward Contracts, cash, cash equivalents, or readily marketable debt securities
equal to the amount of the purchase will be held in segregated accounts with 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 daily. The ability of the fund to
enter into Forward Contracts is limited only to the extent such Forward
Contracts would, in the opinion of Advisers, impede portfolio management or the
ability of the fund to honor redemption requests.
INTEREST RATE AND CURRENCY SWAPS. An interest rate swap is the transfer between
two counterparties of interest rate obligations, one of which has an interest
rate fixed to maturity while the other has an interest rate that changes in
accordance with changes in a designated benchmark (e.g., LIBOR, prime,
commercial paper, or other benchmarks). The obligations to make repayment of
principal on the underlying securities are not exchanged. These transactions
generally require the participation of an intermediary, frequently a bank. The
entity holding the fixed-rate obligation will transfer the obligation to the
intermediary, and that entity will then be obligated to pay to the intermediary
a floating rate of interest, generally including a fractional percentage as a
commission for the intermediary. The intermediary also makes arrangements with a
second entity that has a floating-rate obligation which substantially mirrors
the obligation desired by the first party. In return for assuming a fixed
obligation, the second entity will pay the intermediary all sums that the
intermediary pays on behalf of the first entity, plus an arrangement fee and
other agreed upon fees. Interest rate swaps are generally entered into to permit
the party seeking a floating rate obligation the opportunity to acquire such
obligation at a lower rate than is directly available in the credit market,
while permitting the party desiring a fixed-rate obligation the opportunity to
acquire such a fixed-rate obligation, also frequently at a price lower than is
available in the credit markets. The success of such a transaction depends in
large part on the availability of fixed-rate obligations at a low enough coupon
rate to cover the cost involved.
The fund will only enter into interest rate swaps on a net basis, which means
that the two payment streams are netted out, with the fund receiving or paying,
as the case may be, only the net amount of the two payments. Interest rate swaps
do not involve the delivery of securities, other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate swaps is limited to
the net amount of interest payments that the fund is contractually obligated to
make. If the other party to an interest rate swap defaults, the fund's risk of
loss consists of the net amount of interest payments that the fund is
contractually entitled to receive. In contrast, currency swaps usually involve
the delivery of the entire principal value of one designated currency in
exchange for the other designated currency. Therefore, the entire principal
value of a currency swap is subject to the risk that the other party to the swap
will default on its contractual delivery obligations.
ILLIQUID SECURITIES. As noted in the Prospectus, it is the policy of the fund
that illiquid securities (including illiquid equity securities, defaulted debt
securities, loan participations, securities with legal or contractual
restrictions on resale, repurchase agreements of more than seven days duration,
and other securities which are not readily marketable) may not constitute more
than 10% of the value of the fund's total net assets. Generally, an "illiquid
security" is any security that cannot be disposed of promptly and in the
ordinary course of business at approximately the amount at which the fund has
valued the instrument. Subject to this limitation, the Board has authorized the
fund to invest in restricted securities where such investment is consistent with
the fund's investment objectives and has authorized such securities to be
considered liquid to the extent Advisers determines that there is a liquid
institutional or other market for such securities - such as, 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 will review on a
monthly basis any determination by Advisers to treat a restricted security as
liquid, including Advisers' assessment of current trading activity and the
availability of reliable price information. In determining whether a restricted
security is properly considered a liquid security, Advisers and the Board will
take into account the following factors: (i) the frequency of trades and quotes
for the security; (ii) the number of dealers willing to buy or sell the security
and the number of other potential buyers; (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 may be increased if qualified institutional buyers become
uninterested in buying these securities or the market for these securities
contracts.
A restricted security is a security that has been purchased through a private
offering and cannot be sold without prior registration under the Securities Act
of 1933 unless the sale is pursuant to an exemption therefrom. Notwithstanding
the restriction on the sale of such securities, a secondary market exists for
many of these securities. As with other securities in the fund's portfolio, if
there are readily available market quotations for a restricted security, it will
be valued, for purposes of determining the fund's Net Asset Value, between the
range of the bid and ask prices. To the extent that no quotations are available,
the securities will be valued at fair value in accordance with procedures
adopted by the Board.
The fund's purchases of restricted securities can result in the receipt of
commitment fees. For example, the transaction may involve an individually
negotiated purchase of short-term increasing rate notes. Maturities for this
type of security typically range from one to five years. These notes are usually
issued as temporary or "bridge" financing to be replaced ultimately with
permanent financing for the project or transaction which the issuer seeks to
finance. Typically, at the time of commitment, the fund receives the security
and sometimes a cash commitment fee. Because the transaction could possibly
involve a delay between the time the fund commits to buy the security and the
fund's payment for and receipt of that security, the fund will maintain, in a
segregated account with its custodian bank, cash or high-grade marketable
securities having an aggregate value equal to the amount of the purchase
commitments until payment is made. The fund will not buy restricted securities
in order to generate commitment fees, although the receipt of such fees will
assist the fund in achieving its principal objective of earning a high level of
current income.
Notwithstanding the determinations in regard to the liquidity of restricted
securities, the Board remains responsible for such determinations and will
consider appropriate action to maximize the fund's liquidity and its ability to
meet redemption demands if a security should become illiquid after 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 buying these securities or the
market for these securities contracts.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
HIGH YIELD SECURITIES. Because the fund may invest in securities below
investment grade, an investment in the fund is subject to a higher degree of
risk than an investment in a fund that invests primarily in higher-quality
securities. You should consider the increased risk of loss to principal that is
present with an investment in higher risk securities, such as those in which the
fund invests. Accordingly, an investment in the fund should not be considered a
complete investment program and should be carefully evaluated for its
appropriateness in light of your overall investment needs and goals.
The market value of high yield, lower-quality fixed-income securities, commonly
known as junk bonds, tends to reflect individual developments affecting the
issuer to a greater degree than the market value of higher-quality securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality securities also tend to be more sensitive to economic conditions
than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with buying the securities of these issuers is generally
greater than the risk associated with higher-quality securities. For example,
during an economic downturn or a sustained period of rising interest rates,
issuers of lower-quality securities may experience financial stress and may not
have sufficient cash flow to make interest payments. The issuer's ability to
make timely interest and principal payments may also be adversely affected by
specific developments affecting the issuer, including the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the fund's portfolio defaults, the fund may have unrealized losses on the
security, which may lower the fund's Net Asset Value. Defaulted securities tend
to lose much of their value before they default. Thus, the fund's Net Asset
Value may be adversely affected before an issuer defaults. In addition, the fund
may incur additional expenses if it must try to recover principal or interest
payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities during
periods of declining interest rates, Advisers may find it necessary to replace
the securities with lower-yielding securities, which could result in less net
investment income for the fund. The premature disposition of a high yield
security due to a call or buy-back feature, the deterioration of an issuer's
creditworthiness, or a default by an issuer may make it more difficult for the
fund to manage the timing of its income. Under the Code and U.S. Treasury
regulations, the fund may have to accrue income on defaulted securities and
distribute the income to shareholders for tax purposes, even though the fund is
not currently receiving interest or principal payments on the defaulted
securities. To generate cash to satisfy these distribution requirements, the
fund may have to sell portfolio securities that it otherwise may have continued
to hold or use cash flows from other sources, such as the sale of fund shares.
Lower quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse impact
on market price of a security and on the fund's ability to sell a security in
response to a specific economic event, such as a deterioration in the
creditworthiness of the issuer, or if necessary to meet the fund's liquidity
needs. Reduced liquidity may also make it more difficult to obtain market
quotations based on actual trades for purposes of valuing the fund's portfolio.
The fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry restrictions
on resale. While many high yielding securities have been sold with registration
rights, covenants, and penalty provisions for delayed registration, if the fund
is required to sell restricted securities before the securities have been
registered, it may be deemed an underwriter of the securities under the
Securities Act of 1933, which entails special responsibilities and liabilities.
The fund may also incur special costs in disposing of restricted securities,
although the fund will generally not incur any costs when the issuer is
responsible for registering the securities.
The fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other characteristics.
The fund has no arrangement with its underwriter or any other person concerning
the acquisition of these securities.
The high yield securities market is relatively new and much of its growth before
1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yield securities and adversely affected the value
of outstanding securities, as well as the ability of issuers of high yield
securities to make timely principal and interest payments. Although the economy
has improved and high yield securities have performed more consistently since
that time, the adverse effects previously experienced may reoccur. For example,
the highly publicized defaults on some high yield securities during 1989 and
1990 and concerns about a sluggish economy that continued into 1993 depressed
the prices of many of these securities. While market prices may be temporarily
depressed due to these factors, the ultimate price of any security generally
reflects the true operating results of the issuer. Factors adversely impacting
the market value of high yield securities may lower the fund's Net Asset Value.
The fund relies on Advisers' judgment, analysis, and experience in evaluating
the creditworthiness of an issuer. In this evaluation, Advisers takes 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.
MORTGAGE-BACKED SECURITIES. To the extent mortgage securities are purchased at a
premium, unscheduled principal prepayments, including prepayments resulting from
mortgage foreclosures, may result in some loss of the holder's principal
investment to the extent of the premium paid. On the other hand, if mortgage
securities are purchased at a discount, both a scheduled payment of principal
and an unscheduled prepayment of principal will increase current and total
returns and will accelerate the recognition of income which, when distributed to
you, will be taxable as ordinary income.
Some of the CMOs in which the fund may invest may be less liquid than other
types of mortgage securities. A lack of liquidity in the market for CMOs could
result in the fund's inability to dispose of such securities at an advantageous
price under certain circumstances.
FOREIGN SECURITIES. You should consider carefully the substantial risks involved
in securities of companies of foreign nations, which are in addition to the
usual risks inherent in domestic investments.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or financial
reporting standards, and auditing practices and requirements may not be
comparable to those applicable to U.S. companies. The fund, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing its
portfolio and calculating its Net Asset Value. Foreign markets have
substantially less volume than the NYSE, and securities of some foreign
companies are less liquid and more volatile than securities of comparable U.S.
companies. Commission rates in foreign countries, which are generally fixed
rather than subject to negotiation as in the U.S., are likely to be higher. In
many foreign countries there is less government supervision and regulation of
stock exchanges, brokers, and listed companies than in the U.S.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political, and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries.
In addition, many countries in which the funds may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
Investing in Russian companies involves a high degree of risk and special
considerations not typically associated with investing in the U.S. securities
markets, and should be considered highly speculative. Such risks include,
together with Russia's continuing political and economic instability and the
slow-paced development of its market economy, the following: (a) delays in
settling portfolio transactions and risk of loss arising out of Russia's system
of share registration and custody; (b) the risk that it may be impossible or
more difficult than in other countries to obtain and/or enforce a judgment; (c)
pervasiveness of corruption, insider trading, and crime in the Russian economic
system; (d) currency exchange rate volatility and the lack of available currency
hedging instruments; (e) higher rates of inflation (including the risk of social
unrest associated with periods of hyper-inflation); (f) controls on foreign
investment and local practices disfavoring foreign investors and limitations on
repatriation of invested capital, profits, and dividends, and on the fund's
ability to exchange local currencies for U.S. dollars; (g) the risk that the
government of Russia or other executive or legislative bodies may decide not to
continue to support the economic reform programs implemented since the
dissolution of the Soviet Union and could follow radically different political
and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, a return to the centrally planned economy
that existed prior to the dissolution of the Soviet Union, or the
nationalization of privatized enterprises; (h) the risks of investing in
securities with substantially less liquidity and in issuers having significantly
smaller market capitalization, when compared to securities and issuers in more
developed markets; (i) the difficulties associated in obtaining accurate market
valuations of many Russian securities, based partly on the limited amount of
publicly available information; (j) the financial condition of Russian
companies, including large amounts of inter-company debt which may create a
payments crisis on a national scale; (k) dependency on exports and the
corresponding importance of international trade; (l) the risk that the Russian
tax system will not be reformed to prevent inconsistent, retroactive and/or
exorbitant taxation or, in the alternative, the risk that a reformed tax system
may result in the inconsistent and unpredictable enforcement of the new tax
laws; (m) possible difficulty in identifying a purchaser of securities held by
the fund due to the underdeveloped nature of the securities markets; (n) the
possibility that pending legislation could restrict the levels of foreign
investment in certain industries, thereby limiting the number of investment
opportunities in Russia; (o) the risk that pending legislation would confer to
Russian courts the exclusive jurisdiction to resolve disputes between foreign
investors and the Russian government, instead of bringing such disputes before
an internationally-accepted third-country arbitrator; and (p) the difficulty in
obtaining information about the financial condition of Russian issuers, in light
of the different disclosure and accounting standards applicable to Russian
companies.
There is little long-term historical data on Russian securities markets because
they are relatively new, and a substantial proportion of securities transactions
in Russia is privately negotiated outside of stock exchanges. Because of the
recent formation of the securities markets as well as the underdeveloped state
of the banking and telecommunications systems, settlement, clearing, and
registration of securities transactions are subject to significant risks.
Ownership of shares (except where shares are held through depositories that meet
the requirements of the 1940 Act) is defined according to entries in the
company's share register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central registration system
for shareholders, and these services are carried out by the companies themselves
or by registrars located throughout Russia. These registrars are not necessarily
subject to effective state supervision, nor are they licensed with any
governmental entity, and it is possible for the fund to lose its registration
through fraud, negligence, or even mere oversight. While the fund will endeavor
to ensure that its interest continues to be appropriately recorded either itself
or through a custodian or other agent inspecting the share register and by
obtaining extracts of share registers through regular confirmations, these
extracts have no legal enforceability, and it is possible that subsequent
illegal amendment or other fraudulent act may deprive the fund of its ownership
rights or improperly dilute its interests. In addition, while applicable Russian
regulations impose liability on registrars for losses resulting from their
errors, it may be difficult for the fund to enforce any rights it may have
against the registrar or issuer of the securities in the event of loss of share
registration. Furthermore, although a Russian public enterprise with more than
500 shareholders is required by law to contract out the maintenance of its
shareholder register to an independent entity that meets certain criteria, in
practice this regulation has not always been strictly enforced. Because of this
lack of independence, management of a company may be able to exert considerable
influence over who can purchase and sell the company's shares by illegally
instructing the registrar to refuse to record transactions in the share
register. In addition, so-called "financial-industrial groups" have emerged in
recent years that seek to deter outside investors from interfering in the
management of companies they control. These practices may prevent the fund from
investing in the securities of certain Russian companies deemed suitable by
Advisers. Further, this also could cause a delay in the sale of Russian company
securities by the fund if a potential purchaser is deemed unsuitable, which may
expose the fund to potential loss on the investment.
The fund's management endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when the fund changes
investments from one country to another or when proceeds of the sale of shares
in U.S. dollars are used for the purchase of securities in foreign countries.
Also, some countries may adopt policies that would prevent the fund from
transferring cash out of the country or withhold portions of interest and
dividends at the source. There is the possibility of cessation of trading on
national exchanges, expropriation, nationalization, or confiscatory taxation,
withholding, and other foreign taxes on income or other amounts, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), default in foreign government securities,
political or social instability, or diplomatic developments that could affect
investments in securities of issuers in foreign nations.
The fund may be affected either favorably or unfavorably by fluctuations in the
relative rates of exchange between the currencies of different nations, by
exchange control regulations, and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Further,
certain currencies may not be internationally traded.
Certain of these currencies have experienced a steady devaluation relative to
the U.S. dollar. Any devaluations in the currencies in which the fund's
portfolio securities are denominated may have a detrimental impact on the fund.
Through the fund's flexible policy, management endeavors to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where, from time to time, it places the fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses.
The Board considers at least annually the likelihood of the imposition by any
foreign government of exchange control restrictions which would affect the
liquidity of the fund's assets maintained with custodians in foreign countries,
as well as the degree of risk from political acts of foreign governments to
which such assets may be exposed. The Board also considers the degree of risk
involved through the holding of portfolio securities in domestic and foreign
securities depositories. However, in the absence of willful misfeasance, bad
faith, or gross negligence on the part of Advisers, any losses resulting from
the holding of the fund's portfolio securities in foreign countries and/or with
securities depositories will be at the risk of the shareholders. No assurance
can be given that the Board's appraisal of the risks will always be correct or
that such exchange control restrictions or political acts of foreign governments
might not occur.
STOCK INDEX OPTIONS, STOCK INDEX FUTURES, FINANCIAL FUTURES, AND RELATED
OPTIONS. 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 securities correlate with
price movements in the relevant portion of the fund's portfolio. Inasmuch as
these securities will not duplicate the components of any index or underlying
securities, the correlation will not be perfect. Consequently, the fund bears
the risk that the prices of the securities being hedged will not move in the
same amount as the hedging instrument. It is also possible that there may be a
negative correlation between the index or other securities underlying the
hedging instrument and the hedged securities which would result in a loss on
both the securities and the hedging instrument. Accordingly, successful use by
the fund of options on stock indexes, stock index futures, financial futures,
and related options will be subject to Advisers' 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 that provides a
secondary market. There can be no assurance that a liquid secondary market will
exist for any particular stock index option or futures contract or related
option at any specific time. Thus, it may not be possible to close an option or
futures position. The inability to close options or futures positions could have
an adverse impact on the fund's ability to effectively hedge its securities. The
fund will enter into an option or futures position only if there appears to be a
liquid secondary market for such options or futures.
There can be no assurance that a continuous liquid secondary market will exist
for any particular OTC option at any specific time. Consequently, the fund may
be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer that
issued it. Similarly, when the fund writes an OTC option, it generally can close
out that option prior to its expiration only by entering into a closing purchase
transaction with the dealer to 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 buyer of such put or call option might
also find it difficult to terminate its position on a timely basis in the
absence of a secondary market.
The CFTC and the various exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position that
any person may hold or control in a particular futures contract. Trading limits
are imposed on the maximum number of contracts that any person may trade on a
particular trading day. An exchange may order the liquidation of positions found
to be in violation of these limits and it may impose other sanctions or
restrictions. The fund does not believe that these trading and positions limits
will have an adverse impact on the fund's strategies for hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions 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 Advisers 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 Advisers' 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. These 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 buy securities upon
termination of long futures contracts and long call options on future contracts,
but under unusual market conditions it may terminate any of such positions
without a corresponding purchase of securities.
FORWARD CURRENCY CONTRACTS. As noted above, the fund may enter into forward
currency contracts, in part in order to limit the risk from adverse changes in
the relationship between currencies. However, 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 contracts.
INVESTMENT RESTRICTIONS
The fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the fund or (ii) 67%
or more of the shares of the fund present at a shareholder meeting if more than
50% of the outstanding shares of the fund are represented at the meeting in
person or by proxy, whichever is less. The fund MAY NOT:
(1) Invest more than 25% of the value of the fund's total assets in one
particular industry; except that, to the extent this restriction is applicable,
all or substantially all of the assets of the fund may be invested in another
registered investment company having the same investment objective and policies
as the fund;
(2) Underwrite securities of other issuers, except insofar as the fund may be
technically deemed an underwriter in connection with the disposition of
securities in its portfolio; except that all or substantially all of the assets
of the fund may be invested in another registered investment company having the
same investment objectives and policies as the fund;
(3) Make loans to other persons except on a temporary basis in connection with
the delivery or receipt of portfolio securities which have been bought or sold,
or by the purchase of bonds, debentures or similar obligations which have been
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;
(4) Borrow money in excess of 5% of the value of the fund's total assets, and
then only as a temporary measure for extraordinary or emergency purposes;
(5) Sell securities short or buy on margin nor pledge or hypothecate any of the
fund's assets; except that the fund may enter into financial futures and options
on financial futures as discussed;
(6) Buy or sell real estate (other than interests in real estate investment
trusts), commodities or commodity contracts; except that the fund may invest in
financial futures and related options on futures with respect to securities,
securities indices and currencies;
(7) 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; provided that
all or substantially all of the assets of the fund may be invested in another
registered investment company having the same investment objective and policies
as the fund. To the extent permitted by exemptions granted under the 1940 Act,
the fund may invest in shares of one or more money market funds managed by
Advisers or its affiliates;
(8) Invest in securities for the purpose of exercising management or control of
the issuer, except that, to the extent this restriction is applicable, all or
substantially all of the assets of the fund may be invested in another
registered investment company having the same investment objective and policies
as the fund; and
(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 fund,
one or more of the officers or trustees of the fund, 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, except that, to the extent this restriction is applicable, all or
substantially all of the assets of the fund may be invested in another
registered investment company having the same investment objective and policies
as the fund, or except as permitted under investment restriction Number 7
regarding the purchase of shares of money market funds managed by Advisers or
its affiliates.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the fund, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. In this case, the fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the fund who are responsible for
administering the fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
fund under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND OFFICES
NAME, AGE AND ADDRESS WITH THE TRUST PRINCIPAL OCCUPATION DURING
THE PAST FIVE YEARS
- ------------------------------------------------------------------------------
Frank H. Abbott, III (77)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (66)
191 Clapboard Ridge Road
Greenwich, CT 06830
Trustee
Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods (a meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
*Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
and Trustee
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton Investor
Services, Inc.; and officer and/or director or trustee, as the case may be, of
most of the other subsidiaries of Franklin Resources, Inc. and of 53 of the
investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (66)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee, as
the case may be, of 51 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Director, General Host Corporation (nursery and
craft centers).
Edith E. Holiday (46)
3239 38th Street, N.W.
Washington, DC 20016
Trustee
Director, Amerada Hess Corporation (crude oil and natural gas refining),
Hercules Incorporated (chemicals, fibers and resins) (1993-present), Beverly
Enterprises, Inc. (1995-present) and H.J. Heinz Company (packaged foods and
allied products) (1994-present); director or trustee, as the case may be, of 25
of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chairman (1995-1997) and Trustee (1993-1997), National Child Research
Center, Assistant to the President of the United States and Secretary of the
Cabinet (1990-1993), General Counsel to the United States Treasury Department
(1989-1990), and Counselor to the Secretary and Assistant Secretary for Public
Affairs and Public Liaison-United States Treasury Department (1988-1989).
*Charles B. Johnson (65)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman
of the Board
and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc. and Franklin Templeton Services, Inc.; officer and/or director or trustee,
as the case may be, of most of the other subsidiaries of Franklin Resources,
Inc. and of 50 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Director, General Host Corporation (nursery and craft
centers).
*Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
President
and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Senior Vice President and Director, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case may
be, of most of the other subsidiaries of Franklin Resources, Inc. and of 53 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (69)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); Chairman of the Board and Director,
Quarterdeck Corporation (software firm); Director, Digital Transmission Systems,
Inc. (wireless communications); director or trustee, as the case may be, of 27
of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Director, Fischer Imaging Corporation (medical imaging systems) and
General Partner, Peregrine Associates, which was the General Partner of
Peregrine Ventures (venture capital firm).
Gordon S. Macklin (70)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Director, Fund American Enterprises Holdings, Inc., MCI Communications
Corporation, MedImmune, Inc. (biotechnology), Spacehab, Inc. (aerospace
services) and Real 3D (software); director or trustee, as the case may be, of 49
of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chairman, White River Corporation (financial services) and Hambrecht
and Quist Group (investment banking,) and President, National Association of
Securities Dealers, Inc.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
and Chief
Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive Vice
President, Chief Operating Officer and Director, Templeton Investment Counsel,
Inc.; Executive Vice President and Chief Financial Officer, Franklin Advisers,
Inc.; Chief Financial Officer, Franklin Advisory Services, Inc. and Franklin
Investment Advisory Services, Inc.; President and Director, Franklin Templeton
Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin/Templeton Investor Services, Inc.; officer and/or director of some of
the other subsidiaries of Franklin Resources, Inc.; and officer and/or director
or trustee, as the case may be, of 53 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (49)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice President, Chief Legal Officer
and Chief Operating Officer, Franklin Investment Advisory Services, Inc.; and
officer of 53 of the investment companies in the Franklin Templeton Group of
Funds.
Charles E. Johnson (42)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Vice President
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; President, Chief Executive Officer, Chief Investment
Officer and Director, Franklin Institutional Services Corporation; Chairman and
Director, Templeton Investment Counsel, Inc.; Vice President, Franklin Advisers,
Inc.; officer and/or director of some of the other subsidiaries of Franklin
Resources, Inc.; and officer and/or director or trustee, as the case may be, of
34 of the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and
Principal
Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32 of
the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. As of June 1, 1998, nonaffiliated members of the
Board are paid $1,575 for each of the Trust's eight regularly scheduled Board
meetings plus $1,050 per meeting attended. As shown above, the nonaffiliated
Board members also serve as directors or trustees of other investment companies
in the Franklin Templeton Group of Funds. They may receive fees from these funds
for their services. The fees payable to nonaffiliated Board members by the Trust
are subject to reductions resulting from fee caps limiting the amount of fees
payable to Board members who serve on other boards within the Franklin Templeton
Group of Funds. The following table provides the total fees paid to
nonaffiliated Board members by the Trust and by other funds in the Franklin
Templeton Group of Funds.
NUMBER OF BOARDS
TOTAL FEES IN THE FRANKLIN
TOTAL FEES RECEIVED FROM THE TEMPLETON GROUP
RECEIVED FRANKLIN TEMPLETON OF FUNDS ON WHICH
NAME FROM TRUST*** GROUP OF FUNDS**** EACH SERVES*****
- ------------------------------------------------------------------------------
Frank H. Abbott, III....... $5,400 $165,937 27
Harris J. Ashton........... 5,100 344,642 49
S. Joseph Fortunato........ 5,100 361,562 51
David Garbellano*.......... 1,500 91,317 N/A
Edith Holiday**............ 1,200 72,875 25
Frank W.T. LaHaye.......... 5,400 141,433 27
Gordon S. Macklin.......... 5,100 337,292 49
*Deceased, September 27, 1997.
**Appointed January 15, 1998.
***For the fiscal year ended April 30, 1998, during which time fees at the rate
of $300 for each of the Trust's eight meetings plus $300 per meeting attended
were in effect.
****For the calendar year ended December 31, 1997.
*****We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not include
the total number of series or funds within each investment company for which the
Board members are responsible. The Franklin Templeton Group of Funds currently
includes 54 registered investment companies, with approximately 170 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or trustee.
No officer or Board member received any other compensation, including pension or
retirement benefits, directly or indirectly from the fund or other funds in the
Franklin Templeton Group of Funds. Certain officers or Board members who are
shareholders of Resources may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
As of June 2, 1998, the officers and Board members, as a group, owned of record
and beneficially the following shares of the fund: approximately 5,851 Class I
shares, or less than 1% of the total outstanding Class I shares of the fund.
Many of the Board members also own shares in other funds in the Franklin
Templeton Group of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are
brothers and the father and uncle, respectively, of Charles E.
Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the fund to buy, hold or
sell and the selection of brokers through whom the fund's portfolio transactions
are executed. Advisers' activities are subject to the review and supervision of
the Board to whom Advisers renders periodic reports of the fund's investment
activities. Advisers and its officers, directors and employees are covered by
fidelity insurance for the protection of the fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by Advisers on behalf of the fund. Similarly, with
respect to the fund, Advisers is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that Advisers and
access persons, as defined by the 1940 Act, may buy or sell for its or their own
account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the fund or other funds that it
manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the fund's Code of Ethics. Please
see "Miscellaneous Information - Summary of Code of Ethics."
Under an agreement with Advisers, TICI is the fund's sub-advisor. TICI provides
Advisers with investment management advice and assistance. TICI also provides a
continuous investment program for the fund, including allocation of the fund's
assets among the various securities markets of the world and investment research
and advice with respect to securities and investments and cash equivalents in
the fund.
MANAGEMENT FEES. Under its management agreement, the fund pays Advisers a
management fee equal to an annual rate of 0.625 of 1% of the value of its
average daily net assets up to and including $100 million; 0.50 of 1% of the
value of its average daily net assets over $100 million and not over $250
million; and 0.45 of 1% of the value of its average daily net assets in excess
of $250 million. The fee is computed at the close of business on the last
business day of each month. Each class pays its proportionate share of the
management fee. Under the sub-advisory agreement, Advisers pays TICI a
sub-advisory fee, in U.S. dollars, equal to 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 and not
over $250 million; and 0.225 of 1% of the value of the fund's average daily net
assets in excess of $250 million. This fee is not a separate expense of the fund
but is paid by Advisers from the management fees it receives from the fund. TICI
will pay all expenses incurred in connection with its activities under the
subadvisory agreement with Advisers other than the cost of securities (including
brokerage commissions, if any) purchased for the fund.
For the fiscal years ended April 30, 1998, 1997 and 1996, management fees,
before any advance waiver, totaled $527,061, $129,938 and $58,092, respectively.
Under an agreement by Advisers to waive its fees, the fund paid no management
fees for the same periods. For the same periods, Advisers paid TICI no
sub-advisory fees.
MANAGEMENT AGREEMENTS. The management and sub-advisory agreements are in effect
until February 28, 1999. They may continue in effect for successive annual
periods if their continuance is specifically approved at least annually by a
vote of the Board or by a vote of the holders of a majority of the fund's
outstanding voting securities, and in either event by a majority vote of the
Board members who are not parties to either agreement or interested persons of
any such party (other than as members of the Board), cast in person at a meeting
called for that purpose. The management agreement may be terminated without
penalty at any time by the Board or by a vote of the holders of a majority of
the fund's outstanding voting securities on 60 days' written notice to Advisers,
or by Advisers on 60 days' written notice to the fund, and will automatically
terminate in the event of its assignment, as defined in the 1940 Act. The
sub-advisory agreement may be terminated without penalty at any time by the
Board or by vote of the holders of a majority of the fund's outstanding voting
securities, or by either Advisers or TICI on not less than 60 days' written
notice, and will automatically terminate in the event of its assignment, as
defined in the 1940 Act.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the fund. These include
preparing and maintaining books, records, and tax and financial reports, and
monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, Advisers pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
During the fiscal year ended April 30, 1998, and for the period October 1, 1996,
through April 30, 1997, administration fees totaling $129,758 and $21,855,
respectively, were paid to FT Services. The fee is paid by Advisers. It is not a
separate expense of the fund.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the fund's shareholder servicing agent and acts as the fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. The fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the fund. The amount of reimbursements for these services
per benefit plan participant fund account per year may not exceed the per
account fee payable by the fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York, 10286, acts as custodian of the securities and other assets of
the fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITOR. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, is the fund's independent auditor. During the fiscal year ended April 30,
1998, the auditor's services consisted of rendering an opinion on the financial
statements of the Trust included in the Trust's Annual Report to Shareholders
for the fiscal year ended April 30, 1998.
HOW DOES THE FUND BUY
SECURITIES FOR ITS PORTFOLIO?
Advisers selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the Board may give.
When placing a portfolio transaction, Advisers seeks to obtain prompt execution
of orders at the most favorable net price. For portfolio transactions on a
securities exchange, the amount of commission paid by the fund is negotiated
between Advisers and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. Advisers will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of Advisers, 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.
Advisers may pay certain brokers commissions that are higher than those another
broker may charge, if Advisers determines in good faith that the amount paid is
reasonable in relation to the value of the brokerage and research services it
receives. This may be viewed in terms of either the particular transaction or
Advisers' overall responsibilities to client accounts over which it exercises
investment discretion. The services that brokers may provide to Advisers
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and other
information that provides lawful and appropriate assistance to Advisers in
carrying out its investment advisory responsibilities. These services may not
always directly benefit the fund. They must, however, be of value to Advisers in
carrying out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services Advisers receives 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 staffs of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the fund's
officers are satisfied that the best execution is obtained, the sale of fund
shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, may also be considered a factor in the selection of broker-dealers to
execute the fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the fund,
any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to Advisers will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the fund and one or more other investment
companies or clients supervised by Advisers are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions may improve execution and reduce transaction costs to the
fund.
During the fiscal years ended April 30, 1998, 1997 and 1996, the fund paid
brokerage commissions totaling $3,070, $2,435 and $985, respectively.
As of April 30, 1998, the fund owned securities issued by Salomon Brothers
Inc. and Morgan Stanley & Co. Inc. valued in the amount of $459,788 and
$2,020,781, respectively. Except as noted, the fund did not own any
securities issued by its regular broker-dealers as of the end of the fiscal
year.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Banks and financial institutions that sell shares of the fund may be required by
state law to register as Securities Dealers. Financial institutions or their
affiliated brokers may receive an agency transaction fee in the percentages
indicated in the table under "How Do I Buy Shares? - Purchase Price of Fund
Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Class I shares of the fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE
- ------------------------------------------------------------------------------
Under $30,000............................................... 3%
$30,000 but less than $100,000.............................. 2%
$100,000 but less than $400,000............................. 1%
$400,000 or more............................................ 0%
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 0.75% on
sales of $1 million to $2 million, plus 0.60% on sales over $2 million to $3
million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales
over $50 million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases of Class I shares by certain retirement plans without a front-end
sales charge, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Class
I shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds acquired more than 90 days before the Letter is filed will be counted
towards completion of the Letter, but they will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions you make during the 13
month period, except in the case of certain retirement plans, will be subtracted
from the amount of the purchases for purposes of determining whether the terms
of the Letter have been completed. If the Letter is not completed within the 13
month period, there will be an upward adjustment of the sales charge, depending
on the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute a
Letter before a change in the sales charge structure of the fund, you may
complete the Letter at the lower of the new sales charge structure or the sales
charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the fund registered in
your name until you fulfill the Letter. This policy of reserving shares does not
apply to certain retirement plans. If the amount of your total purchases, less
redemptions, equals the amount specified under the Letter, the reserved shares
will be deposited to an account in your name or delivered to you or as you
direct. If the amount of your total purchases, less redemptions, exceeds the
amount specified under the Letter and is an amount that would qualify for a
further quantity discount, a retroactive price adjustment will be made by
Distributors and the Securities Dealer through whom purchases were made pursuant
to the Letter (to reflect such further quantity discount) on purchases made
within 90 days before and on those made after filing the Letter. The resulting
difference in Offering Price will be applied to the purchase of additional
shares at the Offering Price applicable to a single purchase or the dollar
amount of the total purchases. If the amount of your total purchases, less
redemptions, is less than the amount specified under the Letter, you will remit
to Distributors an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge that would have applied to
the aggregate purchases if the total of the purchases had been made at a single
time. Upon remittance, the reserved shares held for your account will be
deposited to an account in your name or delivered to you or as you direct. If
within 20 days after written request the difference in sales charge is not paid,
the redemption of an appropriate number of reserved shares to realize the
difference will be made. In the event of a total redemption of the account
before fulfillment of the Letter, the additional sales charge due will be
deducted from the proceeds of the redemption, and the balance will be forwarded
to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the fund under the exchange privilege, the fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the fund's investment goals exist
immediately. This money will then be withdrawn from the short-term, money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh day. The sale of fund shares to complete an exchange will be effected at
Net Asset Value at the close of business on the day the request for exchange is
received in proper form. Please see "May I Exchange Shares for Shares of Another
Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be made
from the redemption of an equivalent amount of shares in your account, generally
on the 25th day of the month in which a payment is scheduled. If the 25th falls
on a weekend or holiday, we will process the redemption on the next business
day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
fund's net assets and you may incur brokerage fees in converting the securities
to cash. The fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. The fund is not responsible for tracking down uncashed checks, unless a
check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions that
maintain omnibus accounts with the fund on behalf of numerous beneficial owners
for recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, the fund may reimburse Investor
Services an amount not to exceed the per account fee that the fund normally pays
Investor Services. These financial institutions may also charge a fee for their
services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the close of the NYSE, normally
1:00 p.m. Pacific time, each day that the NYSE is open for trading. As of the
date of this SAI, the fund is informed that the NYSE observes the following
holidays: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
For the purpose of determining the aggregate net assets of the fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by Advisers.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the close of trading on the
NYSE, if that is earlier. The value is then converted into its U.S. dollar
equivalent at the foreign exchange rate in effect at noon, New York time, on the
day the value of the foreign security is determined. If no sale is reported at
that time, the foreign security is valued within the range of the most recent
quoted bid and ask prices. Occasionally events that affect the values of foreign
securities and foreign exchange rates may occur between the times at which they
are determined and the close of the exchange and will, therefore, not be
reflected in the computation of the Net Asset Value of each class. If events
materially affecting the values of these foreign securities occur during this
period, the securities will be valued in accordance with procedures established
by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the Net
Asset Value of each class is determined as of such times. Occasionally, events
affecting the values of these securities may occur between the times at which
they are determined and the close of the NYSE that will not be reflected in the
computation of the Net Asset Value. If events materially affecting the values of
these securities occur during this period, the securities will be valued at
their fair value as determined in good faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
fund may use a pricing service, bank or Securities Dealer to perform any of the
above described functions.
ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. The fund receives income generally in
the form of dividends, interest, original issue, market and acquisition
discount, and other income derived from its investments. This income, less
expenses incurred in the operation of the fund, constitute its net investment
income from which dividends may be paid to you. Any distributions by the fund
from such income will be taxable to you as ordinary income, whether you take
them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS. The fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income. Distributions
paid from long-term capital gains realized by the fund will be taxable to you as
long-term capital gain, regardless of how long you have held your shares in the
fund. Any net short-term or long-term capital gains realized by the fund (net of
any capital loss carryovers) generally will be distributed once each year, and
may be distributed more frequently, if necessary, in order to reduce or
eliminate federal excise or income taxes on the fund.
Gain from securities sold by the fund that are held for more than one year will
be taxable at a maximum rate of 20% for individual investors in the 28% or
higher federal income tax brackets; or at a maximum rate of 10% for individual
investors in the 15% federal income tax bracket. Gains from securities sold by
the fund prior to January 1, 1998, are taxable at different rates depending on
the length of time the fund held such assets.
For "qualified 5-year gains," the maximum capital gain rate is 18% for
individuals in the 28% or higher federal income tax brackets; or 8% for
individuals in the 15% federal income tax bracket. For individuals in the 15%
bracket, qualified 5-year gains are net gains on securities held for more than 5
years which are sold after December 31, 2000. For individuals who are subject to
tax at higher rates, qualified 5-year gains are net gains on securities which
are purchased after December 31, 2000 and are held for more than 5 years.
Taxpayers subject to tax at the higher rates may also make an election for
shares held on January 1, 2001 to recognize gain on their shares in order to
qualify such shares as qualified 5-year property.
Additional information on reporting capital gains distributions on your personal
income tax returns is available in Franklin Templeton's Tax Information
Handbook. Please call Fund Information to request a copy. Questions concerning
each investor's personal tax reporting should be addressed to the investor's
personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November or December and paid to you in January of the following year,
will be treated for tax purposes as if they had been received by you on December
31 of the year in which they were declared. The fund will report this income to
you on your Form 1099-DIV for the year in which these distributions were
declared.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS. Most foreign exchange gains
realized on the sale of debt instruments are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt instruments are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the fund's ordinary
income distributions to you, and may cause some or all of the fund's previously
distributed income to be classified as a return of capital.
The fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of the total assets of the fund at the
end of the fiscal year are invested in securities of foreign corporations, the
fund may elect to pass-through to you your pro rata share of foreign taxes paid
by the fund, subject to certain holding period requirements. If this election is
made, you will be (i) required to include in your gross income your pro rata
share of foreign source income (including any foreign taxes paid by the fund),
and, (ii) entitled to either deduct your share of such foreign taxes in
computing your taxable income or to claim a credit for such taxes against your
U.S. income tax, subject to certain limitations under the Code. You will be
informed by the fund at the end of each calendar year regarding the availability
of any such foreign tax credits and the amount of foreign source income
(including any foreign taxes paid by the fund). If the fund elects to
passthrough to you the foreign income taxes that it has paid, you will be
informed at the end of the calendar year of the amount of foreign taxes paid and
foreign source income that must be included on your federal income tax return.
If the fund invests 50% or less of its total assets in securities of foreign
corporations, it will not be entitled to passthrough to you your pro rata share
of the foreign taxes paid by the fund. In this case, these taxes will be taken
as a deduction by the fund, and the income reported to you will be the net
amount after these deductions.
The procedures by which investors in funds that invest in foreign securities can
claim tax credits on their individual income tax returns for the foreign taxes
paid by the fund have been simplied for tax years beginning in 1998. These
provisions will allow investors who claim a credit for foreign taxes paid of
$300 or less on a single return or $600 or less on a joint return during any
year (all of which must be reported on IRS Form 1099-DIV from the fund to the
investor) to bypass the burdensome and detailed reporting requirements on the
supporting foreign tax credit schedule (Form 1116) and report foreign taxes paid
directly on page 2 of Form 1040.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The fund will inform you of
the amount and character of your distributions at the time they are paid, and
will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held fund shares for a full year, you may have designated and distributed to you
as ordinary income or capital gain a percentage of income that is not equal to
the actual amount of such income earned during the period of your investment in
the fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. The fund has elected to
be treated as a regulated investment company under Subchapter M of the Code, has
qualified as such for its most recent fiscal year, and intends to so qualify
during the current fiscal year. The Board reserves the right not to maintain the
qualification of the fund as a regulated investment company if it determines
such course of action to be beneficial to you. In such case, the fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of the fund's available earnings and profits.
In order to qualify as a regulated investment company for tax purposes, the fund
must meet certain specific requirements, including:
o The fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the fund's total assets,
and, with respect to 50% of the fund's total assets, no investment (other
than cash and cash items, U.S. government securities and securities of other
regulated investment companies) can exceed 5% of the fund's total assets or
10% of the outstanding voting securities of the issuer;
o The fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the sale
or disposition of stock, securities or foreign currencies, or other income
derived with respect to its business of investing in such stock, securities,
or currencies; and
o The fund must distribute to its shareholders at least 90% of its investment
company taxable income (i.e., net investment income plus net short-term
capital gains) and net tax-exempt income for each of its fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires the fund to distribute
at least 98% of its taxable ordinary income earned during the calendar year and
98% of its capital gain net income earned during the twelve month period ending
October 31 (in addition to undistributed amounts from the prior year) to you by
December 31 of each year in order to avoid federal excise taxes. The fund
intends to declare and pay sufficient dividends in December (or in January that
are treated by you as received in December) but does not guarantee and can give
no assurances that its distributions will be sufficient to eliminate all such
taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. The tax law requires
that you recognize a gain or loss in an amount equal to the difference between
your tax basis and the amount you received in exchange for your shares, subject
to the rules described below. If you hold your shares as a capital asset, the
gain or loss that you realize will be capital gain or loss, and will be
long-term for federal income tax purposes if you have held your shares for more
than one year at the time of redemption or exchange. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gains
distributed to you by the fund on those shares.
All or a portion of any loss that you realize upon the redemption of your fund
shares will be disallowed to the extent that you purchase other shares in the
fund (through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be added
to your tax basis in the new shares you purchase.
DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for your
shares in the fund will be excluded from your tax basis in any of the shares
sold within 90 days of their purchase (for the purpose of determining gain or
loss upon the sale of such shares) if you reinvest the sales proceeds in the
fund or in another of the Franklin Templeton Funds, and the sales charge that
would otherwise apply to your reinvestment is reduced or eliminated. The portion
of the sales charge excluded from your tax basis in the shares sold will equal
the amount that the sales charge is reduced on your reinvestment. Any portion of
the sales charge excluded from your tax basis in the shares sold will be added
to the tax basis of the shares you acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by
the fund. Investments in GNMA/FNMA securities, bankers' acceptances, commercial
paper and repurchase agreements collateralized by U.S. government securities do
not generally qualify for tax-free treatment. At the end of each calendar year,
the fund will provide you with the percentage of any dividends paid that may
qualify for tax-free treatment on your personal income tax return. You should
consult with your own tax advisor to determine the application of your state and
local laws to these distributions. Because the rules on exclusion of this income
are different for corporations, corporate shareholders should consult with their
corporate tax advisors about whether any of their distributions may be exempt
from corporate income or franchise taxes.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. As a corporate shareholder, you
should note that only a small percentage of the dividends paid by the fund for
the most recent fiscal year qualified for the dividends-received deduction. You
will be permitted in some circumstances to deduct these qualified dividends,
thereby reducing the tax that you would otherwise be required to pay on these
dividends. The dividends-received deduction will be available only with respect
to dividends designated by the fund as eligible for such treatment. Dividends so
designated by the fund must be attributable to dividends earned by the fund from
U.S. corporations that were not debt-financed.
INVESTMENT IN COMPLEX SECURITIES. The fund's investment in options, futures
contracts and forward contracts, including transactions involving actual or
deemed short sales or foreign exchange gains or losses are subject to many
complex and special tax rules. Over-the-counter options on debt securities and
equity options, including options on stock and on narrow-based stock indexes,
will be subject to tax under section 1234 of the Code, generally producing a
long-term or short-term capital gain or loss upon exercise, lapse, or closing
out of the option or sale of the underlying stock or security. Certain other
options, futures and forward contracts entered into by the fund are generally
governed by section 1256 of the Code. These "section 1256" positions generally
include listed options on debt securities, options on broad-based stock indexes,
options on securities indexes, options on futures contracts, regulated futures
contracts and certain foreign currency contracts and options thereon.
Absent a tax election to the contrary, each such section 1256 position held by
the fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the fund's fiscal year (and on other
dates as prescribed by the Code), and all gain or loss associated with fiscal
year transactions and mark-to-market positions at fiscal year end (except
certain currency gain or loss covered by section 988 of the Code) will generally
be treated as 60% long-term capital gain or loss and 40% short-term capital gain
or loss. Even though marked-to-market, gains and losses realized on foreign
currency and foreign security investments will generally be treated as ordinary
income. The effect of section 1256 mark-to-market rules may be to accelerate
income or to convert what otherwise would have been long-term capital gains into
short-term capital gains or short-term capital losses into long-term capital
losses within the fund. The acceleration of income on section 1256 positions may
require the fund to accrue taxable income without the corresponding receipt of
cash. In order to generate cash to satisfy the distribution requirements of the
Code, the fund may be required to dispose of portfolio securities that it
otherwise would have continued to hold or to use cash flows from other sources
such as the sale of fund shares. In these ways, any or all of these rules may
affect the amount, character and timing of income distributed to you by the
fund.
When the fund holds an option or contract which substantially diminishes the
fund's risk of loss with respect to another position of the fund (as might occur
in some hedging transactions), this combination of positions could be treated as
a "straddle" for tax purposes, possibly resulting in deferral of losses,
adjustments in the holding periods and conversion of short-term capital losses
into long-term capital losses. The fund may make certain tax elections for mixed
straddles (i.e., straddles comprised of at least one section 1256 position and
at least one non-section 1256 position) which may reduce or eliminate the
operation of these straddle rules.
When the fund enters into "constructive sale transactions," the fund must
recognize gain (but not loss) on any constructive sale of an appreciated
financial position in stock, a partnership interest or certain debt instruments.
The fund will generally be treated as making a constructive sale when it: 1)
enters into a short sale on the same property, 2) enters into an offsetting
notional principal contract, or 3) enters into a futures or forward contract to
deliver the same or substantially similar property. Other transactions
(including certain financial instruments called collars) will be treated as
constructive sales as provided in Treasury regulations to be published. There
are also certain exceptions that apply for transactions that are closed before
the end of the 30th day after the close of the taxable year.
Distributions paid to you by the fund of ordinary income and short-term capital
gains arising from the fund's investments, including investments in options,
forwards, and futures contracts, will be taxable to you as ordinary income. The
fund will monitor its transactions in such options and contracts and may make
certain other tax elections in order to mitigate the effect of the above rules.
INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES. The fund is authorized
to invest in foreign currency denominated securities. Such investments, if made,
will have the following additional tax consequences:
Under the Code, gains or losses attributable to fluctuations in foreign currency
exchange rates which occur between the time the fund accrues income (including
dividends), or accrues expenses which are denominated in a foreign currency, and
the time the fund actually collects such income or pays such expenses generally
are treated as ordinary income or loss. Similarly, on the disposition of debt
securities denominated in a foreign currency and on the disposition of certain
options, futures, forward contracts, gain or loss attributable to fluctuations
in the value of foreign currency between the date of acquisition of the security
or contract and the date of its disposition are also treated as ordinary gain or
loss. These gains or losses, referred to under the Code as "section 988" gains
or losses, may increase or decrease the amount of the fund's net investment
company taxable income, which, in turn, will affect the amount of income to be
distributed to you by the fund.
If the fund's section 988 losses exceed the fund's other net investment company
taxable income during a taxable year, the fund generally will not be able to
make ordinary dividend distributions to you for that year, or distributions made
before the losses were realized will be recharacterized as return of capital
distributions for federal income tax purposes, rather than as an ordinary
dividend or capital gain distribution. If a distribution is treated as a return
of capital, your tax basis in your fund shares will be reduced by a like amount
(to the extent of such basis), and any excess of the distribution over your tax
basis in your fund shares will be treated as capital gain to you.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES. The fund may invest
in shares of foreign corporation which may be classified under the Code as
passive foreign investment companies ("PFICs"). In general, a foreign
corporation is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income.
If the fund receives an "excess distribution" with respect to PFIC stock, the
fund itself may be subject to U.S. federal income tax on a portion of the
distribution, whether or not the corresponding income is distributed by the fund
to you. In general, under the PFIC rules, an excess distribution is treated as
having been realized ratably over the period during which the fund held the PFIC
shares. The fund itself will be subject to tax on the portion, if any, of an
excess distribution that is so allocated to prior fund taxable years, and an
interest factor will be added to the tax, as if the tax had been payable in such
prior taxable years. In this case, you would not be permitted to claim a credit
on your own tax return for the tax paid by the fund. Certain distributions from
a PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain. This may have the effect of increasing
fund distributions to you that are treated as ordinary dividends rather than
long-term capital gain dividends.
The fund may be eligible to elect alternative tax treatment with respect to PFIC
shares. Under an election that currently is available in some circumstances, the
fund generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether distributions are
received from the PFIC during such period. If this election were made, the
special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, under another election that
involves marking-to-market the fund's PFIC shares at the end of each taxable
year (and on certain other dates as prescribed in the Code), unrealized gains
would be treated as though they were realized. The fund would also be allowed an
ordinary deduction for the excess, if any, of the adjusted basis of its
investment in the PFIC stock over its fair market value at the end of the
taxable year. This deduction would be limited to the amount of any net
mark-to-market gains previously included with respect to that particular PFIC
security. If the fund were to make this second PFIC election, tax at the fund
level under the PFIC rules would generally be eliminated.
The application of the PFIC rules may affect, among other things, the amount of
tax payable by the fund (if any), the amounts distributable to you by the fund,
the time at which these distributions must be made, and whether these
distributions will be classified as ordinary income or capital gain
distributions to you.
You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is a
PFIC, and that there is always a possibility that a foreign corporation will
become a PFIC after the fund acquires shares in that corporation. While the fund
will generally seek to avoid investing in PFIC shares to avoid the tax
consequences detailed above, there are no guarantees that it will do so and it
reserves the right to make such investments as a matter of its fundamental
investment policy.
CONVERSION TRANSACTIONS. Gains realized by a fund from transactions that are
deemed to be "conversion transactions" under the Code, and that would otherwise
produce capital gain may be recharacterized as ordinary income to the extent
that such gain does not exceed an amount defined as the "applicable imputed
income amount." A conversion transaction is any transaction in which
substantially all of the fund's expected return is attributable to the time
value of the fund's net investment in such transaction, and any one of the
following criteria are met:
1) there is an acquisition of property with a substantially contemporaneous
agreement to sell the same or substantially identical property in the future;
2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the fund on the basis that it would
have the economic characteristics of a loan but would be taxed as capital gain;
or
4) the transaction is specified in Treasury regulations to be promulgated in the
future.
The applicable imputed income amount, which represents the deemed return on the
conversion transaction based upon the time value of money, is computed using a
yield equal to 120 percent of the applicable federal rate, reduced by any prior
recharacterizations under this provision or the provisions of Section 263(g) of
the Code dealing with capitalized carrying costs.
STRIPPED PREFERRED STOCK. Occasionally, the fund may purchase "stripped
preferred stock" that is subject to special tax treatment. Stripped preferred
stock is defined as certain preferred stock issues where ownership of the stock
has been separated from the right to receive dividends that have not yet become
payable. The stock must have a fixed redemption price, must not participate
substantially in the growth of the issuer, and must be limited and preferred as
to dividends. The difference between the redemption price and purchase price is
taken into fund income over the term of the instrument as if it were original
issue discount. The amount that must be included in each period generally
depends on the original yield to maturity, adjusted for any prepayments of
principal.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) BONDS. The
fund's investments in zero coupon bonds, bonds issued or acquired at a discount,
delayed interest bonds, or bonds that provide for payment of interest-in-kind
(PIK) may cause the fund to recognize income and make distributions to you prior
to its receipt of cash payments. Zero coupon and delayed interest bonds are
normally issued at a discount and are therefore generally subject to tax
reporting as OID obligations. The fund is required to accrue as income a portion
of the discount at which these securities were issued, and to distribute such
income each year (as ordinary dividends) in order to maintain its qualification
as a regulated investment company and to avoid income reporting and excise taxes
at the fund level. PIK bonds are subject to similar tax rules concerning the
amount, character and timing of income required to be accrued by the fund. Bonds
acquired in the secondary market for a price less than their stated redemption
price, or revised issue price in the case of a bond having OID, are said to have
been acquired with market discount. For these bonds, the fund may elect to
accrue market discount on a current basis, in which case the fund will be
required to distribute any such accrued discount. If the fund does not elect to
accrue market discount into income currently, gain recognized on sale will be
recharacterized as ordinary income instead of capital gain to the extent of any
accumulated market discount on the obligation.
DEFAULTED OBLIGATIONS. The fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy these distribution requirements, the fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
fund shares.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the fund's shares. The
underwriting agreement will continue in effect for successive annual periods if
its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting called
for that purpose. The underwriting agreement terminates automatically in the
event of its assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
In connection with the offering of the fund's shares, aggregate underwriting
commissions for the fiscal years ended April 30, 1998, 1997 and 1996, were
$2,420,305, $330,506 and $86,370, respectively. After allowances to dealers,
Distributors retained $163,904, $23,568 and $5,531 in net underwriting discounts
and commissions and received $0, $0 and $399 in connection with redemptions or
repurchases of shares for the respective years. Distributors may be entitled to
reimbursement under the Rule 12b-1 plan for each class, as discussed below.
Except as noted, Distributors received no other compensation from the fund for
acting as underwriter.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 plans" that
were adopted pursuant to Rule 12b-1 of the 1940 Act.
THE CLASS I PLAN. Under the Class I plan, the fund may pay up to a maximum of
0.25% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares.
THE CLASS II PLAN. Under the Class II plan, the fund pays Distributors up to
0.50% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the fund.
Under the Class II plan, the fund also pays an additional 0.15% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
THE CLASS I AND CLASS II PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the fund, Advisers or Distributors or other parties on behalf of the
fund, Advisers or Distributors make payments that are deemed to be for the
financing of any activity primarily intended to result in the sale of shares of
each class within the context of Rule 12b-1 under the 1940 Act, then such
payments shall be deemed to have been made pursuant to the plan. The terms and
provisions of each plan relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the Board, including a majority vote
of the Board members who are not interested persons of the fund and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such Board members be done by the non-interested
members of the Board. The plans and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
management agreement with Advisers or by vote of a majority of the outstanding
shares of the class. Distributors or any dealer or other firm may also terminate
their respective distribution or service agreement at any time upon written
notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, cast in person at a meeting called for the purpose of
voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plans should be continued.
For the fiscal year ended April 30, 1998, Distributors had eligible expenditures
of $334,308 for advertising, printing, and payments to underwriters and
broker-dealers pursuant to the Class I plan, of which the fund paid Distributors
$220,076 under the Class I plan.
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the fund to compute or express performance follows. Regardless of the method
used, past performance does not guarantee future results, and is an indication
of the return to shareholders only for the limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over the periods indicated below that
would equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes the maximum front-end sales charge is deducted
from the initial $1,000 purchase, and income dividends and capital gain
distributions are reinvested at Net Asset Value. The quotation assumes the
account was completely redeemed at the end of each period and the deduction of
all applicable charges and fees. If a change is made to the sales charge
structure, historical performance information will be restated to reflect the
maximum front-end sales charge currently in effect.
The average annual total return for Class I for the one-year period ended April
30, 1998, and for the period from inception (June 1, 1994) through April 30,
1998, was 8.32% and 11.61%, respectively.
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of the each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, is based on the
actual return for a specified period rather than on the average return over the
periods indicated above. The cumulative total return for Class I for the
one-year period ended April 30, 1998 and for the period from inception (June 1,
1994) through April 30, 1998, was 8.32% and 53.68%, respectively.
YIELD
CURRENT YIELD. Current yield of each class shows the income per share earned by
the fund. It is calculated by dividing the net investment income per share of
each class earned during a 30-day base period by the applicable maximum Offering
Price per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all shareholders of
the class during the base period. The yield for the 30-day period ended April
30, 1998, was 6.08% for Class I.
These figures were obtained using the following
SEC formula:
6
Yield = 2 [( a-b + 1 ) - 1]
---
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum Offering Price per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the SEC,
is not indicative of the amounts which were or will be paid to shareholders.
Amounts paid to shareholders are reflected in the quoted current distribution
rate. The current distribution rate is usually computed by annualizing the
dividends paid per share by a class during a certain period and dividing that
amount by the current maximum Offering Price. The current distribution rate
differs from the current yield computation because it may include distributions
to shareholders from sources other than dividends and interest, such as premium
income from option writing and short-term capital gains, and is calculated over
a different period of time. The current distribution rate for the 30-day period
ended April 30, 1998, was 7.67% for Class I.
VOLATILITY
Occasionally statistics may be used to show the fund's volatility or risk.
Measures of volatility or risk are generally used to compare the fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
The fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax
applies.
The fund may include in its advertising or sales material information relating
to investment goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Resources is the parent company of the advisors and
underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the fund may satisfy your
investment goal, advertisements and other materials about the fund may discuss
certain measures of fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's(R) 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 New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the NYSE.
d) Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
h) Financial publications: THE WALL STREET JOURNAL, and BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines provide performance
statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
l) Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
m) Standard & Poor's(R) 100 Stock Index - an unmanaged index based on the prices
of 100 blue-chip stocks, including 92 industrials, one utility, two
transportation companies, and 5 financial institutions. The S&P 100 Stock Index
is a smaller more flexible index for options trading.
n) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk-adjusted performance of a fund over specified
time periods relative to other funds within its category.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the fund's
fixed-income investments, as well as the value of its shares that are based upon
the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the fund to calculate its figures. In addition,
there can be no assurance that the fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
fund cannot guarantee that these goals will be met.
The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 50 years and
now services more than 3 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton, a pioneer in international
investing. The Mutual Series team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
Together, the Franklin Templeton Group has over $236 billion in assets under
management for more than 6 million U.S. based mutual fund shareholder and other
accounts. The Franklin Templeton Group of Funds offers 119 U.S. based open-end
investment companies to the public. The fund may identify itself by its NASDAQ
symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment goals, no two are exactly alike. As
noted in the Prospectus, shares of the fund are generally sold through
Securities Dealers. Investment representatives of such Securities Dealers are
experienced professionals who can offer advice on the type of investment
suitable to your unique goals and needs, as well as the types of risks
associated with such investment.
From time to time, the number of fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the fund, no other person holds beneficially or of record more
than 5% of the outstanding shares of any class.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations and statements must be sent
to a compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) above, file annual
reports of their securities holdings each January and inform the compliance
officer (or other designated personnel) if they own a security that is being
considered for a fund or other client transaction or if they are recommending a
security in which they have an ownership interest for purchase or sale by a fund
or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended April 30, 1998, including the auditor's
report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - The fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the fund's principal
underwriter
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable
Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I and 1% for Class II. We calculate
the offering price to two decimal places using standard rounding criteria.
PROSPECTUS - The prospectus for the fund dated September 1, 1998, which we may
amend from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TICI - Templeton Investment Counsel, Inc., the fund's sub-advisor
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present that make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations that are speculative to a high degree.
These issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings, which are also applicable to municipal paper
investments permitted to be made by the fund, 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.
SEMI
ANNUAL
REPORT
OCTOBER 31, 1998
FRANKLIN STRATEGIC SERIES
Franklin Biotechnology Discovery Fund
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin Global Health Care Fund
Franklin Global Utilities Fund
Franklin MidCap Growth Fund
Franklin Natural Resources Fund
Franklin Small Cap Growth Fund
Franklin Strategic Income Fund
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective and remember that all securities markets move
both up and down, as do mutual fund share prices. We appreciate your past
support and look forward to serving your investment needs in the years ahead.
Rupert H. Johnson, Jr.
President
Franklin Strategic Series
CONTENTS
Shareholder Letter ....................... 1
Fund Reports
Franklin Biotechnology
Discovery Fund........................... 3
Franklin Blue Chip Fund.................. 8
Franklin California
Growth Fund ............................. 13
Franklin Global
Health Care Fund......................... 20
Franklin Global
Utilities Fund .......................... 26
Franklin MidCap
Growth Fund ............................. 34
Franklin Natural
Resources Fund........................... 39
Franklin Small Cap
Growth Fund.............................. 46
Franklin Strategic
Income Fund.............................. 56
Financial Highlights &
Statement of Investments ................. 66
Financial Statements ..................... 118
Notes to
Financial Statements ..................... 132
SHAREHOLDER LETTER
Dear Shareholder:
This semiannual report for Franklin Strategic Series covers the six months ended
October 31, 1998.
A bumpy ride
If a pilot were to describe the performance of global securities markets during
the six months under review, he'd probably use the word "turbulent." On April
30, the Dow Jones(R) Industrial Average closed at 9063.37. By July 17, it
climbed to 9337.97. But due to investors' concerns about economic crises in Asia
and Russia, it fell to 8051.68 by August 28 and suffered an additional 512.61
point drop on August 31. Responding to the threat posed to the U.S. economy by
global financial problems, the Federal Reserve Board cut short-term interest
rates in late September and mid-October, fueling an October rally that raised
the Dow 749.48 points. On October 31, it stood at 8592.10.
Fasten your seatbelts!
What should you do when faced with widely fluctuating markets? In our opinion,
you should call your investment representative and review your current financial
plans, recalling your goals and the reasons you made your investment choices in
the first place. Then discuss whether your investments are properly diversified
to reduce the negative impact that any one holding will have upon your
portfolio. Finally, review your investment timeframe to help put recent gains
and losses into perspective. Maintaining a long-term outlook is one of the keys
to weathering market volatility.
One of the most important components of a long-term approach is setting up an
investment plan. Investing on a scheduled basis, regardless of market direction,
can help you take advantage of market downturns when prices are low, and benefit
from market rallies. Most importantly, adhering to such a plan can contribute
not only to your investment success, but also to your peace of mind.
Whatever direction the market takes, you can be confident that Franklin
Templeton's portfolio managers are dedicated to providing our shareholders with
careful investment selection and constant professional supervision of their
funds. As always, we appreciate your support, welcome your comments and look
forward to serving your investment needs.
Sincerely,
/s/ Rupert H. Johnson, Jr.
Rupert H. Johnson, Jr.
President
Franklin Strategic Series
FRANKLIN BIOTECHNOLOGY
DISCOVERY FUND
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 67 of
this report.
Your Fund's Goal: Franklin Biotechnology Discovery Fund seeks capital
appreciation by investing primarily in equity securities of biotechnology
companies and discovery research firms located in the U.S. and other countries.
This semiannual report of Franklin Biotechnology Discovery Fund covers the six
months ended October 31, 1998. During the period, the biotechnology sector
experienced severe volatility due to product disappointments and general market
malaise. After most major market downturns in August, stock prices began to rise
by early September, and small-cap stocks, including the biotechnology sector,
roared back to life as the market picked up momentum in October. Within this
environment, the fund posted a -14.73% cumulative total return for the period,
as discussed in the Performance Summary on page 6.
At the end of the reporting period, the fund had over $55 million invested in
five industries. On October 31, our largest position was Inhale Therapeutic
Systems, a leading developer of an inhaled form of insulin. With this novel
product, diabetics may be able to breathe in a powder form of insulin rather
than injecting it. Although the product won't be available to the general public
for a year or two, we believe its potential could be substantial.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
During the reporting period, we increased the fund's weighting in the large-cap
biotech sector, establishing positions in Amgen, Inc. and Genzyme Corp. Amgen,
Inc. has had exceptional earnings growth this year as Epogen, its largest
selling drug, experienced an increase in sales. In our opinion, Genzyme Corp.
also has strong growth potential. By October 31, the company's stock rose 35%
from the time we bought it in July. During the period, we also increased our
position in Chiron Corp., which restructured its business, hired an experienced
chief executive officer and chief financial officer, and sold its low-margin
diagnostics division.
Establishing short positions (selling borrowed stock in hopes of buying it later
at a lower price) is a strategy the fund uses to help offset declines in a
sector and to reduce volatility within the fund. At the beginning of the period,
the fund's short position represented approximately 9% of total net assets.
After the market decline in August, the fund covered nearly all of its short
positions for substantial gains.
We are optimistic about the outlook for the biotechnology industry. Many of
these entrepreneurial companies are seeking new treatments for a variety of
diseases, and the potential reward is substantial, even if only a fraction of
the new drugs makes it to the market. Although the market valuation of the
approximately 260 publicly traded biotech companies is less than the market
value of Merck, we believe investors will be rewarded as this small but exciting
industry produces future treatments for diabetes, cancer and heart disease.
Biotechnology companies are often small, relatively new, or unseasoned. Such
companies can be particularly sensitive to changing economic conditions, and
have less certain growth prospects than larger, more established companies. And
since small company stocks are volatile, they may not be appropriate for
short-term investors. Also, the fund is non-diversified and concentrates in a
single industry, involving other risks, such as patent considerations, product
liability, government regulatory requirements, and regulatory approval for new
drugs and medical products. The fund may invest in foreign securities, which
involve additional risks, including political uncertainty and currency
volatility. These and other risks, including hedging strategies, are described
more fully in the fund's prospectus. The nature of the investments of this fund
require an investor to have a long-term investment horizon. These are developing
companies whose product introductions must face many hurdles before they become
commercially viable.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of October 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
better understand our investment and management philosophy.
Sincerely,
/s/ Kurt von Emster
Portfolio Manager
Franklin Biotechnology Discovery Fund
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
PERFORMANCE SUMMARY
Franklin Biotechnology Discovery Fund posted a -14.73% cumulative total return
for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge.
The fund's share price, as measured by net asset value, decreased $3.96, from
$26.89 on April 30, 1998, to $22.93 on October 31, 1998. During the reporting
period, shareholders did not receive distributions. Distributions will vary
depending on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses.
Performance
Franklin Biotechnology Discovery Fund
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR (9/15/97)
- ---------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -10.42% -8.10%
AVERAGE ANNUAL TOTAL RETURN2 -15.56% -11.99%
VALUE OF $10,000 INVESTMENT3 $8,444 $8,660
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total represents the average annual change in value of an
investment over the periods indicated and has been restated to reflect the
current, maximum 5.75% initial sales charge. Prior to August 3, 1998, fund
shares were offered at a lower initial sales charge; thus, actual total returns
would have been higher.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and have been restated to include the current,
maximum 5.75% initial sales charge. Prior to August 3, 1998, fund shares were
offered at a lower initial sales charge; thus, actual total returns would have
been higher.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, currency volatility, and the economic, social
and political climates of countries where the fund invests. You may have a gain
or loss when you sell your shares. Past expense reductions by the fund's manager
increased total return.
Past performance is not predictive of future results.
FRANKLIN BLUE CHIP FUND
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 70 of
this report.
Your Fund's Goal: Franklin Blue Chip Fund seeks long-term capital appreciation
by investing primarily in high quality, blue chip companies with market
capitalization of $1 billion or more, that the managers believe are leaders in
their industries and are positioned for stable, long-term growth potential.
This semiannual report of Franklin Blue Chip Fund covers the six months ended
October 31, 1998. During the first part of the period, the U.S. stock market
reached all-time highs, as the economy experienced steady growth and benign
inflation. However, Asia's financial turmoil, coupled with Russia's economic
meltdown, led to severe volatility in global equity markets by late summer. The
Dow Jones(R) Industrial Average, which had peaked on July 17, fell 14.91% in
August. Even though it rallied in September and October, it was down 4.33% for
the reporting period. Within this environment, Franklin Blue Chip Fund posted a
- -2.73% six-month cumulative total return, as discussed in the Performance
Summary on page 11. The Morgan Stanley Capital International(R) World Index, the
fund's benchmark, delivered a total return of -2.85% for the same period.*
*Source: Standard & Poor's(R) Micropal. Dow Jones Industrial Average's total
return is calculated by Wilshire Associates Inc. The Morgan Stanley Capital
International (MSCI) World Index includes approximately 1,480 companies
representing the stock markets of 23 countries, including the U.S., Canada, the
United Kingdom, and Japan. Indices are unmanaged and total return includes
reinvested dividends. One cannot invest directly in an index.
GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Throughout the reporting period, we maintained our conservative, long-term
investment discipline. In our search for companies offering management
excellence, a healthy balance sheet, and solid long-term earnings potential, we
focused on industry leaders demonstrating sustainable competitive advantages. On
October 31, 1998, our holdings were diversified across 14 sectors, including
consumer non-durables, health technology, finance, and electronic technology.
During the reporting period, the health technology and electronic technology
sectors strengthened considerably, and our holdings of Abbott Laboratories,
Johnson & Johnson, Intel Corp., and Cisco Systems Inc. contributed positively to
the fund's performance. In our opinion, they offer sustainable earnings growth
potential in the long term.
After a long period of weak results, the retail and utilities sectors also
performed well. However, even though we added to our holdings of Wal-Mart Stores
Inc. and Bellsouth Corp., our exposure to these sectors remained low because we
believed they could experience slow growth and intense competition over the long
term.
On the negative side, the stock prices of many financial institutions, including
our holdings of Citigroup Inc. and Merrill Lynch & Co. Inc., fell largely due to
hedge fund losses and bad loans to emerging market countries. Fortunately, the
fund had a relatively small exposure to this sector, and our shares of The
Charles Schwab Corp. and American International Group Inc. rose in value,
offsetting much of the sector's decline.
Seeking to take advantage of market volatility, we added to our holdings of The
Coca Cola Co., the world's largest soft drink company, and Medtronic Inc., an
international manufacturer of medical devices. In our opinion, these companies
have strong growth potential.
GRAPHIC MATERIAL 5 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Looking forward, we are optimistic about the outlook for the fund. Despite the
possibility of Asia's financial problems affecting the U.S. economy, we believe
prospects remain bright for companies with quality assets, solid management,
sound competitive strategies, and the potential to generate strong future
earnings. It is important to remember, however, that investing in the fund
involves the special risks of global, and especially emerging market, investing
related to market and currency volatility and adverse social and political
developments.
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1998, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the fund's portfolio composition. Although historical performance
is no guarantee of future results, these insights may help you understand our
investment and management philosophy.
We thank you for your participation in the Franklin Blue Chip Fund and look
forward to serving your investment needs in the years to come.
Sincerely,
/s/ Suzanne W. Killea
Portfolio Manager
Franklin Blue Chip Fund
PERFORMANCE SUMMARY
Franklin Blue Chip Fund posted a -2.73% cumulative total return for the
six-month period ended October 31, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of all distributions,
and does not include the sales charge. We have always maintained a long-term
perspective when managing the fund, and we encourage shareholders to view their
investments in a similar manner. As you can see from the table on page 12, the
fund delivered a +23.58% cumulative total return since inception on June 3,
1996.
The fund's share price, as measured by net asset value, decreased $0.34, from
$12.46 on April 30, 1998, to $12.12 on October 31, 1998. During the reporting
period, shareholders did not receive any distributions. Distributions will vary
depending on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
Performance
Franklin Blue Chip Fund
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR (6/3/96)
- ---------------------------------------------------
CUMULATIVE TOTAL RETURN1 11.58% 23.58%
AVERAGE ANNUAL TOTAL RETURN2 5.18% 6.53%
VALUE OF $10,000 INVESTMENT3 $10,518 $11,648
10/31/97 10/31/98
- ---------------------------------------------------
ONE-YEAR TOTAL RETURN4 8.25% 11.58%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and has been restated to reflect the
current, maximum 5.75% initial sales charge. Prior to August 3, 1998, fund
shares were offered at a lower initial sales charge; thus, actual total returns
would have been higher.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and have been restated to reflect the current,
maximum 5.75% initial sales charge. Prior to August 3, 1998, fund shares were
offered at a lower initial sales charge; thus, actual total returns would have
been higher.
4. One-year total return represents the change in value of an investment over
the periods ended on the dates indicated and does not include the sales charge.
Past expense reductions by the fund's manager increased the fund's total return
to shareholders. Without this waiver, the fund's total return and distributions
would have been lower.
All calculations assume reinvestment of all distributions at net asset value.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the social,
economic and political climates of countries where investments are made.
Emerging markets involve heightened risks related to the same factors, in
addition to those associated with their relatively small size and lesser
liquidity. You may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
FRANKLIN CALIFORNIA GROWTH FUND
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 75 of
this report.
Your Fund's Goal: 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. The fund may also invest in foreign securities.
The six months ended October 31, 1998, were one of the most challenging
environments for stocks in the history of Franklin California Growth Fund.
During the first half of the calendar year, California's economy continued to
expand robustly, with June's unemployment rate falling to 5.7%, the lowest rate
in eight years. By summer, however, signs of slowing growth were beginning to
emerge. Trade, an important influence on California's economy, deteriorated,
with exports to Japan and much of the rest of Asia falling significantly.
Interestingly, though, shipments to Europe and U.S. NAFTA partners (Canada and
Mexico), rose appreciably. During the reporting period, Asia's financial turmoil
spread to Russia and Latin America, causing volatility in equity markets
throughout the world. Within this environment, Franklin California Growth Fund -
Class I posted a -13.29% six-month cumulative total return, as discussed in the
Performance Summary on page 17.
GRAPHIC MATERIAL 6 OMITTED - SEE APPENDIX AT END OF DOCUMENT
In the U.S., a variety of industry groups, especially the high technology
sector, were particularly hard hit. In an effort to support declining economies
in other countries and prevent a recession in the U.S., the Federal Reserve
Board (the Fed) reduced the federal funds rate from 5.5% to 5.25% at the
September meeting of the Federal Open Market Committee. Then, in October, Fed
Chairman Alan Greenspan cut the fed funds rate to 5% and the discount rate from
5.0% to 4.75%, before the next scheduled meeting.
As of October 31, 1998, about a third of the fund's total positions were
represented by companies with a market capitalization of less than $1 billion.
Because large caps generally performed better during the period, the small cap
sector hurt the fund's performance. As an example of how small cap stocks
performed, the Russell 2000, a broad barometer of small cap stocks, peaked on
April 21, 1998 at 491.41. On October 31, 1998, the index stood at 378.16,
representing a decline of 23%.
Real-estate related companies also hindered the fund's performance during the
period under review. The share price of one fund holding, Arden Realty, Inc., a
real-estate investment trust specializing in Southern California office
properties, fell 22.9%, despite the fact that the company continued to exhibit
double-digit cash flow growth. We maintained our position in this company
because its properties had higher occupancy rates than its peers and, in our
opinion, the company's portfolio consisted of high quality holdings.
Of course, the fund also held many large cap stocks, with several among the top
holdings at the end of the period. Such companies as Cisco Systems, Inc.,
Safeway, Inc., and Sun Microsystems, Inc., had relatively stable and predictable
earnings growth. The share prices for many of these larger companies held up
relatively well in the reporting period's volatile market environment, with some
holdings, such as Granite Construction, Inc., appreciating dramatically.
Benefiting from strong national infrastructure rejuvenation, its share price
rose 69.0% during the six months under review. In our opinion, this is a
well-run company that is positioned to benefit from spending under the
Intermodal Surface Transportation Efficiency Act.
Looking forward, we are optimistic about prospects for California's economy and
the Franklin California Growth Fund. In our opinion, this diverse and dynamic
state, with almost 1,400 publicly traded companies, represents tremendous
potential for investment opportunities. The market's volatility during the
reporting period helped create some terrific values in the small- and mid-cap
sectors, and we continue to maintain or invest in positions in these areas
anticipating potential for capital appreciation. While several of our holdings
in the small cap arena hurt the fund's performance during the period, we believe
many of these companies may prove to be substantial contributors to the fund's
performance in the years to come. As we scan the investment horizon for
opportunities, we find there is no shortage of potential investments for the
fund.
GRAPHIC MATERIAL 7 OMITTED - SEE APPENDIX AT END OF DOCUMENT
It should be remembered, of course, that there are certain risks involved with
investing in a non-diversified fund concentrating in securities associated with
a single state, such as increased susceptibility to adverse economic or
regulatory developments. The fund also invests a portion of its assets in small
or relatively new or unseasoned companies, which involves the additional risks
related to relatively small revenues, limited product lines and small market
share. These and other risks are described in the prospectus.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of October 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
better understand our investment and management philosophy.
Thank you for your participation in Franklin California Growth Fund. We welcome
any comments or suggestions you may have.
Sincerely,
/s/ Conrad B. Herrmann
Portfolio Manager
Franklin California Growth Fund
PERFORMANCE SUMMARY
Class I
Franklin California Growth Fund - Class I provided a -13.29% cumulative total
return for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge. We always have
maintained a long-term perspective when managing the fund, and encourage
shareholders to view their investments in a similar manner. As you can see from
the table on page 18, the fund's Class I shares delivered a +218.04% cumulative
total return since inception on October 30, 1991.
The fund's share price, as measured by net asset value, decreased $3.36, from
$24.98 on April 30, 1998, to $21.62 on October 31, 1998. During the reporting
period, shareholders receives per-share distributions of 4.3 cents ($0.043) in
income dividends. Distributions will vary depending on income earned by the fund
and any profits realized from the sale of securities in the portfolio, as well
as the level of the fund's operating expenses.
Performance
Franklin California Growth Fund - Class I
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR 5-YEAR (10/30/91)
- ---------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -4.73% +158.82% +218.04%
AVERAGE ANNUAL TOTAL RETURN2 -10.22% +19.52% +16.97%
VALUE OF $10,000 INVESTMENT3 $8,978 $24,392 $29,972
10/31/94 10/31/95 10/31/96 10/31/97 10/31/98
- --------------------------------------------------------------------------------
ONE-YEAR TOTAL RETURN4 +19.75% +45.31% +24.61% +25.40% -4.73%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and has been restated to reflect the
current, maximum 5.75% initial sales charge. Prior to August 3, 1998, fund
shares were offered at a lower initial sales charge; thus, actual total returns
would have been higher.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and have been restated to include the current,
maximum 5.75% initial sales charge. Prior to August 3, 1998, fund shares were
offered at a lower initial sales charge; thus, actual total returns would have
been higher.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, and you may have a gain or loss when you sell
your shares.
Past expense reductions by the fund's manager increased the fund's total
returns. Without this reduction, the fund's total returns would have been lower.
Class II
Franklin California Growth Fund - Class II provided a -13.58% cumulative total
return for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include sales charges.
The fund's share price, as measured by net asset value, decreased $3.37, from
$24.82 on April 30, 1998, to $21.45 on October 31, 1998. During the reporting
period, shareholders did not receive any distributions. Distributions will vary
depending on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses.
Performance
Franklin California Growth Fund - Class II
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR (9/3/96)
- ------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -5.36% +26.47%
AVERAGE ANNUAL TOTAL RETURN2 -7.21% +10.98%
VALUE OF $10,000 INVESTMENT3 $9,279 $12,522
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated. All figures include the 1.0% initial
sales charge and 1.0% contingent deferred sales charge, applicable to shares
redeemed within 18 months of investment. Class II shares have higher annual fees
and expenses than Class I shares.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include sales charges.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, and you may have a gain or loss when you sell
your shares.
Past performance is not predictive of future results.
FRANKLIN GLOBAL HEALTH CARE FUND
GRAPHIC MATERIAL 8 OMITTED - SEE APPENDIX AT END OF DOCUMENT
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 81 of
this report.
Your Fund's Goal: Franklin Global Health Care Fund seeks capital appreciation by
investing primarily in the equity securities of health care companies, including
small capitalization companies, located throughout the world.
The six-month period under review was one of uncertainty and great volatility in
global equity markets. Economic turmoil overseas threatened continued growth of
the U.S. economy, and domestic stock markets reacted with wild price swings. As
a result of investors' flight to quality, many large-capitalization drug stocks
soared in value during the reporting period, while small cap health care stocks
generally slumped. Within this environment, Franklin Global Health Care Fund
Class I posted a -21.52% six-month cumulative total return, as discussed in the
Performance Summary on page 23.
During the period, we were attracted to what we believed were the superior
growth prospects of smaller, emerging health care companies, whose shares had,
in our opinion, extremely attractive prices. Although the lack of popularity of
small cap stocks hurt the fund's performance, we believe that over longer time
periods, small cap stocks may significantly outperform large caps.
One of the fund's top holdings, Serologicals Inc., performed well, advancing
over 13% during the six month period. This company operates a national network
of blood collection centers and identifies and retains donors with rare antigens
in their blood. These antigens are extracted from donated blood and sold to
large pharmaceutical companies. We find this niche attractive since there is a
tremendous shortage of blood products and Serologicals Inc. has little
competition and an excellent reputation.
On October 31, 1998, the fund's largest sector was medical specialties. We
discovered a number of companies in this area possessing what we believed were
excellent growth potential and attractive valuations. One of our largest
holdings in the sector was Penederm Inc., whose drug delivery technology is used
in topical compounds for skin disorders. In June, the company was acquired by
generic drug manufacturer Mylan Laboratories. Penederm Inc.'s stock price jumped
about 30% the day of the announcement and was up 87.7% from April 30 through
completion of the acquisition on October 5, 1998.
During the period, we increased the fund's exposure to the pharmaceutical
sector. Anticipating a rotation into these large cap stocks as investors sought
more liquid investments that would be more resistant to an economic slowdown, we
initiated a position in SmithKline Beecham. In our opinion, this company had a
strong product portfolio and promising new drugs in development, and its shares
were trading at a discount to its peers.
Looking forward, we are optimistic about prospects for investors in health care
stocks. In our opinion, expenditures in the health care industry will be driven
by an aging population and rapidly changing technology. Both of these factors
may result in a wider range of treatable conditions and increased life
expectancy. In addition, demand for health care products and services is not
necessarily affected by the cyclical swings of the business cycle. Our goal is
to seize upon investment opportunities in a timely and disciplined manner in an
attempt to provide our shareholders unique opportunities to invest in rapidly
growing, smaller cap companies with exciting technologies, limited competition,
and strong management teams.
GRAPHIC MATERIAL 9 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 10 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of October 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
better understand our investment and management philosophy.
Of course, there are 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 Franklin Global Health Care Fund and look
forward to serving your future investment needs.
Sincerely,
/s/ Kurt von Emster
Portfolio Manager
Franklin Global Health Care Fund
PERFORMANCE SUMMARY
Class I
Franklin Global Health Care Fund - Class I provided a -21.52% cumulative total
return for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge. While we expect
market volatility in the short term, 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 table on page 24, the
fund's Class I shares delivered a +99.46% cumulative total return since
inception on February 14, 1992.
The fund's share price, as measured by net asset value, decreased $4.15, from
$19.28 on April 30, 1998, to $15.13 on October 31, 1998. During the reporting
period, shareholders did not receive any distributions. Distributions will vary
depending on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses.
Performance
Franklin Global Health Care - Class I
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR 3-YEAR 5-YEAR (2/14/92)
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -22.14% +21.43% +95.40% +99.46%
AVERAGE ANNUAL TOTAL RETURN2 -26.62% +4.59% +13.00% +9.86%
VALUE OF $10,000 INVESTMENT3 $7,338 $11,442 $18,424 $18,799
10/31/94 10/31/95 10/31/96 10/31/97 10/31/98
- --------------------------------------------------------------------------------
ONE-YEAR TOTAL RETURN4 +23.62% +30.17% +26.06% +23.73% -22.14%
1. Cumulative total return represents the change in value of an investment over
the periods shown and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and has been restated to reflect the
current, maximum 5.75% initial sales charge. Prior to August 3, 1998, fund
shares were offered at a lower initial sales charge; thus, actual returns would
have been higher.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and have been restated to include the current,
maximum 5.75% initial sales charge. Prior to August 3, 1998, fund shares were
offered at a lower initial sales charge; thus, actual total returns would have
been higher.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, currency volatility, and the economic, social
and political climates of countries where the fund invests. You may have a gain
or loss when you sell your shares.
Past expense reductions by the fund's manager increased the fund's total
returns. Without this reduction, total returns would have been lower.
Class II
Franklin Global Health Care Fund - Class II provided a -21.86% cumulative total
return for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include sales charges.
The fund's share price, as measured by net asset value, decreased $4.19, from
$19.17 on April 30, 1998, to $14.98 on October 31, 1998. During the reporting
period, shareholders did not receive any distributions. Distributions will vary
depending on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses.
Performance
Franklin Global Health Care - Class II
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR (9/3/96)
- ---------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -22.71% -5.80%
AVERAGE ANNUAL TOTAL RETURN2 -24.20% -3.20%
VALUE OF $10,000 INVESTMENT3 $7,580 $9,433
1. Cumulative total return represents the change in value of an investment over
the periods shown and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and 1.0% contingent deferred sales charge, applicable to shares redeemed
within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include all sales charges.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, currency volatility, and the economic, social
and political climates of countries where the fund invests. You may have a gain
or loss when you sell your shares.
Past performance is not predictive of future results.
FRANKLIN GLOBAL UTILITIES FUND
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 85 of
this report.
Your Fund's Goal: Franklin Global Utilities Fund seeks to provide total return
by investing in the equity and debt securities of utility companies located in
the United States and around the world.
During the six months ended October 31, 1998, slow economic growth in Asia
adversely affected economies in Europe, Latin America and the U.S. This led to
severe volatility in global stock markets, and it was not uncommon for markets
to rise or fall 5% in a single day. On a regional basis, the U.S. and Europe
experienced the strongest performance, with Latin America and Asia generally
weaker. Within this environment, the Franklin Global Utilities Fund - Class I
posted a -10.61% six-month cumulative total return, as discussed in the
Performance Summary on page 30. However, the fund delivered a +9.18% cumulative
total return for the 12-month period ended October 31, 1998.
The fund's industry weightings remained relatively stable during the reporting
period, with electric utility companies comprising 46.3% of total net assets,
telecommunications companies 34.8%, and natural gas companies 11.9% on October
31, 1998. The fund's largest geographic exposure was the United States (63.2%),
followed by Continental Europe (20.2%), Latin America (5.0%), and Asia (2.7%).
United States
Domestic utility stocks were uncharacteristically volatile throughout the
reporting period, as investors speculated about the direction of the U.S.
economy and interest rates. Because many investors feared a slowing economy
might hinder subscriber growth, the share price of Rural Cellular Corp. fell
more than 32%. However, believing that domestic telecommunications stocks are
poised for healthy growth in the next few years, we added to our holdings of
Intermedia Communications Inc. and initiated a position in Bell Atlantic Corp.
Although domestic natural gas companies experienced relatively low prices and
high inventory levels, electric utility companies continued to improve cash flow
and were one of the strongest performing sectors during the six months under
review. Since electric utility companies are generally able to deliver stable
earnings and dividends even in times of economic uncertainty, we purchased
shares of Montana Power Co., which, in our opinion, has a solid balance sheet.
Europe
European utility markets delivered mixed results during the six months under
review. Profit-taking and investor uncertainty about the European Monetary Union
(EMU) adversely affected several of our holdings, including Portugal Telecom,
SA, which fell 12.2% in value.* During the period, we initiated a position in
AEM SpA, an Italian gas distribution and electric utility; Endesa, SA, a Spanish
electric utility; and Equant, NV, a Dutch telecommunications network company we
believe could benefit from the huge growth of data communications and the
Internet.
GRAPHIC MATERIAL 11 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 12 OMITTED - SEE APPENDIX AT END OF DOCUMENT
*Price depreciation is measured in U.S. dollars.
Latin America
The Asian economic crisis that began in late 1997 sent shock waves throughout
Latin America, and financial markets there plummeted. Many of our Latin American
holdings dropped in value, which hurt the fund's performance. During the
reporting period, we sold our shares of Telecomunicacoes Brasileiras, SA, and
several Brazilian electric utility companies. Consequently, our Latin American
exposure decreased from 8.7% of total net assets on April 30, 1998, to 5.0% on
October 31, 1998. Although we are cautious about Latin America in the short
term, we view the region's market-oriented reforms positively, and believe this
area could provide promising investment opportunities in the long term.
Asia
Many Asian utility stocks fell dramatically in value, as the Asian currency
crisis continued to make headlines during the reporting period. Although we
maintained a low weighting in Asia because we felt that the financial turmoil
could worsen, we will still search for Asian securities with low risk and
high-return potential.
Looking forward
We are optimistic about prospects for global utility companies because these
firms generally are able to deliver stable earnings and solid dividends even
during periods of economic downturn. Additionally, global demand for gas,
electric power and telecommunications appears to be growing, and many foreign
utility markets are experiencing regulatory changes that could produce high
levels of revenue for utility firms in the future. In the U.S., which remains a
core investment area for the fund, uncertainty caused by the electric utility
deregulation seems to be subsiding, and many utility stocks have experienced
significant declines in their share prices and now appear to be attractively
valued. This could make it easier for us to discover bargain stocks in the near
future.
Of course, there are special risks involved with investing globally in a
non-diversified fund. 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 thank you for your participation in Franklin Global Utilities Fund and look
forward to serving you in the future. Please feel free to contact us with your
questions or comments.
Sincerely,
Sally E. Haff
Portfolio Manager
Franklin Global Utilities Fund
PERFORMANCE SUMMARY
Class I
Franklin Global Utilities Fund - Class I posted a -10.61% cumulative total
return for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge. 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 table on page 31, the fund delivered a +130.74% cumulative total return
since inception on July 2, 1992.
The fund's share price, as measured by net asset value, decreased $1.95, from
$17.36 on April 30, 1998, to $15.41 on October 31, 1998. During the reporting
period, shareholders received per-share distributions of 11.4 cents ($0.114) in
income dividends. Distributions will vary depending on income earned by the fund
and any profits realized from the sale of securities in the portfolio, as well
as the level of the fund's operating expenses. Past distributions are not
indicative of future trends.
Performance
Franklin Global Utilities Fund - Class I
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR 3-YEAR 5-YEAR (7/2/92)
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 9.18% 53.49% 70.17% 130.74%
AVERAGE ANNUAL TOTAL RETURN2 2.88% 13.09% 9.90% 13.06%
VALUE OF $10,000 INVESTMENT3 $10,288 $14,464 $16,033 $21,748
10/31/94 10/31/95 10/31/96 10/31/97 10/31/98
- --------------------------------------------------------------------------------
ONE-YEAR TOTAL RETURN4 -1.27% 12.29% 18.16% 18.98% 9.18%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and has been restated to reflect the
current, maximum 5.75% initial sales charge. Prior to August 3, 1998, fund
shares were offered at a lower initial sales charge; thus, actual total returns
would have been higher.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and have been restated to reflect the current,
maximum 5.75% initial sales charge. Prior to August 3, 1998, fund shares were
offered at a lower initial sales charge; thus, actual returns would have been
higher.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
Past expense reductions by the fund's manager increased the fund's total
returns. Without this waiver, the fund's total return would have been lower.
All calculations assume reinvestment of all distributions at net asset value.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the economic,
social and political climates of countries where the fund invests. Emerging
markets involve heightened risks related to the same factors, in addition to
those associated with their relatively small size and lesser liquidity. You may
have a gain or loss when you sell your shares.
Class II
Franklin Global Utilities Fund - Class II posted a -11.00% cumulative total
return for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include sales charges. We have always maintained a
long-term perspective when managing the fund, and we encourage shareholders to
view their investments in a similar manner. As you can see from the table on
page 33, the fund delivered a +67.24% cumulative total return since inception on
May 1, 1995.
The fund's share price, as measured by net asset value, decreased $1.97, from
$17.25 on April 30, 1998, to $15.28 on October 31, 1998. During the reporting
period, shareholders received per-share distributions of 7.74 cents ($0.0774) in
income dividends. Distributions will vary depending on income earned by the fund
and any profits realized from the sale of securities in the portfolio, as well
as the level of the fund's operating expenses. Past distributions are not
indicative of future trends.
Performance
Franklin Global Utilities Fund - Class II
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR 3-YEAR (5/1/95)
- -------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 8.39% 50.45% 67.24%
AVERAGE ANNUAL TOTAL RETURN2 6.36% 14.21% 15.50%
VALUE OF $10,000 INVESTMENT3 $10,636 $14,898 $16,561
10/31/96 10/31/97 10/31/98
- -------------------------------------------------------------------------------
ONE-YEAR TOTAL RETURN4 17.48% 18.15% 8.39%
1. Cumulative total return represents the change in value of an investment over
the indicated periods and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the indicated periods and includes the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge applicable to shares
redeemed within 18 months of purchase.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the indicated periods and include sales charges.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
All calculations assume reinvestment of all distributions at net asset value.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the economic,
social and political climates of countries where the fund invests. Emerging
markets involve heightened risks related to the same factors, in addition to
those associated with their relatively small size and lesser liquidity. You may
have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
FRANKLIN MIDCAP GROWTH FUND
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 89 of
this report.
Your Fund's Goal: Franklin MidCap Growth Fund seeks long-term capital growth by
investing primarily in equity securities of medium-capitalization companies -
those with a market capitalization between $200 million and $5 billion.
This semiannual report of Franklin MidCap Growth Fund covers the six months
ended October 31, 1998, a period of severe volatility for the U.S. stock market.
Even though the market's momentum began to wane in the spring, investors' desire
for liquidity continued to boost the share prices of many large-cap companies.
However, by the end of the period, Asia's economic crisis, Russia's financial
meltdown, and political uncertainty in Washington contributed to investors'
anxiety concerning the entire market. Fearing that the financial turmoil
overseas would adversely affect the U.S. economy, the Federal Reserve Board
lowered the federal funds rate in September, and again in October. Believing the
U.S. would not experience a recession, many investors gained confidence and the
market rallied. Although many mid-cap stocks outperformed their larger
counterparts in October, the Standard & Poor's(R) (S&P) MidCap 400 Index
underperformed the S&P 500 Stock Index during the period as a whole. Within this
environment, Franklin MidCap Growth Fund posted a -21.33% six-month cumulative
total return, as discussed in the Performance Summary on page 37.
The latter half of the reporting period was especially difficult for the fund as
several of our healthcare holdings were negatively impacted by investor concerns
about pressure on managed-care companies to lower their rates. Some of our
positions in the technology services sector also fell in value due to expenses
related to solving the Y2K (Year 2000) problem.
Taking advantage of market declines, we invested in firms with diversified
product lines, sustainable competitive advantages and proven earnings records.
For example, we increased our weighting in the real estate investment trust
(REIT) sector by purchasing shares of Equity Residential Properties Trust, which
owns multifamily properties containing apartment units, and Cornerstone
Properties Inc., a developer in central business districts and major
metropolitan markets. We also found opportunities in other sectors and initiated
positions in CMS Energy Corp., an operator of gas and electric utilities;
AptarGroup Inc., a major manufacturer of consumer products dispensing systems;
and U.S. Foodservice Inc., one of the nation's largest food service
distributors.
During the reporting period, we sold our shares of companies whose valuations
appeared excessive or fundamentals seemed to be deteriorating. For instance, we
eliminated our position in ESC Medical Systems Ltd., a developer of medical
devices, and U.S. Filter Corp., a provider of industrial and municipal water and
wastewater treatment systems.
GRAPHIC MATERIAL 13 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 14 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Looking forward, we remain optimistic about growth opportunities for mid-cap
growth companies. In our opinion, they offer the best features of small- and
large-cap stocks. Medium-cap companies tend to be more established and more
stable than smaller companies, but unlike large-cap companies, which can offer
greater stability, they generally are still growing rapidly. Of course, there
are risks associated with investing in a fund seeking long-term capital growth
from small- to medium-size companies with less certain growth prospects and
greater sensitivity to changing economic conditions than large-cap companies.
These and other risks are discussed further in the prospectus.
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1998, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the fund's portfolio composition. Although historical performance
is no guarantee of future results, these insights may help you understand our
investment and management philosophy.
We thank you for participating in Franklin MidCap Growth Fund and look forward
to serving you in the future. Please feel free to contact us with your questions
or comments.
Sincerely,
/s/ Edward B. Jamieson
Portfolio Manager
Franklin MidCap Growth Fund
PERFORMANCE SUMMARY
Franklin MidCap Growth Fund posted a -21.33% cumulative total return for the
six-month period ended October 31, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of all distributions,
and does not include the initial sales charge. 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 table on
page 38, the fund delivered a +29.59% cumulative total return for the three-year
period ended October 31, 1998.
The fund's share price, as measured by net asset value, decreased $3.72, from
$17.44 on April 30, 1998, to $13.72 on October 31, 1998. During the reporting
period, shareholders did not receive any distributions. Distributions will vary
depending on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
Performance
Franklin MidCap Growth Fund
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR5 3-YEAR5 5-YEAR5 (8/17/93)5
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -14.11% 29.59% 66.83% 71.67%
AVERAGE ANNUAL TOTAL RETURN2 -19.05% 6.90% 9.47% 9.68%
VALUE OF $10,000 INVESTMENT3 $8,095 $12,217 $15,721 $16,180
10/31/94 10/31/95 10/31/96 10/31/97 10/31/98
- --------------------------------------------------------------------------------
ONE-YEAR TOTAL RETURN4 1.52% 26.81% 19.00% 26.79% -14.11%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and has been restated to reflect the
current, maximum 5.75% initial sales charge. Prior to August 3, 1998, fund
shares were offered at a lower initial sales charge; thus, actual total returns
would have been higher.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and have been restated to reflect the current,
maximum 5.75% initial sales charge. Prior to August 3, 1998, fund shares were
offered at a lower initial sales charge; thus, actual total returns would have
been higher.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
5. On January 2, 1996, the fund changed its investment objective, strategy and
investment adviser.
Past expense reductions by the fund's manager increased the fund's total return
to shareholders. Without this waiver, the fund's total return would have been
lower. All calculations assume reinvestment of all distributions at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, and you may have a gain or loss
when you sell your shares.
Past performance is not predictive of future results.
FRANKLIN NATURAL RESOURCES FUND
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 94 of
this report.
Your Fund's Goal: Franklin Natural Resources Fund seeks long-term capital
appreciation by investing at least 65% of its total assets in securities of
companies that own, produce, refine, process or market natural resources, as
well as those that provide support services for natural resources companies.
This semiannual report of Franklin Natural Resources Fund covers the six months
ended October 31, 1998. During this time, financial and political turmoil in
Asia, Latin America and Russia led to severe volatility in global stock markets.
As a result of investor concerns about a possible global economic slowdown,
demand for energy, chemicals, steel and paper declined. Many commodity prices
fell, and the profitability of some natural resources companies were negatively
impacted. Within this environment, Franklin Natural Resources Fund - Class I
posted a -25.70% six-month cumulative total return, as discussed in the
Performance Summary on page 42.
Throughout the reporting period, we invested in what we believed to be
well-managed companies with fast-growing, highly efficient, technologically
advanced operations in the sectors shown in the chart to the right. Rather than
purchasing stocks solely on the assumption that commodity prices would rise, we
bought stock in companies we felt would fare best due to rapid production
growth, asset or technological edge, or lower costs, even in a flat-to-declining
commodity price environment.
GRAPHIC MATERIAL 15 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 16 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Energy Minerals, which was the fund's largest sector weighting, adversely
affected the fund's performance, as sluggish demand and high inventories led to
declining crude oil and natural gas prices. Crude oil prices dropped from on
$15.48 per barrel on April 30, 1998, to $11.61 on June 15, before rising to
$14.45 at the end of October, and natural gas prices slid to two-year lows
during the reporting period. Taking advantage of these declines, we added to our
holdings of YPF, SA, an integrated Argentine oil and gas company which reduced
costs and, in our opinion, is well positioned to benefit from strong demand for
hydrocarbon in Latin America. We also augmented our positions in Newfield
Exploration Co., an independent exploration and production company; Varco
International Inc., a major provider of technologically advanced drilling
equipment; and Transocean Offshore Inc., one of the world's leading
manufacturers of deepwater drilling rigs. Our low exposure to the international
integrated oil and gas sector also hurt the fund's performance.
During the reporting period, many natural resources companies consolidated in an
attempt to cut costs, improve their market share and diversify their service
capabilities. The British Petroleum Co. Ltd. merged with Amoco Corp., one of our
holdings, creating one of the world's leading integrated oil and gas companies.
In the forest products and paper industry, Bowater Inc., another holding,
acquired Halla Pulp & Paper Co. Ltd.'s Korean assets and Avenor Inc.'s North
American assets. Consolidation also occurred in the chemicals sector, with
Hercules Inc. buying BetzDearborn Inc., one of our positions in the chemicals
sector.
Looking forward, we anticipate a period of balanced supply and demand conditions
for a wide range of natural resources in the near future. In our opinion, this
should lead to moderate growth and sustained levels of profitability for
low-cost producers in commodity-related industries. Recent evidence of OPEC
production cutbacks and non-OPEC production declines also adds to our belief
that the stocks of energy companies offer significant value under today's
depressed conditions. It is important to remember, however, that investing in
the fund involves the special risks of investing in a non-diversified, sector
fund, as well as the currency volatility and political, economic or regulatory
uncertainty associated with foreign, and especially developing market,
investing.
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1998, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the fund's portfolio composition. Although historical performance
is no guarantee of future results, these insights may help you understand our
investment and management philosophy.
We thank you for participating in Franklin Natural Resources Fund and look
forward to serving you in the future. Please feel free to contact us with your
questions or comments.
Sincerely,
/s/ Suzanne W. Killea
Portfolio Manager
Franklin Natural Resources Fund
GRAPHIC MATERIAL 17 OMITTED - SEE APPENDIX AT END OF DOCUMENT
PERFORMANCE SUMMARY
Class I
Franklin Natural Resources Fund - Class I posted a -25.70% cumulative total
return for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge. 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 table on page 43, the fund delivered a +28.40% cumulative total return since
inception on June 5, 1995.
The fund's share price, as measured by net asset value, decreased $4.04, from
$15.46 on April 30, 1998, to $11.42 on October 31, 1998. During the reporting
period, shareholders received per-share distributions of 7.4 cents ($0.074) in
income dividends. Distributions will vary depending on income earned by the fund
and any profits realized from the sale of securities in the portfolio, as well
as the level of the fund's operating expenses. Past distributions are not
indicative of future trends.
Performance
Franklin Natural Resources Fund - Class I
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR 3-YEAR (6/5/95)
- ------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -28.40% 29.83% 28.40%
AVERAGE ANNUAL TOTAL RETURN2 -32.51% 6.97% 5.76%
VALUE OF $10,000 INVESTMENT3 $6,749 $12,241 $12,102
10/31/96 10/31/97 10/31/98
- ------------------------------------------------------------------------------
ONE-YEAR TOTAL RETURN4 46.74% 23.58% -28.40%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and has been restated to reflect the
current, maximum 5.75% initial sales charge. Prior to August 3, 1998, fund
shares were offered at a lower initial sales charge; thus, actual total returns
would have been higher.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and have been restated to reflect the current,
maximum 5.75% initial sales charge. Prior to August 3, 1998, fund shares were
offered at a lower initial sales charge; thus, actual returns would have been
higher.
4. One-year total return represents the change in value of an investment over
the periods ended on the dates indicated and does not include the sales charge.
The fund's manager has agreed in advance to waive a portion of its management
fees, which reduces operating expenses and increases total return to
shareholders. Without this waiver, total return would have been lower. The
waiver may be discontinued at any time upon notice to the fund's Board of
Trustees.
All calculations assume reinvestment of all distributions at net asset value.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the economic,
social and political climates in countries where the fund invests. You may have
a gain or loss when you sell your shares.
Advisor Class
Franklin Natural Resources Fund - Advisor Class posted a -25.52% cumulative
total return for the six-month period ended October 31, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment of
all distributions.
The fund's share price, as measured by net asset value, decreased $4.06, from
$15.48 on April 30, 1998, to $11.42 on October 31, 1998. During the reporting
period, shareholders received per-share distributions of 12.1 cents ($0.121) in
income dividends. Distributions will vary depending on income earned by the fund
and any profits realized from the sale of securities in the portfolio, as well
as the level of the fund's operating expenses. Past distributions are not
indicative of future trends.
Performance
Franklin Natural Resources Fund - Advisor Class
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR* 3-YEAR* (6/5/95)*
- ----------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -28.05% 30.75% 29.31%
AVERAGE ANNUAL TOTAL RETURN1 -28.05% 9.35% 7.84%
VALUE OF $10,000 INVESTMENT2 $7,195 $13,075 $12,931
10/31/96 10/31/97 10/31/98
- ----------------------------------------------------------------------------
ONE-YEAR TOTAL RETURN*,3 46.74% 23.84% -28.05%
*On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I sales
charge, but including the effect of Class I expenses, including Rule 12b-1 fees;
and (b) for periods after January 1, 1997, figures reflect actual Advisor Class
performance, including the deduction of all fees and expenses applicable only to
that class. Since January 2, 1997 (commencement of sales), the cumulative total
return of Advisor Class shares was -15.58%.
1. Cumulative total return represents the change in value of an investment over
the periods indicated. Average annual total return represents the average annual
change in value of an investment over the periods indicated.
2. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated.
3. One-year total return represents the change in value of an investment over
the periods ended on the dates indicated and does not include the sales charge.
The fund's manager has agreed in advance to waive a portion of its management
fees, which reduces operating expenses and increases total return to
shareholders. Without this waiver, total returns would have been lower. The
waiver may be discontinued at any time upon notice to the fund's Board of
Trustees.
All calculations assume reinvestment of all distributions at net asset value.
Since markets can go down as well as up investment return and principal value
will fluctuate with market conditions, currency volatility and the social,
economic and political climates of countries where the fund invests. You may
have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
FRANKLIN SMALL CAP GROWTH FUND
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 100 of
this report.
Your Fund's Goal: 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 $1.5 billion at the time of investment.
The six months ended October 31, 1998 proved to be a difficult time for
small-cap stocks in general and the Franklin Small Cap Growth Fund in
particular. Because liquid, large-cap shares were viewed as a safe haven by
investors concerned about a global economic slowdown, small-cap stocks
underperformed their larger counterparts. The Russell(R) 2500 Index, which
measures the performance of small cap stocks, dropped 18.51%, whereas the Dow
Jones(R) Industrial Average, which is representative of large, blue chip
equities, declined only 4.33%.* Within this environment, Franklin Small Cap
Growth Fund - Class I posted a -23.79% six-month cumulative total return, as
discussed in the Performance Summary on page 50.
*Source: Standard & Poor's(R) Micropal. Dow Jones Industrial Average's total
return is calculated by Wilshire Associates Inc. Price depreciation includes
reinvested dividends. One cannot invest directly in an index.
Our investment style of buying growth stocks at a reasonable price led us to
invest in many companies we consider to have strong long-term potential, but did
not fare well in the face of a potential economic slowdown. For example, our
shares of Atwood Oceanics Inc., an operator of deep-water drilling rigs, fell
48.6% during the six months under review. But since deep water is believed to be
a fertile source of oil, it remains a focus of major exploration and production
efforts. Because the number of companies which supply deep water rigs is
limited, we feel that Atwood has strong growth potential.
Believing that use of the internet and corporate intranets could lead to
substantial growth for technology companies into the next century, we added to
some of our holdings in that sector. For example, we increased our position in
Etec Systems Inc., a developer of electron and laser beam systems applied in the
manufacture of integrated circuits. We also augmented our holdings of 24/7 Media
Inc., Entrust Technologies Inc., and BroadVision Inc., all of which help
companies set up internet commerce systems.
During the reporting period, our holdings of Access Health Inc., Pharmaceutical
Product Development Inc., and Serologicals Corp. appreciated in value, as many
investors bestowed favor upon industries that were relatively immune to cyclical
influences and had low exposure to international markets. The stock prices of
some of our technology holdings, including VERITAS Software Corp. and Gemstar
International Group Ltd., also rose because both companies delivered earnings
that exceeded many analysts' expectations.
GRAPHIC MATERIAL 18 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 19 OMITTED - SEE APPENDIX AT END OF DOCUMENT
On October 31, 1998, the fund's top 10 holdings were significantly different
than they were at the beginning of the reporting period. Wind River Systems Inc.
became one of our largest positions because we added to our holdings early in
the period and its share price appreciated following analyst upgrades of its
stock. We also took advantage of market volatility to add to or initiate
positions in Newfield Exploration Co., Waters Corp., Gemstar International Group
Ltd., Novellus Systems Inc., Intuit Inc., and Uniphase Corp.
Seven companies fell from the fund's top 10 holdings as their shares declined in
value. These included Atwood Oceanics Inc. and Barrett Resources Corp., two
energy firms adversely affected by lower oil prices. Due to investor concerns
about slowing economic growth, the stock prices of Komag Inc., Etec Systems
Inc., Tekelec, Carpenter Technology Corp., and Tommy Hilfiger Corp. fell.
Looking forward, we are optimistic about the prospects for small-cap stocks.
Although shares of small-cap companies have been out of favor for the past few
years, they may substantially outperform large cap stocks in the future.
Following the U.S. bear markets of 1974 and 1990, small-cap stocks performed
better than large-caps for a time. In our opinion, the same could be true again
when economies worldwide have stabilized.
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1998, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the fund's portfolio composition. Although historical performance
is no guarantee of future results, these insights may help you understand our
investment and management philosophy.
Of course, there are risks involved in investing in a fund seeking long-term
growth from small or relatively new or unseasoned companies. These risks, which
include relatively small revenues, limited product lines and small market share,
are further discussed in the fund's prospectus.
We thank you for your participation in Franklin Small Cap Growth Fund and look
forward to serving you in the future. Please feel free to contact us with your
questions or comments.
Sincerely,
/s/ Edward B. Jamieson
Portfolio Manager
Franklin Small Cap Growth Fund
PERFORMANCE SUMMARY
Class I
Franklin Small Cap Growth Fund - Class I posted a -23.79% cumulative total
return for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge. 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 table on page 51, the fund delivered a +166.43% cumulative total return
since inception on February 14, 1992.
The fund's share price, as measured by net asset value, decreased $6.17, from
$25.93 on April 30, 1998, to $19.76 on October 31, 1998. During the reporting
period, shareholders did not receive any distributions. Distributions will vary
depending on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
Performance
Franklin Small Cap Growth Fund - Class I
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR 3-YEAR 5-YEAR (2/14/92)
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -16.94% 32.37% 106.92% 166.43%
AVERAGE ANNUAL TOTAL RETURN2 -21.72% 7.66% 14.29% 14.70%
VALUE OF $10,000 INVESTMENT3 $7,828 $12,477 $19,497 $25,111
10/31/94 10/31/95 10/31/96 10/31/97 10/31/98
- --------------------------------------------------------------------------------
ONE-YEAR TOTAL RETURN4 16.38% 34.31% 24.85% 27.65% -16.94%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and has been restated to reflect the
current, maximum 5.75% initial sales charge. Prior to August 3, 1998, fund
shares were offered at a lower initial sales charge; thus, actual returns may
differ.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and have been restated to reflect the current,
maximum 5.75% initial sales charge. Prior to August 3, 1998, fund shares were
offered at a lower initial sales charge; thus, actual returns may differ.
4. One-year total return represents the change in value of an investment over
the indicated periods ended on the specified dates and does not include the
initial sales charge. Past expense reductions by the fund's manager increased
the fund's total returns. Without this waiver, the fund's total return would
have been lower.
All calculations assume reinvestment of all distributions at net asset value.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the economic,
social and political climates of countries where the fund invests. You may have
a gain or loss when you sell your shares.
Class II
Franklin Small Cap Growth Fund - Class II posted a -24.04% cumulative total
return for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include sales charges. We have always maintained a
long-term perspective when managing the fund, and we encourage shareholders to
view their investments in a similar manner. As you can see from the table on
page 53, the fund delivered a +26.04% cumulative total return since inception on
October 2, 1995.
The fund's share price, as measured by net asset value, decreased $6.15, from
$25.58 on April 30, 1998, to $19.43 on October 31, 1998. During the reporting
period, shareholders did not receive any distributions. Distributions will vary
depending on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
Performance
Franklin Small Cap Growth Fund - Class II
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR 3-YEAR (10/2/95)
- ----------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -17.52% 29.48% 26.04%
AVERAGE ANNUAL TOTAL RETURN2 -19.14% 8.64% 7.45%
VALUE OF $10,000 INVESTMENT3 $8,086 $12,822 $12,477
10/31/96 10/31/97 10/31/98
- ----------------------------------------------------------------------------
ONE-YEAR TOTAL RETURN4 23.96% 26.64% -17.52%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge applicable to shares
redeemed within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include sales charges.
4. One-year total return represents the change in value of an investment over
the indicated periods ended on the specified dates and does not include the
initial sales charge.
All calculations assume reinvestment of all distributions at net asset value.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the social,
economic and political climates of countries where the fund invests. You may
have a gain or loss when you sell your shares.
Advisor Class
Franklin Small Cap Growth Fund - Advisor Class posted a -23.65% cumulative total
return for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions.
The fund's share price, as measured by net asset value, decreased $6.15, from
$26.00 on April 30, 1998, to $19.85 on October 31, 1998. During the reporting
period, shareholders did not receive any distributions. Distributions will vary
depending on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
Performance
Franklin Small Cap Growth Fund - Advisor Class
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR* 3-YEAR* 5-YEAR* (2/14/92)*
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -16.60% 33.18% 108.18% 168.06%
AVERAGE ANNUAL TOTAL RETURN1 -16.60% 10.02% 15.79% 15.82%
VALUE OF $10,000 INVESTMENT2 $8,340 $13,318 $20,818 $26,806
10/31/94 10/31/95 10/31/96 10/31/97 10/31/98
- --------------------------------------------------------------------------------
ONE-YEAR TOTAL RETURN*,3 16.38% 34.31% 24.85% 27.91% -16.60%
*On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I sales
charge, but including the effect of Class I expenses, including Rule 12b-1 fees;
and (b) for periods after January 1, 1997, figures reflect actual Advisor Class
performance, including the deduction of all fees and expenses applicable only to
that class. Since January 2, 1997 (commencement of sales), the cumulative total
return of Advisor Class shares was 1.57%.
1. Cumulative total return represents the change in value of an investment over
the periods indicated. Average annual total return represents the average annual
change in value of an investment over the periods indicated.
2. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated.
3. One-year total return represents the change in value of an investment over
the periods ended on the specified dates.
Past expense reductions by the fund's manager increased the fund's total
returns. Without this waiver, the fund's total return would have been lower.
All calculations assume reinvestment of all distributions at net asset value.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the social,
economic and political climates of countries where the fund invests. You may
have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
FRANKLIN STRATEGIC INCOME FUND
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 109 of
this report.
Your Fund's Goal: Franklin Strategic Income Fund seeks a high level of current
income, with capital preservation 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, preferred stock, common stock that pays dividends, and
income-producing securities convertible into common stock of such companies.
Although domestic inflation remained in check during this reporting period, the
financial markets recently experienced increased volatility as a result of
several factors. Concerns regarding the financial health of certain emerging
markets, including Russia, precipitated much of the capital markets' initial
downward movement. Subsequently, an outlook for slowing global economic growth
combined with the well-publicized difficulties of various financial institutions
caused a "flight to quality" toward U.S. Treasuries and reduced liquidity for
lower-rated, higher-risk securities.
By diversifying across the six distinct asset classes listed above in the fund's
goal, Franklin Strategic Income Fund was able to lessen the overall impact from
this price volatility. Anticipating declining market stability, the fund
increased its exposure to U.S. government securities, while moderately reducing
its weighting in the equity-sensitive convertible securities market during the
first half of the reporting period. Nonetheless, the fund's cumulative total
return over the past six months was still negatively impacted, declining by
3.11%. At the same time, valuations in such sectors as mortgage-backed
securities, high yield corporate bonds and emerging market fixed-income
securities became more attractively priced. The fund took advantage of rather
dramatic price fluctuations and increased its exposure to those countries and
companies, within impacted sectors, that maintained favorable fundamental
outlooks, believing that they should provide attractive, long-term risk-adjusted
returns to our shareholders.
Portfolio Breakdown
Franklin Strategic Income Fund
Based on Total Net Assets
APRIL 30, 1998 OCTOBER 31, 1998
- -----------------------------------------------------------------------
High Yield Corporate Bonds 28.0% 29.2%
Emerging Market Bonds 23.7% 23.6%
International Bonds 15.9% 14.2%
Convertible Securities 10.1% 7.1%
Mortgage Securities 7.6% 10.5%
U.S. Government Bonds 4.8% 8.6%
Preferred Stock (Non-Convertible) 0.6% 0.2%
Cash & Equivalents 9.3% 6.6%
High Yield Corporate Bonds - During the second half of the reporting period, the
high yield sector came under pressure due to concerns about a domestic economic
slowdown and a decline in trading liquidity. We selectively added to positions
that we viewed as fundamentally sound but that had, nonetheless, experienced
price declines resulting from this broader sector sell-off. At the beginning of
fourth quarter 1998, credit measures for high yield corporate issuers remained
generally healthy. The fund attempted to focus its high yield security holdings
on names we believed were better positioned to weather a temporary economic
slowdown. At the end of the period the portfolio remained moderately
overweighted in the high yield sector, due to its favorable, long-term total
return prospects and currently depressed pricing levels.
The fund maintained meaningful exposure to the telecommunications sectors, as
the forecasted growth in demand for telephone and data telecommunications
services over the next several years appeared robust. During the period, we
added to existing positions in competitive local exchange carriers Intermedia
Communications and Nextlink Communications, Inc., as well as fiber-optic network
provider Level 3 Communications, as these companies' longer-term credit
improvement outlook remained positive. Given the recent concerns about an
economic slowdown, certain of the portfolio's more defensive holdings provided
strong relative returns. Ball Corp., a recent fund purchase, is one of the
world's largest beverage can manufacturers. The steady credit improvement
expectation for this more recession-resistant company bolstered its securities'
prices. We also added to our position in Cablevision Systems Corp. (CSC
Holdings), one of the country's largest cable companies. The prospect for
increasing sales growth from new services, as well as the utility-like nature of
the company's base revenue streams, has supported Cablevision's security prices
over the past several months. Finally, during the period Sullivan Broadcasting,
a television broadcaster, was purchased by Sinclair Broadcasting. As a result of
this transaction, the fund was able to sell its Sullivan bonds and common shares
back to the company at a substantial premium.
Emerging Markets - During the past six months, concerns ignited by Russia's
financial crisis depressed prices in the emerging market fixed-income sector.
Although this decline was related partly to concerns about slowing global
economic growth, technical factors, including trading illiquidity and the flight
to quality across capital markets, appeared to drive much of the sell-off.
Despite a moderate reduction in the portfolio's emerging markets exposure prior
to the August 1998 decline, the fairly substantial, across-the-board drop in
emerging market bond prices negatively impacted the fund's performance.
Once again, the fund took advantage of this increased volatility to add
selectively to its positions in those countries with more favorable, long-term
fundamental outlooks. We focused this sector's core investments in Latin
America. During the period we increased our positions in Mexico and Argentina,
while reducing our exposure to Brazil and Venezuela. We had no exposure to
Russia prior to its publicized difficulties in August, but subsequently
initiated a small position in Russian bonds at significantly discounted levels.
The fund was moderately overweighted in this sector at the end of the reporting
period, although volatility is expected to remain relatively high over the near
term. We believe that, at recent, depressed price levels, the long-term prospect
for total return from selected countries in this sector appears favorable.
TOP FIVE COUNTRY HOLDINGS
Based on Total Net Assets
10/31/98
U.S. 51.46%
Mexico 6.68%
Argentina 3.78%
United Kingdom 3.50%
Germany 3.32%
International - The decline in global interest rates helped drive returns in
Franklin Strategic Income Fund's international holdings. Additionally, the fund
continued to selectively hedge its non-dollar foreign currency exposure in an
attempt to maximize its dollar-based total returns. Toward the end of the period
we moderately reduced hedged international positions, as the likelihood for
further, significant dollar appreciation began to decline. Over the past six
months, the portfolio's exposure to the international bond sector remained
relatively constant, as the opportunities to benefit from currency fluctuations
were somewhat offset by the relatively low, nominal interest rates offered in
many developed foreign countries.
Within Europe, Germany remained the fund's top holding. We increased exposure to
the U. K. and Belgium while reducing our relative position sizes in Spain,
Denmark and Sweden. In the dollar-bloc countries, the fund reduced its
weightings in Canada, while maintaining its exposure to Australia and New
Zealand.
Convertible Securities - The broad domestic equity markets experienced a
meaningful correction during the period, as the prospect for slower corporate
earnings growth caused stock market valuations to recede from their historically
high levels. The fund reduced its exposure to the convertible sector, prior to
its August decline, as the higher equity valuations limited the number of
attractive investment candidates. Although we held a moderately underweighted
position in this sector at the end of the reporting period, recent declines in
the equity and convertible securities markets may provide an opportunity to
increase our holdings at more attractive valuations going forward.
During the reporting period, the fund initiated a position in Texas Utilities
Co., one of the largest electric companies in the U.S. As a result of an
improving operating outlook and declining interest rates, this investment has
already performed strongly for the portfolio. Another new convertible sector
holding, Omnicare, is the country's largest independent pharmacy operator. We
believe Omnicare is well-positioned to benefit from growth in its target market
over the next several years, and the company's recent stock price declines
provided an attractive entry point to purchase its convertible securities.
U.S. Government Securities - The combination of modest inflationary pressures,
the prospect of slowing economic growth and a flight to quality across the
capital markets led to a significant U.S. interest rate decline over the past
six months. In the first half of the reporting period, the fund nearly doubled
its exposure to the U.S. government sector, as the prospect for further interest
rate declines appeared more evident. However, with subdued inflationary
pressures, the portfolio remained modestly underweighted in this sector at the
end of the period because, at recent interest-rate levels, the total return
potential for U.S. government securities appeared more limited.
U.S. Mortgage-Backed Securities - During the reporting period, increasing
refinancing risk and mortgage-backed securities' lower trading liquidity offset
the positive effect of lower domestic interest rates. Consequently, yields for
domestic mortgage-backed securities relative to Treasuries neared record highs
during the period, and the fund took advantage of this spread widening to
moderately increase its exposure to the sector.
Looking Forward
While global economic growth may slow in the fourth quarter of 1998 and early
1999, the outlook for subdued inflation, combined with an eventual return to
normal liquidity levels in the capital markets, should bolster securities of
fundamentally sound countries and companies. As the markets begin to stabilize,
the fund should benefit from its significant positions in selected high yield,
emerging market and mortgage-backed securities. Although we anticipate global
developed-market interest rates will remain low over the near term, their recent
levels promise more limited total return potential, accounting for the
portfolio's moderate exposure to the U.S. government and developed international
sectors. In the future, we will continue to look for opportunities to enhance
long-term returns, while reducing overall volatility by actively managing the
fund's sector and security allocations.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of October 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
Sincerely,
/s/ Christopher J. Molumphy
Portfolio Manager
Franklin Strategic Income Fund
PERFORMANCE SUMMARY
Class I
Franklin Strategic Income Fund - Class I produced a -3.11% cumulative total
return for the six-month period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge. 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 table on page 64, the fund delivered a +32.08% cumulative total return for
the three-year period ended October 31, 1998.
The fund's share price, as measured by net asset value, decreased 77 cents, from
$11.24 on April 30, 1998, to $10.47 on October 31, 1998. During the six-month
reporting period, shareholders received income distributions totaling 42.2 cents
($0.422) per share. Distributions will vary depending on the fund's income, and
past distributions are not indicative of future trends.
DIVIDEND DISTRIBUTIONS
Franklin Strategic Income Fund
Class I
5/1/98-10/31/98
Month Dividend per share
May 7.5 cents
June 7.5 cents
July 6.8 cents
August 6.8 cents
September 6.8 cents
October 6.8 cents
Total 42.2 cents
Performance
Franklin Strategic Income Fund - Class I
Periods ended 10/31/98
SINCE
INCEPTION
1-YEAR 3-YEAR (6/1/94)
- ------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 +2.69% +32.08% +55.44%
AVERAGE ANNUAL TOTAL RETURN2 -1.65% +8.14% +9.43%
VALUE OF $10,000 INVESTMENT3 $9,835 $12,646 $14,889
DISTRIBUTION RATE4 7.47%
30-DAY STANDARDIZED YIELD5 8.05%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the maximum 4.25% initial
sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the sales charge.
4. Distribution rate is based on an annualization of October's 6.8 cent per
share monthly dividend and the maximum offering price of $10.93 on October 31,
1998. 5. Yield, calculated as required by the SEC, is based on the earnings of
the fund's portfolio for the 30 days ended October 31, 1998.
The fund's manager has agreed in advance to waive a portion of its management
fees, which reduces expenses and increases distribution rate, yield and total
return to shareholders. Without these reductions, the fund's distribution rate
and total return would have been lower and the yield for the period would have
been 7.63%. The fee waiver may be discontinued at any time upon notice to the
fund's Board of Trustees.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, currency volatility and the social,
economic and political climates of countries where investments are made.
Emerging markets involve heightened risks related to the same factors, in
addition to those associated with their relatively small size and lesser
liquidity. You may have a gain or loss when you sell your shares.
Class II
Franklin Strategic Income Fund - Class II produced a -3.50% cumulative total
return from May 1, 1998, the date these shares became available, to the end of
the reporting period on October 31, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of all distributions,
and does not include sales charges.
The fund's share price, as measured by net asset value, decreased 72 cents, from
$11.19 on May 1, 1998, to $10.47 on October 31, 1998. During the reporting
period, shareholders received income distributions totaling 32.8 cents ($0.328)
per share. Distributions will vary depending on the fund's income, and past
distributions are not indicative of future trends.
DIVIDEND DISTRIBUTIONS
Franklin Strategic Income Fund
Class I
6/1/98-10/31/98
Month Dividend per share
June 7.12 cents
July 6.42 cents
August 6.42 cents
September 6.42 cents
October 6.42 cents
Total 32.8 cents
Performance
Franklin Strategic Income Fund - Class II
Period ended 10/31/98
SINCE INCEPTION
(5/1/98)
- -----------------------------------------------------------------
CUMULATIVE TOTAL RETURN1 -3.50%
AGGREGATE TOTAL RETURN2 -5.37%
VALUE OF $10,000 INVESTMENT3 $9,463
DISTRIBUTION RATE4 7.28%
30-DAY STANDARDIZED YIELD5 7.91%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Aggregate total return represents the average annual change in value of an
investment over the periods indicated and includes the 1.0% initial sales charge
and the 1.0% contingent deferred sales charge, as applicable. Since the fund has
existed for less than one year, the figures represent aggregate total return
from inception; therefore, average annual total returns are not provided.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the period indicated and include sales charges.
4. Distribution rate is based on an annualization of October's 6.42 cent per
share monthly dividend and the maximum offering price of $10.58 on October 31,
1998.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended April 30, 1998.
The fund's manager has agreed in advance to waive a portion of its management
fees and to make certain payments to reduce expenses. If the manager had not
taken this action, the fund's distribution rate and total return would have been
lower and the yield for the period would have been 7.49%. The fee waiver may be
discontinued at any time upon notice to the fund's Board of Trustees.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, currency volatility and the social,
economic and political climates of countries where investments are made.
Emerging markets involve heightened risks related to the same factors, in
addition to those associated with their relatively small size and lesser
liquidity. You may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Biotechnology Discovery Fund
Class I
---------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
--------------------
(unaudited) 19981
---------------------------------------
<S> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ..................................... $26.89 $25.00
---------------------------------------
Income from investment operations:
Net investment loss ..................................................... (.09) (.05)
Net realized and unrealized gains (losses) .............................. (3.87) 1.99
---------------------------------------
Total from investment operations ......................................... (3.96) 1.94
---------------------------------------
Less distributions from net realized gains ............................... -- (.05)
---------------------------------------
Net asset value, end of period ........................................... $22.93 $26.89
=======================================
Total return*............................................................. (14.73%) 7.78%
Ratios/supplemental data
Net assets, end of period (000's)......................................... $68,823 $73,546
Ratios to average net assets:
Expenses ................................................................ 2.00%** 1.50%**
Expenses excluding waiver and payments by affiliate ..................... 2.00%** 1.61%**
Net investment loss ..................................................... (.76%)** (.44%)**
Portfolio turnover rate .................................................. 67.33% 75.50%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
1For the period September 15, 1997 (effective date) to April 30, 1998.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1998 (unaudited)
Franklin Biotechnology Discovery Fund SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
a Common Stocks 80.6%
Biotechnology 50.4%
Agouron Pharmaceuticals, Inc. ................................................. 10,000 $ 387,500
Alteon, Inc. .................................................................. 115,000 395,313
Amgen, Inc. ................................................................... 35,300 2,773,256
Chiron Corp. .................................................................. 135,000 3,037,500
CuraGen Corp. ................................................................. 151,000 868,250
GelTex Pharmaceuticals, Inc. .................................................. 40,000 1,000,000
Genentech, Inc. ............................................................... 20,000 1,432,500
Genzyme Corp. (General Division) .............................................. 40,000 1,682,500
Gilead Sciences, Inc. ......................................................... 100,000 2,837,500
IDEC Pharmaceuticals Corp. .................................................... 70,000 2,091,250
ImClone Systems, Inc. ......................................................... 100,000 887,500
LifeCell Corp. ................................................................ 237,500 1,076,184
Ligand Pharmaceuticals, Inc., Class B.......................................... 200,000 2,175,000
Neurogen Corp. ................................................................ 107,500 1,464,688
SangStat Medical Corp. ........................................................ 40,000 830,000
Synaptic Pharmaceutical Corp. ................................................. 140,000 2,178,750
Texas Biotechnology Corp. ..................................................... 350,000 1,268,750
TRANSGENE SA, Sponsored ADR (France)........................................... 125,000 1,828,125
Triangle Pharmaceuticals, Inc. ................................................ 150,000 1,743,750
Vertex Pharmaceuticals, Inc. .................................................. 75,000 1,978,125
Vical, Inc. ................................................................... 115,000 1,495,000
ViroPharma, Inc. .............................................................. 70,000 1,268,750
-----------
34,700,191
-----------
Major Pharmaceuticals 4.2%
Chiroscience Group Plc. (United Kingdom)....................................... 623,000 2,921,258
-----------
Medical Specialties 14.8%
Anesta Corp. .................................................................. 40,600 677,513
Aradigm Corp. ................................................................. 116,600 1,355,475
DepoTech Corp. ................................................................ 182,300 267,762
Heska Corp. ................................................................... 210,000 1,036,875
Inhale Therapeutic Systems..................................................... 125,000 3,281,250
Molecular Devices Corp. ....................................................... 52,500 997,500
SYNSORB Biotech, Inc. (Canada)................................................. 278,000 557,078
Zonagen, Inc. ................................................................. 125,000 1,984,375
-----------
10,157,828
-----------
Other Pharmaceuticals 9.4%
Algos Pharmaceutical Corp. .................................................... 52,500 1,345,313
Aviron......................................................................... 146,000 2,774,000
Cell Therapeutics, Inc. ....................................................... 137,500 309,375
CollaGenex Pharmaceuticals, Inc. .............................................. 25,000 243,750
Medicis Pharmaceutical Corp., Class A.......................................... 30,000 1,503,750
Nastech Pharmaceutical, Inc. .................................................. 50,000 250,000
-----------
6,426,188
-----------
Precision Instruments 1.8%
The Perkin-Elmer Corp. ........................................................ 15,000 1,264,688
-----------
Total Long Term Investments (Cost $63,266,852)................................. 55,470,153
-----------
PRINCIPAL
Franklin Biotechnology Discovery Fund AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
c Repurchase Agreement 12.5%
Joint Repurchase Agreement, 5.350%, 11/02/98,
(Maturity Value $8,608,990) (Cost $8,605,154).................................. $8,605,154 $ 8,605,154
Barclays Capital Group, Inc. (Maturity Value $884,867)
Chase Securities, Inc. (Maturity Value $884,867)
CIBC Wood Gundy Securities Corp. (Maturity Value $884,867)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $884,867)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $884,867)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $645,187)
Greenwich Capital Markets, Inc. (Maturity Value $884,867)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $884,867)
Paribas Corp. (Maturity Value $884,867)
SBC Warburg Dillon Read, Inc. (Maturity Value $884,867)
Collateralized by U.S. Treasury Bills and Notes
-----------
Total Investments (Cost $71,872,006) 93.1%..................................... 64,075,307
Other Assets, less Liabilities 6.9%............................................ 4,747,247
-----------
Net Assets 100.0%.............................................................. $68,822,554
===========
aNon-income producing.
cSee Note 1(c) regarding joint repurchase agreement.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Blue Chip Fund
Class I
---------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
---------------------
(unaudited) 1998 19971
---------------------------------------
<S> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period .................................. $12.46 $10.85 $10.00
---------------------------------------
Income from investment operations:
Net investment income ................................................ .01 .09 .09
Net realized and unrealized gains (losses) ........................... (.35) 1.67 .82
---------------------------------------
Total from investment operations....................................... (.34) 1.76 .91
---------------------------------------
Less distributions from:
Net investment income ................................................ -- (.06) (.06)
Net realized gains ................................................... -- (.09) --
---------------------------------------
Total distributions ................................................... -- (.15) (.06)
---------------------------------------
Net asset value, end of period ........................................ $12.12 $12.46 $10.85
=======================================
Total return*.......................................................... (2.73%) 16.41% 9.14%
Ratios/supplemental data
Net assets, end of period (000's) ..................................... $22,323 $16,836 $5,600
Ratios to average net assets:
Expenses ............................................................. 1.25%** 1.25% 1.25%**
Expenses excluding waiver and payments by affiliate .................. 1.64%** 1.95% 2.22%**
Net investment income ................................................ .48%** 1.04% 1.07%**
Portfolio turnover rate ............................................... 11.12% 57.67% 11.14%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
1For the period June 3, 1996 (effective date) to April 30, 1997.
See notes to financial statement
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1998 (unaudited)
Franklin Blue Chip Fund COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks 86.8%
Consumer Durables 2.1%
Sony Corp. ........................................................ Japan 3,700 $ 234,961
Toyota Motor Corp. ................................................ Japan 10,000 240,281
-----------
475,242
-----------
Consumer Non-Durables 17.1%
Bestfoods.......................................................... United States 6,200 337,900
Gillette Co. ...................................................... United States 8,200 368,488
Kao Corp. ......................................................... Japan 12,000 243,028
L'OREAL............................................................ France 365 208,543
Nestle, SA, Registered Shares...................................... Switzerland 185 393,456
Nike, Inc., Class B................................................ United States 5,600 244,650
Panamerican Beverages, Inc., A Shares.............................. Mexico 10,400 210,600
PepsiCo, Inc. ..................................................... United States 6,600 222,750
Philip Morris Cos., Inc. .......................................... United States 6,500 332,313
Procter & Gamble Co. .............................................. United States 4,200 373,275
The Coca-Cola Co. ................................................. United States 6,800 459,850
Wm. Wrigley Jr. Co. ............................................... United States 5,300 428,969
-----------
3,823,822
-----------
Consumer Services 2.2%
Disney (Walt) Co. ................................................. United States 9,400 253,213
McDonald's Corp. .................................................. United States 3,400 227,375
-----------
480,588
-----------
Electronic Technology 10.2%
aApplied Materials, Inc. ........................................... United States 7,400 256,688
aCisco Systems, Inc. ............................................... United States 3,975 250,425
Compaq Computer Corp. ............................................. United States 4,500 142,312
Ericsson (L.M.) Telecommunications, Sponsored ADR.................. Sweden 14,500 328,063
Hewlett-Packard Co. ............................................... United States 5,400 325,013
Intel Corp. ....................................................... United States 4,000 356,750
Lucent Technologies, Inc. ......................................... United States 722 57,895
Molex, Inc. ....................................................... United States 8,500 303,343
Motorola, Inc. .................................................... United States 4,900 254,800
-----------
2,275,289
-----------
Energy Minerals 5.7%
British Petroleum Co., Plc., Sponsored ADR......................... United Kingdom 3,357 296,885
Exxon Corp. ....................................................... United States 5,200 370,500
Royal Dutch Petroleum Co., New York Shares ........................ Netherlands 7,800 384,150
YPF, SA, Sponsored ADR ............................................ Argentina 7,300 211,244
-----------
1,262,779
-----------
Finance 11.7%
American International Group, Inc. ................................ United States 6,912 589,248
Citigroup, Inc. ................................................... United States 5,250 247,078
Fannie Mae......................................................... United States 5,300 375,306
HSBC Holding, Plc. ................................................ United Kingdom 15,989 372,989
Finance (cont.)
J.P. Morgan & Co., Inc. ........................................... United States 2,200 $ 207,350
Merrill Lynch & Co., Inc. ......................................... United States 3,900 231,075
The Charles Schwab Corp. .......................................... United States 7,000 335,562
Tokio Marine & Fire Insurance Co., Sponsored ADR................... Japan 4,400 253,000
-----------
2,611,608
-----------
Health Technology 12.1%
Abbott Laboratories ............................................... United States 5,000 234,688
Eli Lilly & Co. ................................................... United States 4,400 356,125
Johnson & Johnson.................................................. United States 4,000 326,000
Medtronic, Inc. ................................................... United States 5,600 364,000
Merck & Co., Inc. ................................................. United States 2,900 392,225
Novartis, AG....................................................... Switzerland 230 414,430
Roche Holding, AG.................................................. Switzerland 28 326,699
Smithkline Beecham, Plc. .......................................... United Kingdom 23,186 288,883
-----------
2,703,050
-----------
Industrial Services 4.6%
aThe AES Corp. ..................................................... United States 11,000 450,312
Brambles Industries, Ltd. ......................................... Australia 12,700 277,302
Schlumberger, Ltd. ................................................ United States 6,000 315,000
-----------
1,042,614
-----------
Non-Energy Minerals .8%
De Beers Consolidated Mines, AG, ADR .............................. South Africa 12,200 175,375
-----------
Process Industries 6.1%
Avery Dennison Corp. .............................................. United States 9,300 385,369
Hutchison Whampoa, Ltd. ........................................... Hong Kong 38,000 272,270
Monsanto Co. ...................................................... United States 5,100 207,188
Praxair, Inc. ..................................................... United States 5,900 237,475
Sigma-Aldrich Corp. ............................................... United States 8,200 253,432
-----------
1,355,734
-----------
Producer Manufacturing 4.6%
General Electric Co. .............................................. United States 5,400 472,500
Minnesota Mining and Manufacturing Co. ............................ United States 4,200 336,000
Xerox Corp. ....................................................... United States 2,200 213,124
-----------
1,021,624
-----------
Retail Trade .8%
Wal-Mart Stores, Inc. ............................................. United States 2,600 179,400
-----------
Technology Services 3.8%
First Data Corp. .................................................. United States 9,600 254,400
aMicrosoft Corp. ................................................... United States 1,200 127,050
aOracle Corp. ...................................................... United States 8,500 251,281
SAP, AG............................................................ Germany 500 213,742
-----------
846,473
-----------
Utilities and Telecommunications 5.0%
aAirTouch Communications, Inc. ..................................... United States 3,400 $ 190,400
Bellsouth Corp. ................................................... United States 2,300 183,569
Enron Corp. ....................................................... United States 5,800 305,950
Telefonica de Espana, Sponsored ADR ............................... Spain 1,591 217,868
VEBA, AG........................................................... Germany 4,100 225,027
-----------
................................................................... 1,122,814
-----------
Total Long Term Investments (Cost $17,474,285)..................... 19,376,412
-----------
PRINCIPAL
AMOUNT
---------
c Repurchase Agreement 13.6%
Joint Repurchase Agreement, 5.350%, 11/02/98, (Maturity Value $3,029,704)
(Cost $3,028,354).................................................... United States $3,028,354 3,028,354
Barclays Capital Group, Inc. (Maturity Value $311,393)
Chase Securities, Inc. (Maturity Value $311,393)
CIBC Wood Gundy Securities Corp. (Maturity Value $311,393)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $311,393)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $311,393)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $227,167)
Greenwich Capital Markets, Inc. (Maturity Value $311,393)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $311,393)
Paribas Corp. (Maturity Value $311,393)
SBC Warburg Dillon Read, Inc. (Maturity Value $311,393)
Collateralized by U.S. Treasury Bills and Notes
-----------
Total Investments (Cost $20,502,639) 100.4%........................ 22,404,766
Other Assets, less Liabilities (.4%)............................... (82,262)
-----------
Net Assets 100.0%.................................................. $22,322,504
===========
aNon-income producing.
cSee Note 1(c) regarding joint repurchase agreement.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin California Growth Fund
Class I
---------------------------------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
----------------------------------------------------
(unaudited) 1998 1997 1996 1995 1994
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period $24.97 $19.35 $18.26 $14.03 $12.05 $10.21
---------------------------------------------------------------------
Income from investment operations:
Net investment income ............. .06 .14 .13 .20 .16 .14
Net realized and unrealized gains (losses) (3.37) 6.48 1.51 6.03 3.04 2.43
---------------------------------------------------------------------
Total from investment operations ... (3.31) 6.62 1.64 6.23 3.20 2.57
---------------------------------------------------------------------
Less distributions from:
Net investment income ............. (.04) (.14) (.12) (.23) (.12) (.15)
Net realized gains ................ -- (.86) (.43) (1.77) (1.10) (.58)
---------------------------------------------------------------------
Total distributions ................ (.04) (1.00) (.55) (2.00) (1.22) (.73)
---------------------------------------------------------------------
Net asset value, end of period ..... $21.62 $24.97 $19.35 $18.26 $14.03 $12.05
=====================================================================
Total return*....................... (13.29%) 34.98% 8.94% 47.42% 29.09% 25.55%
Ratios/supplemental data
Net assets, end of period (000's) .. $661,395 $721,254 $282,898 $81,175 $13,844 $4,646
Ratios to average net assets:
Expenses .......................... 1.04%** .99% 1.08% .71% .25% .09%
Expenses excluding waiver and payments
by affiliate........................ 1.04%** .99% 1.08% 1.09% 1.27% 1.89%
Net investment income ............. .60%** .67% .84% 1.42% 1.63% 1.16%
Portfolio turnover rate ............ 17.62% 48.52% 44.81% 61.82% 79.52% 135.12%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
Prior to May 1, 1994, dividends from net investment income were reinvested at
the offering price.
**Annualized.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
Franklin California Growth Fund (cont.)
Class II
-----------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
----------------------
(unaudited) 1998 19971
-----------------------------------------
<S> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period .............................. $24.81 $19.27 $18.05
-----------------------------------------
Income from investment operations:
Net investment income (loss) ..................................... (.01) -- .05
Net realized and unrealized gains (losses) ....................... (3.35) 6.43 1.65
-----------------------------------------
Total from investment operations .................................. (3.36) 6.43 1.70
-----------------------------------------
Less distributions from:
Net investment income ............................................ -- (.03) (.05)
Net realized gains ............................................... -- (.86) (.43)
-----------------------------------------
Total distributions ............................................... -- (.89) (.48)
-----------------------------------------
Net asset value, end of period .................................... $21.45 $24.81 $19.27
=========================================
Total return*...................................................... (13.58%) 34.02% 9.32%
Ratios/supplemental data
Net assets, end of period (000's) ................................. $125,962 $122,701 $24,556
Ratios to average net assets:
Expenses ......................................................... 1.80%** 1.74% 1.86%**
Net investment income (loss) ..................................... (.16%)** (.10%) .05%**
Portfolio turnover rate ........................................... 17.62% 48.52% 44.81%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
1For the period September 3, 1996 (effective date) to April 30, 1997.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1998 (unaudited)
Franklin California Growth Fund SHARES VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks 90.1%
aCommercial Services 1.8%
fRemedyTemp, Inc., Class A.............................................. 375,000 $ 6,843,750
Robert Half International, Inc. ....................................... 175,000 7,021,875
-----------
13,865,625
-----------
Consumer Durables 3.8%
aActivision, Inc. ....................................................... 350,000 3,696,875
aElectronic Arts, Inc. .................................................. 250,000 10,281,250
K2, Inc. ............................................................... 250,000 2,750,000
Mattel, Inc. ........................................................... 375,000 13,453,125
-----------
30,181,250
-----------
Consumer Non-Durables 2.1%
aAurora Foods, Inc. ..................................................... 150,000 2,625,000
Clorox Co. ............................................................. 110,000 12,017,500
aGolden State Vintners, Inc., Class B.................................... 150,000 1,575,000
-----------
16,217,500
-----------
Consumer Services 2.6%
Disney (Walt) Co. ...................................................... 75,000 2,020,313
aFoodmaker, Inc. ........................................................ 50,000 790,625
aIDG Books Worldwide, Inc. .............................................. 72,600 1,125,300
The McClatchy Co., Class A ............................................. 175,000 5,939,063
United Television, Inc. ................................................ 60,000 6,615,000
aUnivision Communications Inc., Class A ................................. 125,000 3,687,500
-----------
20,177,801
-----------
Electronic Technology 22.3%
a3com Corp. ............................................................. 200,000 7,212,500
aApplied Materials, Inc. ................................................ 150,000 5,203,125
aApplied Micro Circuits Corp. ........................................... 300,000 7,200,000
aCisco Systems, Inc. .................................................... 337,500 21,262,500
aCoherent, Inc. ......................................................... 375,000 4,406,250
aCom21, Inc. ............................................................ 96,900 1,453,500
aComputer Sciences Corp. ................................................ 250,000 13,187,500
aCypress Semiconductor Corp. ............................................ 600,000 6,675,000
aEtec Systems, Inc. ..................................................... 150,000 5,081,250
aFlextronics International Ltd. ......................................... 175,000 9,089,063
Hewlett-Packard Co. .................................................... 175,000 10,532,813
Intel Corp. ............................................................ 100,000 8,918,750
aJavelin Systems, Inc. .................................................. 185,000 1,295,000
aKLA-Tencor Corp. ....................................................... 125,000 4,609,375
Linear Technology Corp. ................................................ 125,000 7,453,125
Northrop Grumman Corp. ................................................. 75,000 5,981,250
aSanmina Corp. .......................................................... 125,000 5,125,000
aSeagate Technology, Inc. ............................................... 375,000 9,890,625
aSolectron Corp. ........................................................ 125,000 7,156,250
aSpectra-Physics Lasers, Inc. ........................................... 176,500 1,318,243
aSun Microsystems, Inc. ................................................. 250,000 14,562,500
Electronic Technology (cont.)
aUniphase Corp. ......................................................... 180,000 $ 8,910,000
aXilinx, Inc. ........................................................... 200,000 8,931,260
-----------
175,454,879
-----------
Energy Minerals 6.2%
Atlantic Richfield Co. (ARCO)........................................... 175,000 12,053,125
Chevron Corp. .......................................................... 175,000 14,262,500
aNuevo Energy Co. ....................................................... 325,000 6,885,938
Ultramar Diamond Shamrock Corp. ........................................ 300,000 8,081,250
Unocal Corp. ........................................................... 225,000 7,635,938
-----------
48,918,751
-----------
Finance 8.7%
aBA Merchant Services, Inc., Class A..................................... 525,000 8,531,250
The Charles Schwab Corp. ............................................... 150,000 7,190,625
Countrywide Credit Industries, Inc. .................................... 225,000 9,717,188
aE*TRADE Group, Inc. .................................................... 150,000 2,700,000
aFreedom Securities Corp. ............................................... 95,900 1,306,638
Mercury General Corp. .................................................. 50,000 2,125,000
aPBOC Holdings, Inc. .................................................... 250,000 2,406,250
Providian Financial Corp. .............................................. 150,000 11,906,250
aSilicon Valley Bancshares............................................... 375,000 7,687,500
The PMI Group, Inc. .................................................... 40,000 2,017,500
Washington Mutual, Inc. ................................................ 168,750 6,317,578
Zenith National Insurance Corp. ........................................ 250,000 6,390,619
-----------
68,296,398
-----------
Health Services 2.0%
a,fCohr, Inc. ........................................................... 425,000 1,275,000
McKesson Corp. ......................................................... 85,000 6,545,000
aTotal Renal Care Holdings, Inc. ........................................ 325,000 7,962,500
-----------
15,782,500
-----------
Health Technology 4.3%
aChiron Corp. ........................................................... 300,000 6,750,000
aDura Pharmaceuticals, Inc. ............................................. 150,000 1,809,375
aInhale Therapeutic Systems.............................................. 325,000 8,531,250
Mentor Corp. ........................................................... 100,000 1,700,000
aMolecular Devices Corp. ................................................ 200,000 3,800,000
Mylan Laboratories, Inc. ............................................... 181,424 6,247,789
aNanogen, Inc. .......................................................... 175,000 875,000
aThe Cooper Companies, Inc. ............................................. 175,000 4,156,250
-----------
33,869,664
-----------
Industrial Services 3.0%
aCatalytica, Inc. ....................................................... 375,000 6,093,750
aEmcon................................................................... 275,400 963,900
Granite Construction, Inc. ............................................. 325,000 10,826,563
aVarco International, Inc. .............................................. 550,000 5,946,875
-----------
23,831,088
-----------
Process Industries 1.3%
Avery Dennison Corp. ................................................... 250,000 $ 10,359,375
-----------
Producer Manufacturing 2.1%
Reliance Steel & Aluminum Co. .......................................... 225,000 6,960,938
aSimpson Manufacturing Co., Inc. ........................................ 100,000 3,275,000
Superior Industries International, Inc. ................................ 250,000 6,546,875
-----------
16,782,813
-----------
Real Estate 7.2%
Alexandria Real Estate Equities, Inc. .................................. 175,000 4,670,313
AMB Property Corp. ..................................................... 325,000 7,475,000
Arden Realty, Inc. ..................................................... 475,000 10,271,875
Burnham Pacific Properties, Inc. ....................................... 600,000 7,875,000
aCatellus Development Corp. ............................................. 325,000 4,468,750
Innkeepers USA Trust.................................................... 200,000 2,300,000
Irvine Apartment Communities, Inc. ..................................... 200,000 5,250,000
ePacific Retail Trust.................................................... 359,922 3,984,337
Spieker Properties, Inc. ............................................... 300,000 10,350,000
-----------
56,645,275
-----------
aRetail Trade 5.1%
Cost Plus, Inc. ........................................................ 200,000 6,000,000
Costco Co., Inc. ....................................................... 150,000 8,512,500
Federated Department Stores, Inc. ...................................... 75,000 2,882,813
Office Depot, Inc. ..................................................... 250,000 6,250,000
Safeway, Inc. .......................................................... 310,000 14,821,875
Software.net Corp. ..................................................... 200,000 1,850,000
-----------
40,317,188
-----------
aTechnology Services 9.8%
Actuate Software Corp. ................................................. 44,200 469,625
Brio Technology, Inc. .................................................. 74,600 615,450
BroadVision, Inc. ...................................................... 125,000 1,875,000
Clarify, Inc. .......................................................... 250,000 3,406,250
Documentum, Inc. ....................................................... 75,000 2,550,000
EarthLink Network, Inc. ................................................ 50,000 1,925,000
HNC Software, Inc. ..................................................... 300,000 10,087,500
i2 Technologies, Inc. .................................................. 100,000 1,862,500
Inprise Corp. .......................................................... 300,000 1,481,250
Intuit, Inc. ........................................................... 163,800 8,271,900
Micromuse, Inc. ........................................................ 250,000 4,265,625
PeopleSoft, Inc. ....................................................... 50,000 1,059,375
Synopsys, Inc. ......................................................... 325,000 14,706,250
Vantive Corp. .......................................................... 250,000 1,828,125
VERITAS Software Corp. ................................................. 175,000 8,771,875
Wind River Systems, Inc. ............................................... 325,000 14,239,063
-----------
77,414,788
-----------
Transportation 1.8%
Air Express International Corp. ........................................ 350,000 $ 7,350,000
Expeditors International of Washington, Inc. ........................... 200,000 6,775,000
-----------
14,125,000
-----------
Utilities and Telecommunications 6.0%
aAirTouch Communications, Inc. ......................................... 225,000 12,600,000
American States Water Co. .............................................. 168,900 4,433,625
California Water Service Group.......................................... 180,000 4,747,500
Edison International.................................................... 450,000 11,868,750
Sempra Energy........................................................... 512,785 13,332,410
-----------
46,982,285
-----------
Total Common Stocks (Cost $659,758,904)................................. 709,222,180
-----------
Preferred Stocks .6%
Finance .6%
Glenborough Realty Trust, cvt. pfd.,7.75% Series A ..................... 240,000 4,605,000
-----------
Total Preferred Stocks (Cost $6,000,000) ............................... 4,605,000
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
---------
Convertible Bonds .3%
Technology Services .3%
<S> <C> <C>
Activision Inc., cvt. sub. notes, 144A, 6.75%, 1/01/05 ................... $ 3,000,000 2,625,000
------------
Total Convertible Bonds (Cost $3,000,000)................................. 2,625,000
------------
Total Long Term Investments (Cost $668,758,904)........................... 716,452,180
------------
cRepurchase Agreement 8.9%
Joint Repurchase Agreement, 5.350%, 11/02/98,
(Maturity Value $70,202,366) (Cost $70,171,082)........................ 70,171,082 70,171,082
Barclays Capital Group, Inc. (Maturity Value $7,215,685)
Chase Securities, Inc. (Maturity Value $7,215,685)
CIBC Wood Gundy Securities Corp. (Maturity Value $7,215,685)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $7,215,684)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $7,215,684)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $5,261,206)
Greenwich Capital Markets, Inc. (Maturity Value $7,215,684)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $7,215,685)
Paribas Corp. (Maturity Value $7,215,684)
SBC Warburg Dillon Read, Inc. (Maturity Value $7,215,684)
Collateralized by U.S. Treasury Bills and Notes
------------
Total Investments (Cost $738,929,986) 99.9%............................... 786,623,262
Other Assets, less Liabilities .1%........................................ 734,263
------------
Net Assets 100.0% ........................................................ $787,357,525
============
aNon-income producing.
cSee Note 1(c) regarding joint repurchase agreement.
eSee Note 8 regarding restricted securities.
fSee Note 9 regarding holdings of 5% voting securities.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Global Health Care Fund
Class I
-------------------------------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
--------------------------------------------------
(unaudited) 1998 1997 1996 1995 1994
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period .... $19.28 $16.11 $19.34 $11.45 $10.43 $8.88
-------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) ........... (.09) (.14) (.06) .11 .08 .07
Net realized and unrealized gains (losses) (4.06) 4.58 (2.75) 8.96 1.56 1.86
-------------------------------------------------------------------
Total from investment operations ........ (4.15) 4.44 (2.81) 9.07 1.64 1.93
-------------------------------------------------------------------
Less distributions from:
Net investment income .................. -- (.09) (.04) (.13) (.06) (.08)
Net realized gains ..................... -- (1.18) (.38) (1.05) (.56) (.30)
-------------------------------------------------------------------
Total distributions ..................... -- (1.27) (.42) (1.18) (.62) (.38)
-------------------------------------------------------------------
Net asset value, end of period .......... $15.13 $19.28 $16.11 $19.34 $11.45 $10.43
===================================================================
Total return*............................ (21.52%) 28.22% (14.71%) 82.78% 16.33% 21.93%
Ratios/supplemental data
Net assets, end of period (000's) ....... $111,930 $176,545 $150,653 $108,914 $12,906 $5,795
Ratios to average net assets:
Expenses ............................... 1.32%** 1.15% 1.14% .73% .25% .10%
Expenses excluding waiver and payments by affiliate 1.32%** 1.15% 1.14% 1.16% 1.37% 1.74%
Net investment income (loss) ........... (.91%)** (.67%) (.39%) .50% .80% .68%
Portfolio turnover rate ................. 9.97% 66.84% 73.17% 54.78% 93.79% 110.82%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
Prior to May 1, 1994, dividends from net investment income were reinvested at
the offering price.
**Annualized.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
Franklin Global Health Care Fund (cont.)
Class II
--------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
-----------------------
(unaudited) 1998 19971
--------------------------------------------
<S> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ......................... $19.17 $16.07 $17.37
--------------------------------------------
Income from investment operations:
Net investment loss ......................................... (.11) (.20) (.07)
Net realized and unrealized gains (losses) .................. (4.08) 4.48 (.85)
--------------------------------------------
Total from investment operations ............................. (4.19) 4.28 (.92)
--------------------------------------------
Less distributions from net realized gains ................... -- (1.18) (.38)
--------------------------------------------
Net asset value, end of period ............................... $14.98 $19.17 $16.07
============================================
Total return*................................................. (21.86%) 27.22% (5.47%)
Ratios/supplemental data
Net assets, end of period (000's) ............................ $18,806 $25,321 $10,099
Ratios to average net assets:
Expenses .................................................... 2.07%** 1.90% 1.92%**
Net investment loss ......................................... (1.66%)** (1.44%) (1.29%)**
Portfolio turnover rate ...................................... 9.97% 66.84% 73.17%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
1For the period September 3, 1996 (effective date) to April 30, 1997.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1998 (unaudited)
Franklin Global Health Care Fund SHARES VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks 85.7%
aBiotechnology 7.8%
Ligand Pharmaceuticals, Class B............................................... 325,000 $ 3,534,371
Neurogen Corp. ............................................................... 124,600 1,697,675
Noven Pharmaceutical, Inc. ................................................... 113,800 462,313
Vertex Pharmaceuticals, Inc. ................................................. 170,000 4,483,750
------------
10,178,109
------------
Generic Drugs 6.5%
Mylan Laboratories, Inc. ..................................................... 249,000 8,574,938
------------
aHospital/Nursing Management 4.1%
New American Healthcare Corp. ................................................ 170,700 1,813,688
Tenet Healthcare Corp. ....................................................... 125,000 3,492,188
------------
5,305,876
------------
Major Pharmaceuticals 5.2%
Novartis, AG (Switzerland).................................................... 2,900 5,225,418
SmithKline Beecham, Plc., Sponsored ADR (United Kingdom)...................... 25,000 1,593,750
------------
6,819,16
------------
Managed Health Care 1.7%
United Healthcare Corp. ...................................................... 50,000 2,178,125
------------
aMedical Electronics 1.9%
OrthoLogic Corp. ............................................................. 500,000 1,562,500
Somnus Medical Technologies, Inc. ............................................ 290,000 906,250
------------
2,468,750
------------
Medical Specialties 27.8%
aAnesta Corp. ................................................................ 75,000 1,251,563
aBoston Scientific Corp. ..................................................... 50,000 2,721,875
a,fCIMA Labs, Inc. ........................................................... 437,500 1,093,750
Cochlear, Ltd. (Australia).................................................... 225,000 1,134,891
aDepoTech Corp. .............................................................. 350,000 514,080
aESC Medical Systems, Ltd. (Israel)........................................... 430,500 3,497,813
aHeska Corp. ................................................................. 125,000 617,188
aInhale Therapeutic Systems .................................................. 251,400 6,599,250
Mentor Corp. ................................................................. 120,000 2,040,000
aMolecular Devices Corp. ..................................................... 270,000 5,130,000
aSerologicals Corp. .......................................................... 338,650 7,661,956
aZonagen, Inc. ............................................................... 260,000 4,127,500
------------
36,389,866
------------
Medical/Dental Distributors 1.1%
Cardinal Health, Inc. ........................................................ 15,000 1,418,438
------------
aMedical/Nursing Services 12.0%
Pediatrix Medical Group, Inc. ................................................ 62,100 2,895,413
Renal Care Group, Inc. ....................................................... 300,000 8,737,500
Total Renal Care Holdings, Inc. .............................................. 163,200 3,998,400
------------
15,631,313
------------
aOther Pharmaceuticals 4.6%
Algos Pharmaceutical Corp. ................................................... 200,000 $ 5,125,000
Dura Pharmaceuticals, Inc. ................................................... 75,000 904,688
------------
6,029,688
------------
Services To The Health Industry 13.0%
aAccess Health, Inc. ......................................................... 175,000 6,278,124
a,fCohr, Inc. ................................................................ 405,500 1,216,500
HBO & Co. .................................................................... 100,000 2,625,000
aHealthcare Recoveries, Inc. ................................................. 210,000 2,126,250
aPharmaceutical Product Development, Inc. .................................... 100,000 2,700,000
aTransitions Systems, Inc. ................................................... 200,000 2,087,500
------------
17,033,374
------------
Total Long Term Investments (Cost $125,105,897)............................... 112,027,645
------------
PRINCIPAL
AMOUNT
---------
cRepurchase Agreement 11.5%
Joint Repurchase Agreement, 5.350%, 11/02/98, (Maturity Value $15,103,312)
(Cost $15,096,582).............................................................. $15,096,582 15,096,582
Barclays Capital Group, Inc. (Maturity Value $1,552,380)
Chase Securities, Inc. (Maturity Value $1,552,380)
CIBC Wood Gundy Securities Corp. (Maturity Value $1,552,380)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $1,552,380)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $1,552,380)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $1,131,892)
Greenwich Capital Markets, Inc. (Maturity Value $1,552,380)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $1,552,380)
Paribas Corp. (Maturity Value $1,552,380)
SBC Warburg Dillon Read, Inc. (Maturity Value $1,552,380 )
Collateralized by U.S. Treasury Bills and Notes
------------
Total Investments (Cost $140,202,479) 97.2%................................... 127,124,227
Other Assets, less Liabilities 2.8%........................................... 3,611,917
------------
Net Assets 100.0% ............................................................ $130,736,144
============
aNon-income producing.
cSee Note 1(c) regarding joint repurchase agreement.
fSee Note 9 regarding holdings of 5% voting securities.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Global Utilities Fund
Class I
-----------------------------------------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
-----------------------------------------------------------
(unaudited) 1998 1997 1996 1995 1994
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ......... $17.36 $14.46 $14.28 $12.23 $12.60 $11.36
-----------------------------------------------------------------------------
Income from investment operations:
Net investment income ....................... .16 .33 .42 .37 .42 .30
Net realized and unrealized gains (losses)... (2.00) 4.69 1.35 2.39 (.07) 1.28
-----------------------------------------------------------------------------
Total from investment operations.............. (1.84) 5.02 1.77 2.76 .35 1.58
-----------------------------------------------------------------------------
Less distributions from:
Net investment income ....................... (.11) (.37) (.38) (.39) (.36) (.30)
Net realized gains .......................... -- (1.75) (1.21) (.32) (.36) (.04)
-----------------------------------------------------------------------------
Total distributions .......................... (.11) (2.12) (1.59) (.71) (.72) (.34)
-----------------------------------------------------------------------------
Net asset value, end of period ............... $15.41 $17.36 $14.46 $14.28 $12.23 $12.60
=============================================================================
Total return*................................. (10.61%) 37.02% 12.94% 23.27% 3.17% 14.04%
Ratios/supplemental data
Net assets, end of period (000's) ............ $195,108 $226,594 $174,023 $167,225 $119,250 $124,188
Ratios to average net assets:
Expenses .................................... 1.02%** 1.03% 1.00% 1.04% 1.12% .84%
Expenses excluding waiver and payments
by affiliate................................ 1.02%** 1.03% 1.00% 1.04% 1.12% 1.28%
Net investment income ....................... 1.97%** 2.02% 2.82% 2.85% 3.47% 2.95%
Portfolio turnover rate ...................... 26.89% 45.51% 47.55% 50.51% 16.65% 16.28%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
Prior to May 1, 1994, dividends from net investment income were reinvested at
the offering price.
**Annualized.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
Franklin Global Utilities Fund (cont.)
Class II
-------------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
-------------------------------
(unaudited) 1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ................ $17.25 $14.37 $14.24 $12.23
-------------------------------------------------
Income from investment operations:
Net investment income .............................. .10 .24 .32 .37
Net realized and unrealized gains (losses) ......... (1.99) 4.66 1.33 2.32
-------------------------------------------------
Total from investment operations .................... (1.89) 4.90 1.65 2.69
-------------------------------------------------
Less distributions from:
Net investment income .............................. (.08) (.27) (.31) (.36)
Net realized gains ................................. -- (1.75) (1.21) (.32)
-------------------------------------------------
Total distributions ................................. (.08) (2.02) (1.52) (.68)
-------------------------------------------------
Net asset value, end of period ...................... $15.28 $17.25 $14.37 $14.24
=================================================
Total return*........................................ (11.00%) 36.21% 12.04% 22.63%
Ratios/supplemental data
Net assets, end of period (000's) ................... $15,892 $16,324 $8,467 $2,727
Ratios to average net assets:
Expenses ........................................... 1.77%** 1.78% 1.77% 1.81%
Net investment income .............................. 1.22%** 1.29% 1.98% 2.10%
Portfolio turnover rate ............................. 26.89% 45.51% 47.55% 50.51%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1998 (unaudited)
Franklin Global Utilities Fund COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks 89.1%
aElectronic Technology .5%
Applied Micro Circuits Corp. ................................ United States 40,700 $ 976,800
---------
Industrial Services 3.8%
aCogeneration Corp. of America............................... United States 260,500 2,328,219
The AES Corp. ............................................... United States 140,000 5,731,250
---------
8,059,469
---------
Process Industries 2.4%
VEBA, AG .................................................... Germany 60,700 3,331,500
Viag, AG..................................................... Germany 2,600 1,764,521
---------
5,096,021
---------
Producer Manufacturing .3%
Alcatel Alsthom.............................................. France 5,000 556,955
---------
aTechnology Services 1.4%
Equant NV.................................................... Netherlands 69,300 3,031,875
---------
Utilities and Telecommunications 80.7%
aAEM, SpA..................................................... Italy 1,055,000 1,430,923
AGL Resources, Inc. ......................................... United States 29,000 607,188
aAirTouch Communications, Inc. ............................... United States 135,150 7,568,400
Beijing Datang Power Generation Co., Ltd. ................... Hong Kong 509,000 157,707
Bell Atlantic Corp. ......................................... United States 60,000 3,187,500
BSES, Ltd., 144A............................................. India 21,400 263,220
CINergy Corp. ............................................... United States 67,000 2,311,500
Coastal Corp. ............................................... United States 68,000 2,397,000
Companhia Paranaense de Energia-Copel, Sponsored ADR......... Brazil 41,700 323,175
Dominion Resources, Inc. .................................... United States 40,000 1,847,500
Duke Energy Corp. ........................................... United States 95,701 6,190,658
Edison International......................................... United States 150,000 3,956,250
Electricidade de Portugal, SA ............................... Portugal 76,000 1,912,031
Endesa, SA................................................... Spain 110,000 2,767,149
Enron Corp. ................................................. United States 127,000 6,699,250
Entergy Corp. ............................................... United States 77,000 2,213,750
Espoon Sahko Oy, 144A........................................ Finland 195,000 4,547,478
EVN, AG...................................................... Austria 3,360 478,663
Florida Progress Corp. ...................................... United States 90,000 3,774,375
FPL Group, Inc. ............................................. United States 39,000 2,439,938
aGlobal Crossing, Ltd. ....................................... Bermuda 49,500 1,423,125
aGlobal TeleSystems Group, Inc. .............................. United States 145,300 5,821,081
Grupo Iusacell, SA, Series D................................. Mexico 44,400 26,751
aGrupo Iusacell, SA, Series L, Sponsored ADR.................. Mexico 53,200 365,750
Hellenic Telecommunications Organization, SA................. Greece 129,539 2,944,850
Hong Kong Electric Holdings, Ltd. ........................... Hong Kong 687,500 2,520,656
aICG Communications, Inc. .................................... United States 240,000 4,965,000
aIntermedia Communications, Inc. ............................. United States 116,900 2,162,650
aMCI WorldCom, Inc. .......................................... United States 50,000 2,762,500
MDU Resources Group, Inc. ................................... United States 133,200 3,538,125
Utilities and Telecommunications (cont.)
aMillicom International Cellular, SA.......................... Luxembourg 60,000 $ 2,002,500
Montana Power Co. ........................................... United States 46,900 2,031,356
National Fuel Gas Co. ....................................... United States 109,000 5,150,250
National Power, Plc. ........................................ United Kingdom 97,500 845,782
New Century Energies, Inc. .................................. United States 50,000 2,415,625
New Jersey Resources Corp. .................................. United States 125,400 4,820,063
Northwestern Corp. .......................................... United States 191,600 4,730,125
Pacific Gas & Electric Co. .................................. United States 100,000 3,043,750
PacifiCorp................................................... United States 175,000 3,335,938
aPaging Network, Inc. ........................................ United States 175,000 962,500
Pinnacle West Capital Corp. ................................. United States 80,000 3,505,000
Portugal Telecom, SA......................................... Portugal 119,900 5,685,477
PowerGen, Plc. .............................................. United Kingdom 104,626 1,484,920
aPrimus Telecommunications Group, Inc. ....................... United States 203,800 2,254,538
aRural Cellular Corp., Class A................................ United States 95,700 1,148,400
SBC Communications, Inc. .................................... United States 115,800 5,362,988
Scottish Power, Plc. ........................................ United Kingdom 180,000 1,767,927
Sempra Energy................................................ United States 264,668 6,881,368
Southern Co. ................................................ United States 146,500 4,129,469
aSwisscom, AG ................................................ Switzerland 10,100 3,423,476
TECO Energy, Inc. ........................................... United States 100,000 2,762,500
Telecom Italia, SpA ......................................... Italy 1,004,767 5,088,693
Telefonica de Argentina, ADS................................. Argentina 34,200 1,130,738
Telefonica de Espana, Sponsored ADR ......................... Spain 27,110 3,712,376
TNP Enterprises, Inc. ....................................... United States 140,000 4,725,000
Tokyo Electric Power Co. .................................... Japan 48,000 1,215,138
Transportadora de Gas del Sur, SA, Sponsored ADR............. Argentina 179,000 1,845,938
TRICOM, SA, Sponsored ADR.................................... Dominican Republic 150,000 871,875
Videsh Sanchar Nigam, Ltd., Sponsored GDR, 144A.............. India 140,000 1,470,000
Washington Water Power Co. .................................. United States 47,000 884,188
Western Resources, Inc. ..................................... United States 1,700 59,497
............................................................. 170,351,538
-----------
Total Common Stocks (Cost $146,036,866)...................... 188,072,658
-----------
Convertible Preferred Stocks 3.9%
eCMS Energy Trust I, 7.75% cvt. pfd. ........................ United States 35,000 1,892,188
Nortel Inversora, SA, 10.00% cvt. pfd. ...................... Argentina 80,000 4,510,000
Texas Utilities Co., 9.25% cvt. pfd. ........................ United States 31,000 1,747,625
---------
Total Convertible Preferred Stocks (Cost $8,629,000)......... 8,149,813
---------
Total Long Term Investments (Cost $154,665,866).............. 196,222,471
-----------
PRINCIPAL
Franklin Global Utilities Fund COUNTRY AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
cRepurchase Agreement 7.0%
Joint Repurchase Agreement, 5.350%, 11/02/98,
(Maturity Value $14,780,940)
(Cost $14,774,353) .......................................... United States $14,774,353 $ 14,774,353
Barclays Capital Group, Inc. (Maturity Value $1,519,253)
Chase Securities, Inc. (Maturity Value $1,519,253)
CIBC Wood Gundy Securities Corp. (Maturity Value $1,519,252)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $1,519,252)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $1,519,252)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $1,107,669)
Greenwich Capital Markets, Inc. (Maturity Value $1,519,252)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $1,519,253)
Paribas Corp. (Maturity Value $1,519,252)
SBC Warburg Dillon Read, Inc. (Maturity Value $1,519,252)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $169,440,219) 100.0%................. 210,996,824
-----------
Other Assets, less Liabilities .............................. 3,115
-----------
Net Assets 100.0% ........................................... $210,999,939
===========
aNon-income producing.
cSee Note 1(c) regarding joint repurchase agreement.
eSee Note 8 regarding restricted securities.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin MidCap Growth Fund
Class I
------------------------------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
-------------------------------------------------
(unaudited) 1998 1997 1996 1995 19941
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ....... $17.44 $13.34 $14.24 $10.81 $10.05 $10.00
------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)............... .01 -- (.02) .18 .21 .15
Net realized and unrealized gains (losses) (3.73) 4.66 .93 3.59 .77 .01
------------------------------------------------------------------
Total from investment operations ........... (3.72) 4.66 .91 3.77 .98 .16
------------------------------------------------------------------
Less distributions from:
Net investment income ..................... -- -- (.05) (.21) (.20) (.08)
Net realized gains ........................ -- (.56) (1.76) (.13) (.02) (.03)
------------------------------------------------------------------
Total distributions ........................ -- (.56) (1.81) (.34) (.22) (.11)
------------------------------------------------------------------
Net asset value, end of period ............. $13.72 $17.44 $13.34 $14.24 $10.81 $10.05
==================================================================
Total return*............................... (21.33%) 35.53% 6.31% 35.40% 10.06% 1.62%
Ratios/supplemental data
Net assets, end of period (000's) .......... $29,163 $29,864 $12,853 $7,575 $5,591 $5,079
Ratios to average net assets:
Expenses .................................. 1.22%** 1.17% 1.07% .16% -- --
Expenses excluding waiver and payments
by affiliate.............................. 1.22%** 1.17% 1.07% .96% .98% .91%**
Net investment income (loss) .............. .20%** (.03%) (.22%) 1.42% 2.12% 2.21%**
Portfolio turnover rate .................... 24.88% 50.16% 76.35% 102.65% 163.54% 70.53%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
Prior to May 1, 1994, dividends from net investment income were reinvested at
the offering price.
**Annualized.
1For the period August 17, 1993 (effective date) to April 30, 1994.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1998 (unaudited)
Franklin MidCap Growth Fund SHARES VALUE
- -------------------------------------------------------------------------------------------------------
Common Stocks 78.1%
<S> <C> <C>
aCommercial Services 4.3%
Robert Half International, Inc. ....................................... 6,900 $ 276,863
Sylvan Learning Systems, Inc. ......................................... 20,950 646,830
U.S. Foodservice, Inc. ................................................ 7,000 332,500
----------
1,256,193
----------
Consumer Durables 2.7%
Clayton Homes, Inc. ................................................... 27,375 422,602
aElectronic Arts, Inc. ................................................. 6,500 267,313
K2, Inc. .............................................................. 7,400 81,400
----------
771,315
----------
Consumer Non-Durables 3.5%
The Estee Lauder Cos., Inc., Class A................................... 8,300 544,169
aJones Apparel Group, Inc. ............................................. 20,000 345,000
aTommy Hilfiger Corp. .................................................. 3,000 139,313
----------
1,028,482
----------
Consumer Services 11.1%
aApollo Group, Inc, Class A............................................. 18,000 578,250
aChancellor Media Corp. ................................................ 11,800 452,825
aDeVry, Inc. ........................................................... 25,200 554,400
aEducation Management Corp. ............................................ 7,900 290,325
aHost Marriott Corp. ................................................... 18,000 261,000
ITT Educational Services, Inc. ........................................ 14,000 415,625
aStarbucks Corp. ....................................................... 8,000 347,000
The McClatchy Co., Class A............................................. 9,800 332,588
----------
3,232,013
----------
Electronic Technology 7.8%
aAltera Corp. .......................................................... 7,900 328,838
aComputer Sciences Corp. ............................................... 6,000 316,500
Linear Technology Corp. ............................................... 5,500 327,938
aMettler-Toledo International, Inc. .................................... 18,000 393,750
aSeagate Technology, Inc. .............................................. 11,500 303,313
aTellabs, Inc. ......................................................... 5,800 319,000
aXilinx, Inc. .......................................................... 6,600 294,732
----------
2,284,071
----------
aEnergy Minerals .7%
Barrett Resources Corp. ............................................... 8,500 200,281
----------
Finance 11.0%
BankBoston Corp. ...................................................... 5,200 191,425
Countrywide Credit Industries, Inc. ................................... 9,500 410,281
Espirito Santo Financial Group, ADR (Luxembourg)....................... 11,400 192,375
EVEREN Capital Corp. .................................................. 2,800 57,050
Federated Investors, Inc. ............................................. 19,200 344,400
Financial Security Assurance Holdings, Ltd. ........................... 7,600 378,575
Hartford Life, Inc., Class A........................................... 5,000 231,250
HCC Insurance Holdings, Inc. .......................................... 18,000 322,875
Providian Financial Corp. ............................................. 4,300 341,313
Finance (cont.)
Reinsurance Group of America, Inc. .................................... 5,000 $ 275,625
Republic New York Corp. ............................................... 4,000 167,250
The PMI Group, Inc. ................................................... 6,000 302,625
----------
3,215,044
----------
aHealth Services 1.4%
HEALTHSOUTH Corp. ..................................................... 18,300 221,888
Total Renal Care Holdings, Inc. ....................................... 7,600 186,200
----------
408,088
----------
Health Technology 3.1%
Mentor Corp. .......................................................... 6,800 115,600
Omnicare, Inc. ........................................................ 12,000 414,750
aQuintiles Transnational Corp. ......................................... 8,500 384,625
----------
914,975
----------
Industrial Services 6.2%
aThe AES Corp. ......................................................... 9,200 376,625
Diamond Offshore Drilling, Inc. ....................................... 6,000 184,125
aRepublic Services, Inc. ............................................... 15,000 328,125
Transocean Offshore, Inc. ............................................. 11,800 435,863
aVarco International, Inc. ............................................. 17,400 188,138
Waste Management, Inc. ................................................ 6,500 293,313
----------
1,806,189
----------
Process Industries 3.0%
AptarGroup, Inc. ...................................................... 8,000 214,000
Bowater, Inc. ......................................................... 3,200 130,600
aOwens-Illinois, Inc. .................................................. 8,000 244,500
Sigma-Aldrich Corp. ................................................... 9,000 278,157
----------
867,257
----------
Producer Manufacturing 2.4%
aGentex Corp. .......................................................... 20,200 296,688
Mark IV Industries, Inc. .............................................. 13,450 206,794
aWeatherford International, Inc. ....................................... 7,100 193,030
----------
696,512
----------
Real Estate 3.8%
Arden Realty, Inc. .................................................... 10,300 222,738
Cornerstone Properties, Inc. .......................................... 12,600 195,300
Equity Residential Properties Trust.................................... 4,700 197,400
MeriStar Hospitality Corp. ............................................ 12,000 222,000
aSecurity Capital Group, Inc., Class B.................................. 16,200 258,188
----------
1,095,626
----------
Retail Trade 5.7%
aCost Plus, Inc. ....................................................... 10,000 300,000
Family Dollar Stores, Inc. ............................................ 24,000 435,000
aGuitar Center, Inc. ................................................... 5,300 90,760
aOffice Depot, Inc. .................................................... 13,000 325,000
Retail Trade (cont.)
aSafeway, Inc. ......................................................... 8,000 $ 382,500
Talbots, Inc. ......................................................... 6,300 142,930
----------
1,676,190
----------
aTechnology Services 4.1%
Affiliated Computer Services, Inc., Class A ........................... 8,500 314,500
BMC Software, Inc. .................................................... 3,000 144,188
Cambridge Technology Partners, Inc. ................................... 8,200 181,425
Sterling Commerce, Inc. ............................................... 8,211 289,438
Synopsys, Inc. ........................................................ 5,600 253,400
----------
1,182,951
----------
Transportation 3.2%
C.H. Robinson Worldwide, Inc. ......................................... 15,600 346,125
Expeditors International of Washington, Inc. .......................... 17,000 575,875
----------
922,000
----------
Utilities and Telecommunications 4.1%
CMS Energy Corp. ...................................................... 8,500 374,530
aICG Communications, Inc. .............................................. 11,000 227,560
aIntermedia Communications, Inc. ....................................... 9,400 173,900
aMillicom International Cellular, SA (Luxembourg) ...................... 6,800 226,950
Montana Power Co. ..................................................... 4,700 203,569
----------
1,206,509
----------
Total Long Term Investments (Cost $21,523,954)......................... 22,763,696
----------
PRINCIPAL
AMOUNT
-----------
cRepurchase Agreement 21.8%
Joint Repurchase Agreement, 5.350%, 11/02/98, (Maturity Value $6,363,492)
(Cost $6,360,656)..................................................................... $6,360,656 6,360,656
Barclays Capital Group, Inc. (Maturity Value $654,040)
Chase Securities, Inc. (Maturity Value $654,040)
CIBC Wood Gundy Securities Corp. (Maturity Value $654,040)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $654,040)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $654,040)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $477,132)
Greenwich Capital Markets, Inc. (Maturity Value $654,040)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $654,040)
Paribas Corp. (Maturity Value $654,040)
SBC Warburg Dillon Read, Inc. (Maturity Value $654,040)
Collateralized by U.S. Treasury Bills and Notes
-----------
Total Investments (Cost $27,884,610) 99.9% ............................................ 29,124,352
Other Assets, less Liabilities .1% .................................................... 38,681
-----------
Net Assets 100.0% ..................................................................... $29,163,033
===========
aNon-income producing.
cSee Note 1(c) regarding joint repurchase agreement.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Natural Resources Fund
Class I
------------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
-------------------------------
(unaudited) 1998 1997 19961
------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ................ $15.46 $14.07 $13.14 $10.00
------------------------------------------------
Income from investment operations:
Net investment income .............................. .06 .10 .09 .08
Net realized and unrealized gains (losses) ......... (4.03) 2.26 1.25 3.22
------------------------------------------------
Total from investment operations..................... (3.97) 2.36 1.34 3.30
------------------------------------------------
Less distributions from:
Net investment income .............................. (.07) (.09) (.09) (.06)
Net realized gains ................................. -- (.88) (.32) (.10)
------------------------------------------------
Total distributions ................................. (.07) (.97) (.41) (.16)
------------------------------------------------
Net asset value, end of period....................... $11.42 $15.46 $14.07 $13.14
================================================
Total return*........................................ (25.70%) 17.57% 10.23% 33.36%
Ratios/supplemental data
Net assets, end of period (000's) ................... $40,491 $62,274 $45,386 $9,909
Ratios to average net assets:
Expenses ........................................... .95%** .96% .98% .99%**
Expenses excluding waiver and payments by affiliate 1.41%** 1.31% 1.31% 1.77%**
Net investment income .............................. .92%** .67% .72% 1.16%**
Portfolio turnover rate ............................. 33.22% 72.93% 46.31% 59.04%
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized.
**Annualized.
1For the period June 5, 1995 (effective date) to April 30, 1996.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
Franklin Natural Resources Fund (cont.)
Advisor Class
-----------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
-----------------------
(unaudited) 1998 19972
-----------------------------------------
<S> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ......................... $15.48 $14.07 $14.66
-----------------------------------------
Income from investment operations:
Net investment income ....................................... .06 .23 --
Net realized and unrealized gains (losses) .................. (4.00) 2.20 (.59)
-----------------------------------------
Total from investment operations ............................. (3.94) 2.43 (.59)
-----------------------------------------
Less distributions from:
Net investment income ....................................... (.12) (.14) --
Net realized gains .......................................... -- (.88) --
-----------------------------------------
Total distributions .......................................... (.12) (1.02) --
-----------------------------------------
Net asset value, end of period ............................... $11.42 $15.48 $14.07
-----------------------------------------
Total return*................................................. (25.52%) 18.11% (4.02%)
Ratios/supplemental data
Net assets, end of period (000's) ............................ $416 $892 $1,123
Ratios to average net assets:
Expenses .................................................... .65%** .64% .64%**
Expenses excluding waiver and payments by affiliate ......... 1.11%** 1.03% .86%**
Net investment income ....................................... 1.22%** 1.02% 1.03%**
Portfolio turnover rate ...................................... 33.22% 72.93% 46.31%
*Total return is not annualized.
**Annualized.
2For the period January 2, 1997 (effective date) to April 30, 1997.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1998 (unaudited)
SHARES/
Franklin Natural Resources Fund COUNTRY WARRANTS VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks and Warrants 90.6%
Energy Minerals 29.2%
Atlantic Richfield Co. (ARCO) ............................... United States 10,000 $ 688,750
Austral Coal, Ltd. .......................................... Australia 864,700 80,709
aBarrett Resources Corp. ..................................... United States 71,400 1,682,363
aBasin Exploration, Inc. ..................................... United States 40,900 654,400
Chesapeake Energy Corp. ..................................... United States 170,000 329,375
aConoco, Inc., Class A........................................ United States 22,200 552,225
Enron Oil and Gas Co. ....................................... United States 59,500 992,906
aGulf Canada Resources, Ltd. ................................. Canada 311,500 1,168,125
aNewfield Exploration Co...................................... United States 60,000 1,458,750
aNuevo Energy Co. ............................................ United States 44,000 932,250
aOcean Energy, Inc. .......................................... United States 24,420 305,250
Royal Dutch Petroleum Co., New York Shares................... Netherlands 15,500 763,375
aTitan Exploration, Inc. ..................................... United States 51,600 303,150
Ultramar Diamond Shamrock Corp. ............................. United States 8,800 237,050
Unocal Corp. ................................................ United States 15,400 522,638
YPF, SA, Sponsored ADR....................................... Argentina 43,500 1,258,781
-----------
11,930,097
-----------
Finance .9%
aUnited Rentals, Inc. ........................................ United States 13,000 349,375
-----------
Industrial Services 21.3%
aThe AES Corp. ............................................... United States 21,460 878,519
aAtwood Oceanics, Inc. ....................................... United States 19,800 556,875
aCal Dive International, Inc. ................................ United States 30,200 645,525
aCasella Waste Systems, Inc. ................................. United States 10,900 321,550
Diamond Offshore Drilling, Inc. ............................. United States 23,000 705,813
Halliburton Co. ............................................. United States 15,000 539,063
aMarine Drilling Cos., Inc. .................................. United States 40,000 447,500
Schlumberger, Ltd. .......................................... United States 10,000 525,000
Transocean Offshore, Inc. ................................... United States 27,000 997,313
aTuboscope, Inc. ............................................. United States 43,600 539,550
aVarco International, Inc. ................................... United States 80,200 867,163
aWeatherford International, Inc. ............................. United States 62,775 1,706,695
-----------
8,730,566
-----------
Non-Energy Minerals 21.0%
Aluminum Co. of America...................................... United States 5,400 427,950
Barrick Gold Corp. .......................................... Canada 28,000 598,500
aCanyon Resources Corp., wts., 3/20/99........................ United States 7,000 --
Carpenter Technology Corp. .................................. United States 12,900 452,306
Companhia Vale do Rio Doce, Sponsored ADR.................... Brazil 15,900 239,920
Compania de Minas Buenaventura, SA, Class B.................. Peru 1,236 7,425
Compania de Minas Buenaventura, SA, Sponsored ADR............ Peru 37,149 455,075
De Beers Consolidated Mines, AG, ADR......................... South Africa 45,000 646,875
Euro-Nevada Mining Corp. .................................... Canada 53,900 839,683
Franco-Nevada Mining Corp. .................................. Canada 36,000 692,308
Freeport-McMoRan Copper & Gold, Inc., Class A ............... United States 11,700 139,669
Non-Energy Minerals (cont.)
aIspat International, NV, New York Registered Shares.......... Netherlands 18,700 $ 139,081
LTV Corp. ................................................... United States 34,000 208,250
Newmont Mining Corp. ........................................ United States 18,735 398,119
Nucor Corp. ................................................. United States 11,400 516,563
Placer Dome, Inc. ........................................... Canada 42,600 670,950
Pohang Iron & Steel Co., Ltd., Sponsored ADR................. South Korea 32,500 585,000
Potash Corp. of Saskatchewan, Inc. .......................... Canada 11,385 789,834
Rio Tinto, Plc. ............................................. United Kingdom 65,600 801,956
-----------
8,609,464
-----------
Process Industries 11.5%
Asia Pulp & Paper Co., Ltd., ADR............................. Singapore 55,800 463,838
Avery Dennison Corp. ........................................ United States 12,700 526,256
Bemis Co., Inc. ............................................. United States 2,500 92,813
Bowater, Inc. ............................................... United States 7,100 289,769
Champion International Corp. ................................ United States 7,400 236,338
Du Pont (EI) De Nemours and Co. ............................. United States 4,000 230,000
aGibraltar Steel Corp. ....................................... United States 18,500 358,438
International Paper Co. ..................................... United States 4,300 199,681
Owens-Illinois, Inc. ........................................ United States 20,600 629,588
Praxair, Inc. ............................................... United States 21,200 853,300
Sigma-Aldrich Corp. ......................................... United States 19,100 590,310
Willamette Industries, Inc. ................................. United States 7,000 217,000
-----------
4,687,331
-----------
Real Estate 4.1%
Alexandria Real Estate Equities, Inc. ....................... United States 16,300 435,006
Irvine Apartment Communities, Inc. .......................... United States 17,500 459,375
Kilroy Realty Corp. ......................................... United States 16,000 355,000
Starwood Hotels & Resorts.................................... United States 7,300 206,681
Storage Trust Realty......................................... United States 10,700 240,081
-----------
1,696,143
-----------
Utilities and Telecommunications 2.6%
Enron Corp. ................................................. United States 16,700 880,925
Montana Power Co. ........................................... United States 3,900 168,919
-----------
1,049,844
-----------
Total Common Stocks and Warrants (Cost $43,922,782) ......... 37,052,820
-----------
Convertible Preferred Stocks .8%
Timet Capital Trust, 6.625%, cvt., pfd., 144A................ United States 4,600 113,846
USX Corp., 6.75%, cvt., pfd. ................................ United States 14,000 218,750
-----------
Total Convertible Preferred Stocks (Cost $526,650)........... 332,596
-----------
Total Long Term Investments (Cost $44,449,432)............... 37,385,416
-----------
PRINCIPAL
Franklin Natural Resources Fund COUNTRY AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
cRepurchase Agreement 10.3%..................................
Joint Repurchase Agreement, 5.350%, 11/02/98,
(Maturity Value, $4,232,867)
(Cost $4,230,981) ........................................... United States $4,230,981 $ 4,230,981
Barclays Capital Group, Inc. (Maturity Value $435,071)
Chase Securities, Inc. (Maturity Value $435,071)
CIBC Wood Gundy Securities Corp. (Maturity Value $435,071)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $435,071)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $435,071)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $317,228)
Greenwich Capital Markets, Inc. (Maturity Value $435,071)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $435,071)
Paribas Corp. (Maturity Value $435,071)
SBC Warburg Dillon Read, Inc. (Maturity Value $435,071)
Collateralized by U.S. Treasury Bills and Notes ------------
Total Investments (Cost $48,680,413) 101.7% ................. 41,616,397
Other Assets, less Liabilities (1.7%) ....................... (709,181)
------------
Net Assets 100.0% ........................................... $40,907,216
============
aNon-income producing.
cSee Note 1(c) regarding joint repurchase agreement.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Small Cap Growth Fund
Class I
-------------------------------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
-------------------------------------------------
(unaudited) 1998 1997 1996 1995 1994
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period .. $25.93 $18.96 $19.75 $14.90 $12.75 $10.22
-------------------------------------------------------------------
Income from investment operations:
Net investment income ................ .04 .07 .03 .01 .03 .03
Net realized and unrealized gains (losses) (6.21) 7.92 .04 6.23 3.14 2.94
-------------------------------------------------------------------
Total from investment operations....... (6.17) 7.99 .07 6.24 3.17 2.97
-------------------------------------------------------------------
Less distributions from:
Net investment income ................ -- (.09) (.06) (.01) (.02) (.04)
Net realized gains ................... -- (.93) (.80) (1.38) (1.00) (.40)
-------------------------------------------------------------------
Total distributions ................... -- (1.02) (.86) (1.39) (1.02) (.44)
-------------------------------------------------------------------
Net asset value, end of period ........ $19.76 $25.93 $18.96 $19.75 $14.90 $12.75
===================================================================
Total return*.......................... (23.79%) 43.09% .14% 44.06% 27.05% 29.26%
Ratios/supplemental data
Net assets, end of period (000's) ..... $3,401,893 $3,957,972 $1,071,352 $444,912 $63,010 $23,915
Ratios to average net assets:
Expenses ............................. .97%** .89% .92% .97% .69% .30%
Expenses excluding waiver and payments
by affiliate.......................... .97%** .89% .92% 1.00% 1.16% 1.58%
Net investment income ................ .44%** .32% .10% .09% .25% .24%
Portfolio turnover rate ............... 17.64% 42.97% 55.27% 87.92% 104.84% 89.60%
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized.
Prior to May 1, 1994, dividends from net investment income were reinvested at the offering price.
**Annualized.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
Franklin Small Cap Growth Fund (cont.)
Class II
------------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
------------------------------
(unaudited) 1998 1997 19961
------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ......................... $25.59 $18.78 $19.66 $17.94
------------------------------------------------
Income from investment operations:
Net investment loss ......................................... (.02) (.02) (.05) (.03)
Net realized and unrealized gains (losses) .................. (6.14) 7.76 (.03) 2.71
------------------------------------------------
Total from investment operations ............................. (6.16) 7.74 (.08) 2.68
Less distributions from net realized gains.................... -- (.93) (.80) (.96)
------------------------------------------------
Net asset value, end of period ............................... $19.43 $25.59 $18.78 $19.66
================================================
Total return*................................................. (24.04%) 42.06% (.65%) 15.98%
Ratios/supplemental data
Net assets, end of period (000's) ............................ $643,993 $731,707 $146,164 $24,102
Ratios to average net assets:
Expenses .................................................... 1.72%** 1.64% 1.69% 1.76%**
Net investment loss ......................................... (.31%)** (.42%) (.70%) (.69%)**
Portfolio turnover rate ...................................... 17.64% 42.97% 55.27% 87.92%
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized.
**Annualized.
1For the period October 1, 1995 (effective date) to April 30, 1996.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
Franklin Small Cap Growth Fund (cont.)
Advisor Class
-----------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
----------------------
(unaudited) 1998 19972
-----------------------------------------
<S> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ............................ $26.01 $18.97 $20.48
-----------------------------------------
Income from investment operations:
Net investment income .......................................... .06 .09 .01
Net realized and unrealized gains (losses) ..................... (6.22) 8.01 (1.52)
-----------------------------------------
Total from investment operations ................................ (6.16) 8.10 (1.51)
-----------------------------------------
Less distributions from:
Net investment income .......................................... -- (.13) --
Net realized gains ............................................. -- (.93) --
-----------------------------------------
Total distributions ............................................. -- (1.06) --
-----------------------------------------
Net asset value, end of period .................................. $19.85 $26.01 $18.97
=========================================
Total return*.................................................... (23.65%) 43.68% (7.37%)
Ratios/supplemental data
Net assets, end of period (000's) ............................... $140,772 $118,683 $18,777
Ratios to average net assets:
Expenses ....................................................... .72%** .64% .69%**
Net investment income .......................................... .71%** .58% .30%**
Portfolio turnover rate ......................................... 17.64% 42.97% 55.27%
*Total return is not annualized.
**Annualized.
2For the period January 2, 1997 (effective date) to April 30, 1997.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1998 (unaudited)
Franklin Small Cap Growth Fund SHARES VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks 87.9%
Commercial Services 2.6%
a24/7 Media, Inc. ...................................................... 515,400 $ 5,894,888
aAnswerThink Consulting Group, Inc. .................................... 75,000 1,448,438
a,fApplied Graphics Technologies, Inc. ................................. 1,369,000 16,342,438
aLamar Advertising Co., Class A......................................... 502,800 15,696,813
Norrell Corp. .......................................................... 931,100 12,628,044
aNOVA Corp. ............................................................ 688,800 19,889,100
aPegasystems, Inc. ..................................................... 456,300 4,819,669
a,fRemedyTemp, Inc., Class A............................................ 319,300 5,827,225
a,fSOS Staffing Services, Inc. ......................................... 872,400 7,360,875
aSylvan Learning Systems, Inc. ......................................... 687,900 21,238,913
------------
111,146,403
------------
Consumer Durables .9%
a,fActivision, Inc. .................................................... 1,344,400 14,200,225
aElectronic Arts, Inc. ................................................. 200,000 8,225,000
fK2, Inc. .............................................................. 527,100 5,798,100
aSola International, Inc. .............................................. 534,800 10,261,475
------------
38,484,800
------------
Consumer Non-Durables 2.5%
Alberto-Culver Co. ..................................................... 900,000 21,712,500
a,fConsolidated Cigar Holdings, Inc. ................................... 988,300 11,365,450
aGerber Childrenswear, Inc. ............................................ 360,000 3,060,000
aNorth Face, Inc. ...................................................... 486,400 5,806,400
aTommy Hilfiger Corp. .................................................. 748,900 34,777,044
a,fTropical Sportswear International Corp. ............................. 413,200 8,264,000
Wolverine World Wide, Inc. ............................................. 1,550,500 20,253,406
------------
105,238,800
------------
Consumer Services 3.7%
aAMF Bowling, Inc. ..................................................... 190,800 822,825
aCumulus Media Inc., Class A ........................................... 760,000 7,980,000
aDeVry, Inc. ........................................................... 1,064,800 23,425,600
aFoodmaker, Inc. ....................................................... 100,000 1,581,250
a,fMarquee Group, Inc. ................................................. 1,327,500 3,899,531
fMeriStar Hospitality Corp. ............................................ 2,330,000 43,105,000
aMeriStar Hotels & Resorts, Inc. ....................................... 1,330,000 3,158,750
a,fPrime Hospitality Corp. ............................................. 3,020,500 27,562,063
aRio Hotel and Casino, Inc. ............................................ 1,170,600 16,388,400
aSFX Entertainment, Inc. ............................................... 550,000 17,393,750
aVail Resorts, Inc. .................................................... 295,800 7,912,650
------------
153,229,819
------------
Electronic Technology 16.6%
a,fAdvanced Energy Industries, Inc. .................................... 1,619,000 21,249,375
aBrio Technology, Inc. ................................................. 321,300 2,650,725
aCarrier Access Corp. .................................................. 173,000 3,330,250
a,fCoherent, Inc. ...................................................... 1,763,400 20,719,950
Electronic Technology (cont.)
aCom21, Inc. ........................................................... 492,300 $ 7,384,500
aDupont Photomasks, Inc. ............................................... 24,400 884,500
EG&G, Inc. ............................................................. 107,800 2,708,475
a,fEtec Systems, Inc. .................................................. 1,245,500 42,191,313
aFlextronics International Ltd. ........................................ 200,000 10,387,500
a,fFLIR Systems, Inc. .................................................. 1,028,600 17,357,625
aGemstar International Group Ltd. ...................................... 983,300 53,712,763
a,fH.T.E., Inc. ........................................................ 1,330,800 13,474,350
a,fHarmonic Lightwaves, Inc. ........................................... 694,900 7,600,469
a,fItron, Inc. ......................................................... 1,257,700 9,747,175
aJabil Circuit, Inc. ................................................... 626,700 29,024,044
a,fKomag, Inc. ......................................................... 4,207,100 23,664,938
a,fLadish Co., Inc. .................................................... 982,300 8,410,944
aLevel One Communications, Inc. ........................................ 1,400,000 36,837,500
aMettler-Toledo International, Inc. .................................... 1,700,000 37,187,500
a,fNatural Microsystems Corp. .......................................... 646,600 5,799,226
fNewport Corp. ......................................................... 512,500 7,303,125
aNovellus Systems, Inc. ................................................ 1,285,200 49,881,825
a,fPerceptron, Inc. .................................................... 793,500 4,513,031
aPhotronics, Inc. ...................................................... 587,500 12,814,844
aPMC-Sierra, Inc. ...................................................... 1,065,300 47,805,338
aPower Integrations, Inc. .............................................. 500,000 8,000,000
a,fRainbow Technologies, Inc. .......................................... 901,500 12,733,688
aSanmina Corp. ......................................................... 568,200 23,296,200
a,fSecurity Dynamics.................................................... 2,445,000 25,061,250
a,fSpectralink Corp. ................................................... 866,800 2,058,650
a,fSpectra-Physics Lasers, Inc. ........................................ 1,016,300 7,590,541
aTekelec................................................................ 2,583,500 46,341,531
a,fTranscrypt International, Inc. ...................................... 547,100 1,778,075
aTriStar Aerospace Co. ................................................. 490,700 5,029,675
aWaters Corp. .......................................................... 769,800 56,580,300
aWestern Digital Corp. ................................................. 324,300 3,405,150
aXylan Corp. ........................................................... 1,580,000 25,280,000
------------
693,796,345
------------
Energy Minerals 4.3%
a,fBarrett Resources Corp. ............................................. 1,790,900 42,198,081
aDenbury Resources, Inc. ............................................... 1,003,800 6,587,438
Devon Energy Corp. ..................................................... 331,500 11,229,563
a,fNewfield Exploration Co. ............................................ 2,338,600 56,857,213
aNuevo Energy Co. ...................................................... 635,900 13,473,131
fRange Resources Corp. ................................................. 1,990,000 11,318,125
aTitan Exploration, Inc. ............................................... 1,645,700 9,668,488
a,fTom Brown, Inc. ..................................................... 2,095,800 30,127,125
------------
181,459,164
------------
Finance 9.6%
aAffiliated Managers Group, Inc. ....................................... 712,500 $ 15,853,125
aAmerin Corp. .......................................................... 992,000 21,204,000
Bank United Corp. ...................................................... 199,700 7,956,807
aE*TRADE Group, Inc. ................................................... 700,000 12,600,000
Espirito Santo Financial Group, SA (Luxembourg)......................... 1,324,600 22,352,625
EVEREN Capital Corp. ................................................... 660,600 13,459,725
fExecutive Risk, Inc. .................................................. 731,700 34,755,750
Federated Investors, Inc. .............................................. 1,408,800 25,270,350
Financial Security Assurance Holdings Ltd. ............................. 919,300 45,792,631
Freedom Securities Corp. ............................................... 396,800 5,406,400
aGolden State Bancorp, Inc. ............................................ 1,788,700 34,320,681
HCC Insurance Holdings, Inc. ........................................... 556,500 9,982,219
aHealthCare Financial Partners, Inc. ................................... 663,900 20,331,938
Heller Financial, Inc. ................................................. 681,500 16,356,000
Life Real Estate Corp. ................................................. 265,600 24,783,800
Life USA Holding, Inc. ................................................. 586,100 7,289,619
Reinsurance Group of America............................................ 449,700 24,789,713
aRisk Capital Holdings, Inc. ........................................... 751,900 15,601,925
Scor (France)........................................................... 311,000 17,830,592
a,fSilicon Valley Bancshares............................................ 1,293,600 26,518,800
------------
402,456,700
------------
aHealth Services 5.3%
fAccess Health, Inc. ................................................... 975,750 35,005,031
American Dental Partners, Inc. ......................................... 291,200 2,984,800
Medaphis Corp. ......................................................... 1,977,800 6,427,850
New American Healthcare Corp. .......................................... 540,000 5,737,500
PAREXEL International Corp. ............................................ 1,000,000 22,062,500
fPediatrix Medical Group, Inc. ......................................... 1,076,500 50,191,813
fPharmaceutical Product Development, Inc. .............................. 1,300,000 35,100,000
PhyCor, Inc. ........................................................... 1,000,000 7,250,000
Renal Care Group, Inc. ................................................. 1,303,800 37,973,175
Total Renal Care Holdings, Inc. ........................................ 515,666 12,633,817
Transitions Systems, Inc. .............................................. 507,300 5,294,944
------------
220,661,430
------------
Health Technology 4.2%
aCurative Health Services, Inc. ........................................ 250,000 6,812,500
a,fDepoTech Corp. ...................................................... 798,500 1,172,837
aHeska Corp. ........................................................... 675,300 3,334,294
a,fInhale Therapeutic Systems........................................... 811,000 21,288,750
Mentor Corp. ........................................................... 496,200 8,435,400
Mylan Laboratories, Inc. ............................................... 361,216 12,439,376
aNeurogen Corp. ........................................................ 492,000 6,703,500
aOrthoLogic Corp. ...................................................... 1,250,000 3,906,250
a,fSerologicals Corp. .................................................. 2,072,700 46,894,838
The Cooper Companies, Inc. ............................................. 250,000 5,937,500
Health Technology (cont.)
aUniphase Corp. ........................................................ 1,022,000 $ 50,589,000
aZonagen, Inc. ......................................................... 448,800 7,124,700
------------
174,638,945
------------
Industrial Services 5.2%
a,fAtwood Oceanics, Inc. ............................................... 1,216,600 34,216,875
a,fCatalytica, Inc. .................................................... 2,199,233 35,737,536
a,fCore Laboratories, NV (Netherlands).................................. 1,657,400 37,395,088
aMarine Drilling Cos., Inc. ............................................ 1,062,400 11,885,600
aTuboscope, Inc. ....................................................... 2,000,000 24,750,000
a,fU.S. Liquids, Inc. .................................................. 1,103,900 16,696,488
fVarco International, Inc. ............................................. 5,162,500 55,819,531
------------
216,501,118
------------
Non-Energy Minerals .7%
Carpenter Technology Corp. ............................................. 874,500 30,662,156
------------
Process Industries .4%
ChemFirst, Inc. ........................................................ 764,900 14,819,938
Optical Coating Laboratory, Inc. ....................................... 200,000 3,325,000
------------
18,144,938
------------
Producer Manufacturing 2.8%
aCable Design Technologies ............................................. 400,000 6,600,000
aGentex Corp. .......................................................... 2,271,400 33,361,188
a,fGibraltar Steel Corp. ............................................... 1,012,800 19,623,000
JLG Industries, Inc. ................................................... 1,262,700 20,913,469
Reliance Steel & Aluminum Co. .......................................... 580,000 17,943,750
Roper Industries, Inc. ................................................. 1,033,800 18,414,563
------------
116,855,970
------------
Real Estate 3.8%
Arden Realty, Inc. ..................................................... 1,330,400 28,769,900
Camden Property Trust .................................................. 1,200,000 32,250,000
Colonial Properties Trust .............................................. 303,400 8,343,500
Cornerstone Properties, Inc. ........................................... 43,000 666,500
FelCor Lodging Trust, Inc. ............................................. 687,300 16,194,506
Glenborough Realty Trust, Inc. ......................................... 702,700 15,064,131
fInnkeepers USA Trust .................................................. 2,102,800 24,182,200
Omega Healthcare Investors, Inc. ....................................... 150,000 4,650,000
SL Green Realty Corp. .................................................. 394,100 7,463,269
Storage Trust Realty.................................................... 704,700 15,811,706
Winston Hotels, Inc. ................................................... 490,500 4,199,906
------------
157,595,618
------------
Retail Trade .6%
aGuitar Center, Inc. ................................................... 556,800 9,535,200
aSoftware.net Corp. .................................................... 455,000 4,208,750
Retail Trade (cont.)
Talbots, Inc. .......................................................... 476,900 $ 10,819,669
a,fWest Marine, Inc. ................................................... 155,600 1,098,925
------------
25,662,544
------------
aTechnology Services 17.4%
Affiliated Computer Services, Inc., Class A............................. 1,662,300 61,505,100
Aspen Technology, Inc. ................................................. 489,200 6,848,800
BroadVision, Inc. ...................................................... 773,100 11,596,500
Cambridge Technology Partners, Inc. .................................... 622,100 13,763,963
Check Point Software Technologies Ltd. (Israel)......................... 316,500 7,200,375
Concord Communications, Inc. ........................................... 400,000 14,850,000
Documentum, Inc. ....................................................... 611,600 20,794,400
EarthLink Network, Inc. ................................................ 400,000 15,400,000
Entrust Technologies, Inc. ............................................. 1,307,200 21,732,200
Envoy Corp. ............................................................ 596,800 17,605,600
Equant NV (Netherlands)................................................. 226,200 9,896,250
Evolving Systems, Inc. ................................................. 100,000 168,750
Excite, Inc. ........................................................... 400,000 15,425,000
Genesys Telecommunications Laboratories, Inc. .......................... 535,000 14,043,750
Harbinger Corp. ........................................................ 1,694,100 11,223,413
HNC Software, Inc. ..................................................... 1,279,900 43,036,638
i2 Technologies, Inc. .................................................. 1,447,600 26,961,550
Information Advantage, Inc. ............................................ 1,005,400 5,969,563
Inprise Corp. .......................................................... 1,000,000 4,937,500
fIntegrated Systems, Inc. .............................................. 2,091,300 23,527,125
International Network Services.......................................... 903,700 38,407,250
InterVU, Inc. .......................................................... 150,000 1,218,750
Intuit, Inc. ........................................................... 1,015,400 51,277,700
fMicromuse, Inc. ....................................................... 1,110,000 18,939,375
MicroStrategy Inc. ..................................................... 57,000 1,389,375
Network Associates, Inc. ............................................... 212,363 9,025,428
fOmtool, Ltd. .......................................................... 739,300 2,125,488
Sapient Corp. .......................................................... 650,800 29,326,675
Sterling Commerce, Inc. ................................................ 225,058 7,933,295
Synopsys, Inc. ......................................................... 1,405,000 63,576,250
Transaction Systems Architects, Inc. ................................... 658,900 23,782,205
USWeb Corp. ............................................................ 750,000 10,781,250
Vantive Corp. .......................................................... 1,223,500 8,946,844
VERITAS Software Corp. ................................................. 611,700 30,661,463
Visio Corp. ............................................................ 350,000 9,318,750
Whittman-Hart, Inc. .................................................... 525,000 10,434,358
fWind River Systems, Inc. .............................................. 1,439,000 63,046,188
------------
726,677,121
------------
Transportation 3.1%
Air Express International Corp. ........................................ 911,000 19,131,000
a,fAtlantic Coast Airlines, Inc. 1,400,000 33,600,000
Transportation (cont.)
C.H. Robinson Worldwide, Inc. .......................................... 1,046,200 $ 23,212,563
Circle International Group, Inc. ....................................... 201,100 4,034,569
fExpeditors International of Washington, Inc. .......................... 1,281,100 43,397,263
a,fMesa Air Group, Inc. ................................................ 1,617,200 8,187,075
------------
131,562,470
------------
aUtilities and Telecommunications 4.2%
ICG Communications, Inc. ............................................... 1,599,100 33,081,381
Intermedia Communications, Inc. ........................................ 1,782,600 32,978,100
Millicom International Cellular, SA (Luxembourg)........................ 1,041,800 34,770,075
Paging Network, Inc. ................................................... 2,017,200 11,094,600
fPrimus Telecommunications Group, Inc. ................................. 1,406,100 15,554,981
fRural Cellular Corp., Class A.......................................... 700,800 8,409,600
fWestern Wireless Corp., Class A........................................ 1,969,200 39,876,300
------------
175,765,037
------------
Total Common Stocks (Cost $4,066,613,577)............................... 3,680,539,378
------------
PRINCIPAL
AMOUNT
----------
Convertible Bonds .4%
Consumer Services
aAMF Bowling Inc., zero coupon, cvt., 144A, 5/12/18..................... $ 12,900,000 1,144,875
---------------
Electronic Technology .1%
aWestern Digital Corp., cvt. sub. deb., 144A, zero coupon, 2/18/18...... 23,800,000 5,117,000
---------------
Technology Services .2%
Activision Inc., cvt. sub. notes, 144A, 6.75%, 1/01/05 ................. 4,900,000 4,287,500
Wind River Systems, cvt. sub. notes, 144A, 5.00%, 8/01/02 .............. 3,100,000 3,332,500
---------------
7,620,000
---------------
Transportation .1%
Atlantic Coast Airlines, cvt. sub. notes, 144A, 7.00%, 7/01/04 ......... 500,000 1,345,625
---------------
Total Convertible Bonds (Cost $20,291,502).............................. 15,227,500
---------------
Total Long Term Investments (Cost $4,086,905,079) ...................... 3,695,766,878
---------------
cRepurchase Agreement 15.6%
Joint Repurchase Agreement, 5.350%, 11/02/98,
(Maturity Value $655,835,067) (Cost $655,542,812)..................... $655,542,812 $ 655,542,812
Barclays Capital Group, Inc. (Maturity Value $67,409,393)
Chase Securities, Inc. (Maturity Value $67,409,393)
CIBC Wood Gundy Securities Corp. (Maturity Value $67,409,393)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $67,409,393)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $67,409,393)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $49,150,530)
Greenwich Capital Markets, Inc. (Maturity Value $67,409,393)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $67,409,393)
Paribas Corp. (Maturity Value $67,409,393)
SBC Warburg Dillon Read, Inc. (Maturity Value $67,409,393)
Collateralized by U.S. Treasury Bills and Notes ---------------
Total Investments (Cost $4,742,447,891) 103.9% ......................... 4,351,309,690
Other Assets, less Liabilities (3.9%) .................................. (164,651,611)
---------------
Net Assets 100.0% ...................................................... $4,186,658,079
===============
aNon-income producing.
cSee Note 1(c) regarding joint repurchase agreement.
fSee Note 9 regarding holding of 5% voting securities.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Strategic Income Fund
Class I
----------------------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
----------------------------------------
(unaudited) 1998 1997 1996 19951
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ................ $11.24 $10.86 $10.77 $10.18 $10.00
----------------------------------------------------------
Income from investment operations:
Net investment income............................... .43 .87 .93 .85 .70
Net realized and unrealized gains (losses) ......... (.78) .50 .39 .67 .15
----------------------------------------------------------
Total from investment operations .................... (.35) 1.37 1.32 1.52 .85
----------------------------------------------------------
Less distributions from:
Net investment income .............................. (.42) (.90) (.96) (.82) (.67)
Net realized gains ................................. -- (.09) (.27) (.11) --
----------------------------------------------------------
Total distributions ................................. (.42) (.99) (1.23) (.93) (.67)
----------------------------------------------------------
Net asset value, end of period ...................... $10.47 $11.24 $10.86 $10.77 $10.18
==========================================================
Total return*........................................ (3.11%) 13.10% 12.64% 15.59% 8.94%
Ratios/supplemental data
Net assets, end of period (000's) ................... $218,226 $166,633 $34,864 $13,022 $6,736
Ratios to average net assets:
Expenses ........................................... .50%** .25% .23% .25% .25%**
Expenses excluding waiver and payments by affiliate 1.04%** 1.05% 1.05% 1.08% 1.38%**
Net investment income .............................. 7.92%** 7.65% 8.60% 8.53% 7.93%**
Portfolio turnover rate ............................. 23.89% 47.47% 114.26% 73.95% 68.43%
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized.
**Annualized.
1For the period May 24, 1994 (effective date) to April 30, 1995.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
Franklin Strategic Income Fund (cont.)
Class II
-----------------
Six Months Ended
October 31, 19982
(unaudited)
-----------------
<S> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ................................................... $11.19
-----------------
Income from investment operations:
Net investment income ................................................................. .36
Net realized and unrealized losses .................................................... (.75)
-----------------
Total from investment operations ....................................................... (.39)
-----------------
Less distributions from net investment income .......................................... (.33)
-----------------
Net asset value, end of period.......................................................... $10.47
=================
Total return*........................................................................... (3.50%)
Ratios/supplemental data
Net assets, end of period (000's) ...................................................... $22,117
Ratios to average net assets:
Expenses .............................................................................. .91%**
Expenses excluding waiver and payments by affiliate ................................... 1.45%**
Net investment income ................................................................. 7.51%**
Portfolio turnover rate ................................................................ 23.89%
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized.
**Annualized.
2For the period May 1, 1998 (effective date) to October 31,1998.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1998 (unaudited)
SHARES/
Franklin Strategic Income Fund COUNTRY WARRANTS VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
aCommon Stocks, Warrants and Rights
Gulf States Steel, warrants................................. United States 200 $ 200
Loral Space & Communications, Ltd., warrants................ United States 300 2,694
Venezuela Oil Value Recovery, rights........................ Venezuela 3,035 --
-----------
Total Common Stocks, Warrants and Rights (Cost $3,731)...... 2,894
-----------
Preferred Stocks .2%
aCSC Holdings, Inc., 11.125% pfd. .......................... United States 1,331 144,412
Fresenius Medical Care, 9.00% pfd. ......................... Germany 100 99,500
Sinclair Capital, 11.625% pfd. ............................. United States 3,000 309,750
-----------
Total Preferred Stocks (Cost $499,966)...................... 553,662
-----------
Convertible Preferred Stocks 4.5%
El Paso Energy, 4.75% cvt. pfd. ............................ United States 32,000 1,552,000
Host Marriott Financial Trust, 6.75%, cvt. pfd. ............ United States 40,000 1,615,000
MediaOne Group, Inc., 6.25% cvt. pfd. ...................... United States 33,800 1,820,975
Protective Life Capital Trust II, 6.50% cvt. pfd.............. United States 12,100 753,225
Ralston Purina Co., 7.00% cvt. pfd. ........................ United States 9,300 460,931
Salomon, Inc., 6.25% cvt. pfd. ............................. United States 6,700 330,813
Texas Utilities Co., 9.25% cvt. pfd. ....................... United States 40,000 2,255,000
Triathlon Broadcasting, 9.00% cvt. pfd. .................... United States 20,000 193,750
Union Pacific Capital Trust, 6.25% cvt. pfd. ............... United States 40,000 1,860,000
-----------
Total Convertible Preferred Stocks (Cost $11,083,904)....... 10,841,694
-----------
PRINCIPAL
AMOUNT*
---------
Bonds 29.5%
Commercial Services 1.0%
Ameriserv Food Co., senior sub. notes, 10.125%, 7/15/07..... United States $ 1,000,000 815,000
Ameriserv Food Distribution, senior notes, 8.875%, 10/15/06. United States 500,000 426,250
Big Flower Press Holdings, senior disc. notes, 8.875%, 7/01/07 United States 300,000 290,250
Iron Mountain, Inc., senior sub. notes, 8.75%, 9/30/09 ..... United States 350,000 348,250
Outdoor Systems, Inc., senior sub. notes, 8.875%, 6/15/07... United States 500,000 522,500
-----------
2,402,250
-----------
Consumer Durables .9%
AMF Group, Inc., senior disc. notes, zero coupon to 3/15/00,
12.25% thereafter, 3/15/06 .............................. United States 1,118,000 542,230
Revlon Consumer Products Corp., senior sub. notes,
8.625%, 2/01/08 ............................................. United States 1,500,000 1,361,250
Sealy Corp., senior sub. notes, 9.875%, 12/15/07............ United States 200,000 180,000
Sealy Corp., zero coupon to 12/15/02, 10.875% thereafter, 12/15/07 United States 300,000 168,000
-----------
2,251,480
-----------
Consumer Non-Durables .2%
Compania Alimentos Fargo, senior notes, 144A, 13.25%, 8/1/08 Argentina 500,000 300,000
Doane Products Co., senior notes, 10.625%, 3/01/06 ......... United States 100,000 116,084
-----------
416,084
-----------
Consumer Services 6.7%
Chancellor Media Corp., senior sub notes, 144A, 9.00%, 10/01/08 United States $ 1,000,000 $ 1,010,000
Chancellor Media Corp., senior sub. notes, 8.75%, 6/15/07... United States 500,000 495,000
CSC Holdings, Inc., 9.875%, 4/01/23......................... United States 1,750,000 1,881,250
Diamond Cable Communications, Plc., senior disc. notes,
zero coupon to 2/15/02, 10.75% thereafter, 2/15/07....... United Kingdom 150,000 95,063
Diamond Cable Communications Plc., senior disc. notes,
zero coupon to 12/15/00, 11.75% thereafter, 12/15/05.... United Kingdom 150,000 113,250
Diamond Holdings Plc., 9.125%, 2/01/08...................... United Kingdom 1,000,000 932,500
Fox Family Worldwide, Inc., senior disc. notes,
zero coupon to 11/01/02, 10.25% thereafter, 11/01/07.... United States 150,000 89,250
Fox/Liberty Networks, LLC., senior disc. notes,
zero coupon to 8/15/02, 9.75% thereafter, 8/15/07........ United States 2,000,000 1,305,000
LA Petite Academy Inc., Series B, 10.00%, 5/15/08........... United States 1,500,000 1,462,500
Lin Holdings Corp. senior disc. notes,
zero coupon to 3/1/03, 10.00% thereafter, 3/1/08........ United States 1,500,000 971,250
Prime Hospitality Corp., senior sub. notes, Series B, 9.75%, 4/01/07 United States 2,000,000 1,900,000
Regal Cinemas, Inc., senior sub. notes, 144A, 9.50%, 6/01/08 United States 2,000,000 1,965,000
Sinclair Broadcast Group Inc., senior sub notes, 8.75%, 12/15/07 United States 1,700,000 1,632,000
Six Flags Entertainment., senior notes, 8.875%, 4/01/06..... United States 600,000 602,250
Telewest, Plc., senior deb., zero coupon to 10/01/00,
11.00% thereafter, 10/01/07............................... United Kingdom 2,000,000 1,600,000
-----------
16,054,313
-----------
Energy Minerals 2.2%
Abraxas Petroleum Corp., senior notes, Series B, 11.50%, 11/01/04 United States 880,000 682,000
Chesapeake Energy Corp., senior notes, Series B, 9.625%, 5/1/05 United States 300,000 256,500
Clark R&M, Inc., senior sub. notes, 8.875%, 11/15/07........ United States 1,000,000 855,000
Conproca, SA, S.F., secured senior notes, 144A, 12.00%, 6/16/10 Mexico 1,800,000 1,566,000
Nuevo Energy Co., senior sub notes, Series B, 8.875%, 6/1/08 United States 400,000 398,000
P & L Coal Holdings Corp., senior sub. notes, 144A, 9.625%, 5/15/08 United States 1,500,000 1,492,500
-----------
5,250,000
-----------
Finance .4%
Homeside Finance, Inc., senior notes, Series B, 11.25%, 5/15/03 United States 100,000 117,500
Pera Financial Services, secured notes, 9.375%, 10/15/02 ... Turkey 1,000,000 695,000
Pera Financial Services, secured notes, 9.375%, 10/15/02 ... Turkey 160,000 111,200
-----------
923,700
-----------
Health Services 1.5%
Fresenius Medical Care, 7.875%, 2/1/08...................... Germany 1,000,000 935,000
Magellan Health Services, Inc., senior sub. notes, 9.00%, 2/15/08 United States 1,000,000 832,500
Pharmerica, Inc., senior sub. notes, 8.375%, 4/01/08........ United States 350,000 302,750
Tenet Healthcare Corp., senior sub. notes, 8.625%, 1/15/07.. United States 200,000 209,000
Vencor Operating Inc., senior sub notes, 9.875%, 5/1/05..... United States 1,500,000 1,200,000
-----------
3,479,250
-----------
Industrial Services .1%
Dailey International, Inc., senior sub. notes, Series B, 9.50%, 2/15/08 United States 300,000 136,500
-----------
Non-Energy Minerals .4%
LTV Corp., senior notes, 8.20%, 9/15/07..................... United States $ 1,000,000 $ 950,000
-----------
Process Industries 3.7%
Anchor Glass, first mortgage notes, 11.25%, 4/01/05......... United States 300,000 308,250
Anchor Glass Container, senior notes, 9.875%, 3/15/08....... United States 700,000 679,000
Ball Corp., senior notes, 144A, 7.75%, 8/01/06.............. United States 500,000 520,000
Ball Corp., senior sub.notes, 144A, 8.25%, 8/01/08.......... United States 350,000 363,125
Four M Corp., senior notes, Series B, 12.00%, 6/01/06....... United States 200,000 151,000
Graham Packaging Corp., senior sub. notes, 8.75%, 1/15/08... United States 200,000 187,500
Graham Packaging Corp., senior disc. notes,
zero coupon to 1/15/03,10.75% thereafter, 1/15/09....... United States 1,700,000 1,045,500
Huntsman Corp., senior sub. notes, 144A, 9.50%, 7/01/07..... United States 1,000,000 945,000
Pillowtex Corp., senior sub. Notes, 9.00%, 12/18/07......... United States 2,000,000 2,030,000
Pindo Deli Finance Mauritius, Ltd., senior notes, 10.25%, 10/01/02 Indonesia 700,000 372,750
Purina Mills Inc., senior sub notes, 144A, 9.00%, 3/15/10... United States 600,000 589,500
Repap New Brunswick, senior notes, 9.00%, 6/1/04............ Canada 700,000 651,000
Universal Compression Inc., senior disc. notes,
zero coupon to 2/15/03, 9.875% thereafter, 2/15/08...... United States 1,250,000 693,750
Windmere - Durable holdings, senior sub notes, 10.00%, 7/31/08 United States 500,000 427,500
-----------
8,963,875
-----------
Producer Manufacturing 3.3%
Aetna Industries, Inc., senior notes, 11.875%, 10/01/06..... United States 200,000 203,000
Allied Waste Industries, Inc., senior disc. notes,
zero coupon to 6/01/02, 11.30% thereafter, 6/01/07....... United States 500,000 375,000
Cambridge Industries, Inc., senior sub. notes, 10.25%, 7/15/07 United States 600,000 544,500
Collins & Aikman Products, senior sub. notes, 11.50%, 4/15/06 United States 100,000 99,500
Falcon Building Products, Inc., senior disc. sub. notes, Series B,
zero coupon to 6/15/02, 10.50% thereafter, 6/15/07...... United States 250,000 125,000
Falcon Building Products, Inc., senior sub. notes, United States 1,000,000 827,500
Series B, 9.50%, 6/15/07
a,dHarvard Industries, Inc., senior notes, 11.125%, 8/01/05.. United States 300,000 48,000
International Comfort Products, senior notes, Series B, 8.625%, 5/15/08 United States 1,500,000 1,440,000
Intertek Finance, Plc., senior sub. notes, Series B, 10.25%, 11/01/06 United Kingdom 100,000 90,500
LES, Inc., senior sub. notes, 144A, 9.25%, 6/01/08 ......... United States 1,350,000 1,350,000
LDM Technologies, Inc., senior sub. notes, 10.75%, 1/15/07.. United States 200,000 178,000
Nortek, Inc., senior notes, 144A, 8.875%, 8/01/08........... United States 500,000 485,000
Nortek, Inc., senior notes, Series B, 9.125%, 9/01/07....... United States 300,000 294,000
Oshkosh Truck Corp., senior sub. notes 8.75%, 3/01/08....... United States 400,000 370,000
Talon Automotive Group, senior sub. Notes, Series B, 9.625%, 5/1/08 United States 800,000 708,000
Terex Corp., senior sub notes, 8.875%, 4/1/08............... United States 1,000,000 910,000
-----------
8,048,000
-----------
Retail Trade .3%
Fleming Cos., Inc., senior sub. notes, 10.50%, 12/01/04..... United States 500,000 467,500
Shoppers Food Warehouse, senior notes, 9.75%, 6/15/04....... United States 125,000 133,125
Specialty Retailers, Inc., senior notes, 8.50%, 7/15/05..... United States 250,000 231,250
-----------
831,875
-----------
Transportation .7%
American Commercial Lines, 144A, 10.25%, 6/30/08............ United States $ 1,000,000 $ 980,000
Ultrapetrol Ltd., mortgage notes, 10.50%, 4/1/08............ Bahamas 1,000,000 630,000
-----------
1,610,000
-----------
Utilities and Telecommunications 8.1%
AES Corp., senior sub. notes, 8.50%, 11/01/07............... United States 750,000 708,750
AES China Generating Co., Ltd., senior notes, 10.125%, 12/15/06 Bermuda 100,000 57,750
Allegiance Telecom, Inc., senior disc. notes, Series B, zero
coupon to 2/15/03,11.75%, thereafter, 2/15/08.............. United States 2,000,000 810,000
Arch Communications Group, Inc., senior disc. notes, zero coupon
to 3/15/01, 10.875% thereafter, 3/15/08.................... United States 300,000 111,000
Comcast Cellular, senior notes, Series B, 9.50%, 5/01/07.... United States 400,000 414,000
ESI Tractebel Acq. Corp., 7.99%, 12/30/11................... United States 250,000 233,452
Flag Ltd, senior notes, 8.250%, 1/30/08..................... Bermuda 200,000 186,000
IXC Communications Inc., senior sub. notes, 9.00%, 4/15/08.. United States 650,000 641,875
IntelCom Group, Inc., senior disc. notes, zero coupon to
5/01/01, 12.50% thereafter, 5/01/06 ...................... United States 2,250,000 1,552,500
Intermedia Communications, senior disc. notes, Series B,
zero coupon to 7/15/02, 11.25% thereafter, 7/15/07....... United States 2,000,000 1,330,000
Iridium L.L.C., senior notes, Series D, 10.875%, 7/15/05.... United States 2,000,000 1,520,000
Level 3 Communications, senior notes, 9.125%, 5/1/08........ United States 2,000,000 1,890,000
Metrocall, Inc., senior sub. notes, 9.75%, 11/01/07......... United States 1,000,000 915,000
Microcell Telecommunication, senior disc. notes, Series B,
zero coupon to 12/01/01, 14.00% thereafter, 6/01/06..... Canada 600,000 387,000
Millicom International Cellular, SA, senior disc. notes,
zero coupon to 6/01/01, 13.50% thereafter, 6/01/06........ Luxembourg 300,000 180,000
Netia Holdings B.V., senior notes,10.25%, 11/01/07.......... Poland 200,000 154,500
Netia Holdings BV, senior disc. notes, zero coupon to 11/01/01,11.25%
thereafter, 11/01/07..................................... Poland 500,000 256,250
Nextel Communications, senior disc. notes, zero coupon to
10/31/02, 9.75% thereafter, 10/31/07..................... United States 500,000 280,000
Nextel Communications, senior disc. notes, zero coupon to
2/15/99, 9.75% thereafter, 8/15/04....................... United States 500,000 470,000
Nextel Communications, senior disc. notes, zero coupon to
2/15/03, 9.95% thereafter, 2/15/08....................... United States 1,300,000 708,500
Nextlink Communications, Inc., senior notes, 9.625%, 10/01/07 United States 250,000 232,500
Nextlink Communications, Inc., senior notes, 9.00%, 3/15/08. United States 750,000 686,250
Nextlink Communications, Inc., senior disc. notes, zero coupon
to 4/15/03, 9.45% thereafter 4/15/08..................... United States 650,000 354,250
Niagara Mohawk Power Corp., senior disc. notes, Series H,
zero coupon to 7/01/03, 8.50% thereafter, 7/01/10....... United States 1,500,000 1,106,250
Orion Network Systems, Inc., SA, senior disc. notes
zero coupon to 1/15/02, 12.50% thereafter, 1/15/07..... United States 300,000 178,500
Paging Network, Inc., senior sub. notes, 10.125%, 8/01/07... United States 400,000 392,000
RSL Communications Plc., senior disc. notes, 144A,
zero coupon to 3/01/03, 10.125% thereafter, 3/1/08..... United Kingdom 1,000,000 500,000
Sprint Spectrum, L.P., senior disc. notes, zero coupon to
8/01/01, 12.50% thereafter, 8/15/06...................... United States 300,000 263,250
Utilities and Telecommunications (cont.)
Sygnet Wireless, Inc., senior notes, 11.50%, 10/01/06....... United States $ 2,000,000 $ 2,250,000
Triton Communications L.L.C., senior disc. notes, 144A,
zero coupon to 5/1/03, thereafter 11%, 5/1/08........... United States 1,750,000 700,000
-----------
19,469,577
-----------
Total Bonds (Cost $77,627,147).............................. 70,786,904
-----------
Convertible Bonds 2.5%
Electronic Technology .4%
Dovatron International, Inc., cvt., sub. notes, 6.00%, 10/15/02 United States 1,000,000 955,000
-----------
Finance .4%
Macerich Co., cvt., sub. deb., 144A, 7.25%, 12/15/02........ United States 1,000,000 955,000
-----------
Health Services .9%
Omnicare, Inc., cvt., 5.00%, 12/01/07....................... United States 2,000,000 2,150,000
-----------
Industrial Services .8%
Diamond Offshore Drilling, Inc., cvt., 3.75%, 2/15/07....... United States 2,000,000 2,007,500
-----------
Total Convertible Bonds (Cost $6,214,493)................... 6,067,500
-----------
Other Mortgages 2.3%
MLMI, 1998-C2 A2, 6.39%, 2/15/30............................ United States 1,500,000 1,525,208
Morgan Stanley Capital I, 6.55%, 12/15/07................... United States 2,000,000 2,052,500
Delta Home Equity, 6.37%, 7/15/28........................... United States 2,000,000 1,965,000
-----------
Total Other Mortgages (Cost $5,579,900)..................... 5,542,708
-----------
U.S. Government Securities and Agencies/Mortgages 9.5%
U.S. Government Agencies/Mortgages 8.2%
FHLMC, 6.00%, 4/01/09....................................... United States 19,194 19,323
FHLMC, 7.00%, 1/01/09....................................... United States 16,642 16,887
FHLMC, 6.00%, 1/01/11....................................... United States 17,677 17,741
FHLMC, 6.50%, 4/01/11....................................... United States 29,536 29,818
FHLMC, 7.00%, 9/01/11....................................... United States 36,004 36,479
FHLMC, 6.00%, 5/01/13....................................... United States 731,200 735,142
FHLMC, 6.00%, 9/01/13....................................... United States 493,240 495,900
FHLMC, 7.00%, 4/01/24....................................... United States 42,545 43,312
FHLMC, 7.50%, 4/01/24....................................... United States 34,241 35,044
FHLMC, 8.50%, 12/01/24 ..................................... United States 19,771 20,605
FHLMC, 9.00%, 12/01/24 ..................................... United States 9,909 10,430
FHLMC, 7.00%, 11/01/25 ..................................... United States 24,939 25,383
FHLMC, 8.00%, 11/01/25 ..................................... United States 18,751 19,262
FHLMC, 6.50%, 12/01/25 ..................................... United States 33,067 33,373
FHLMC, 8.00%, 1/01/26....................................... United States 15,270 15,686
FHLMC, 7.50%, 1/01/26....................................... United States 25,991 26,597
FHLMC, 6.50%, 3/01/26....................................... United States 44,679 45,076
FHLMC, 7.00%, 9/01/26....................................... United States 22,222 22,618
FHLMC, 7.50%, 1/01/27....................................... United States 45,013 46,059
FHLMC, 7.00%, 4/01/28....................................... United States 210,743 215,237
FHLMC, 7.00%, 4/01/28....................................... United States 144,420 147,501
U.S. Government Agencies/Mortgages (cont.)
FHLMC, 7.00%, 5/01/28....................................... United States $ 628,789 $ 642,151
FNMA, 7.50%, 10/01/07....................................... United States 24,147 24,825
FNMA, 6.50%, 2/01/09........................................ United States 23,932 24,353
FNMA, 6.50%, 4/01/11........................................ United States 19,514 19,832
FNMA, 6.50%, 6/01/13........................................ United States 971,531 986,787
FNMA, 6.50%, 1/01/24........................................ United States 30,835 31,125
FNMA, 7.00%, 5/01/24........................................ United States 18,995 19,378
FNMA, 8.00%, 1/01/25........................................ United States 19,343 20,002
FNMA, 9.00%, 3/01/25........................................ United States 8,072 8,512
FNMA, 9.00%, 5/01/25........................................ United States 4,242 4,473
FNMA, 8.50%, 7/01/25........................................ United States 14,034 14,616
FNMA, 8.00%, 12/01/25....................................... United States 653,728 675,876
FNMA, 7.00%, 1/01/26........................................ United States 44,585 45,482
FNMA, 7.00%, 3/01/26........................................ United States 45,356 46,260
FNMA, 7.50%, 3/01/26........................................ United States 27,087 27,729
FNMA, 8.00%, 5/01/26........................................ United States 17,542 18,135
FNMA, 8.00%, 6/01/26........................................ United States 11,840 12,240
FNMA, 7.50%, 8/01/26........................................ United States 26,599 27,230
FNMA, 7.50%, 10/01/26....................................... United States 13,672 13,996
FNMA, 8.00%, 1/01/27........................................ United States 35,865 37,121
FNMA, 7.00%, 4/01/27........................................ United States 879,433 899,645
FNMA, 6.50%, 3/01/28........................................ United States 2,913,759 2,939,482
FNMA, 7.00%, 6/01/28........................................ United States 1,461,529 1,495,213
FNMA, 6.00%, 9/01/28........................................ United States 988,214 977,483
FNMA, 6.00%, 10/01/28....................................... United States 1,009,469 998,507
bFNMA, 6.50%, 11/01/28....................................... United States 1,000,000 1,007,813
GNMA, SF, 7.00%, 7/15/08 ................................... United States 1,010,000 1,038,674
GNMA, SF, 7.50%, 9/15/23.................................... United States 16,007 16,522
GNMA, SF, 6.50%, 3/15/24.................................... United States 45,709 46,270
GNMA, SF, 8.00%, 6/15/24.................................... United States 37,255 38,649
GNMA, SF, 9.00%, 1/15/25.................................... United States 4,866 5,190
GNMA, SF, 8.00%, 2/15/25.................................... United States 14,788 15,338
GNMA, SF, 9.50%, 6/15/25.................................... United States 9,937 10,736
GNMA, SF, 7.50%, 1/15/26.................................... United States 18,570 19,154
GNMA, SF, 7.50%, 1/15/26.................................... United States 20,570 21,217
GNMA, SF, 7.50%, 2/15/26.................................... United States 21,355 22,026
GNMA, SF, 7.00%, 3/15/26.................................... United States 20,377 20,865
GNMA, SF, 9.00%, 3/15/26.................................... United States 34,259 36,530
GNMA, SF, 8.00%, 6/15/26.................................... United States 41,256 42,782
GNMA, SF, 8.50%, 7/15/26.................................... United States 18,487 19,559
GNMA, SF, 7.50%, 9/15/27.................................... United States 926,806 956,251
GNMA, SF, 8.50%, 8/15/24.................................... United States 9,528 10,099
GNMA, SF, 7.50%, 5/15/27.................................... United States 1,009,999 1,042,088
GNMA, SF, 7.00%, 11/15/27................................... United States 1,009,999 1,034,732
GNMA, SF, 8.00%, 4/15/28.................................... United States 992,464 1,029,372
U.S. Government Agencies/Mortgages (cont.)
GNMA, SF, 7.00%, 5/15/28.................................... United States $ 49,340 $ 50,531
GNMA, SF, 7.00%, 6/15/28.................................... United States 1,002,120 1,026,311
-----------
19,578,635
-----------
U.S. Government Securities 1.3%
U.S. Treasury Bonds, 7.125%, 2/15/23........................ United States 400,000 494,125
U.S. Treasury Note, 5.625%, 12/31/02........................ United States 2,500,000 2,617,970
-----------
3,112,095
-----------
Total U.S. Government Securities and Agencies/Mortgages
(Cost $22,322,284)....................................... 22,690,730
-----------
Other U.S. Government and Agency Securities 7.3%
Fannie Mae, 5.75%, 4/15/03.................................. United States 11,000,000 11,421,575
Fannie Mae, 5.75%, 6/15/05.................................. United States 6,000,000 6,208,050
-----------
Total Other U.S. Government and Agency Securities (Cost $17,027,046) 17,629,625
-----------
Foreign Government and Agency Securities 37.4%
Australian Government, Series 705, 7.50%, 7/15/05........... Australia 3,600,000 AUD 2,585,503
Belgium Kingdom, 6.25%, 3/28/07............................. Belgium 106,245,000 BEF 3,545,958
Bundesobligation, Series 110, 5.375%, 2/22/99 .............. Germany 1,205,000 DEM 731,644
Bundesobligation, Series 118, 5.25%, 2/21/01 ............... Germany 2,565,000 DEM 1,611,295
Bundesrepublic Deutschland, Series 97, 6.00%, 1/04/07....... Germany 3,110,000 DEM 2,107,822
Bundesschatzanweisungen, 6.875%, 2/24/99.................... Germany 1,035,000 DEM 631,111
Buoni Poliennali del Tesoro, 10.50%, 7/15/00................ Italy 2,055,000,000 ITL 1,392,119
Buoni Poliennali del Tesoro, 7.75%, 11/01/06................ Italy 2,815,000,000 ITL 2,097,869
Deutschland Republic, 6.00%, 1/05/06........................ Germany 1,175,000 DEM 793,171
Government of Canada, 10.50%, 7/01/00 ...................... Canada 935,000 CAD 659,671
Government of Canada, 10.50%, 3/01/01 ...................... Canada 1,645,000 CAD 1,196,001
Government of Canada, 10.00%, 5/01/02 ...................... Canada 1,515,000 CAD 1,139,776
Government of Canada, 6.50%, 6/01/04 ....................... Canada 1,000,000 CAD 696,891
Government of Canada, 10.00%, 6/01/08....................... Canada 700,000 CAD 618,109
Government of France, 5.50%, 4/25/07........................ France 6,000,000 FRF 1,181,321
Government of Jamaica, 9.625%, 7/02/02 ..................... Jamaica 1,750,000 1,426,250
Kingdom of Denmark, 9.00%, 11/15/00......................... Denmark 1,785,000 DKK 310,215
Kingdom of Denmark, 7.00%, 12/15/04......................... Denmark 6,000,000 DKK 1,082,003
Netherlands Government, Series 1 & 2, 6.00%, 1/15/06 ....... Netherlands 2,385,000 NEG 1,424,973
New Zealand Government, 6.50%, 2/15/00 ..................... New Zealand 1,295,000 NZD 696,944
Peru - PDI., Series 20YR, 4.00%, 3/07/17.................... Peru 5,100,000 2,932,500
Republic of Korea, 8.875%, 4/15/08.......................... South Korea 3,100,000 2,865,578
Republic of Argentina, 9.25%, 2/23/01....................... Argentina 275,000 270,188
Republic of Argentina, 11.00%, 10/09/06..................... Argentina 2,950,000 2,935,250
Republic of Argentina, 5.75%, 3/31/23....................... Argentina 2,000,000 1,390,000
Republic of Argentina, 9.75%, 9/19/27....................... Argentina 730,000 633,731
Republic of Argentina, Bonos Del Tesoro, 8.75%, 5/09/02 .... Argentina 3,800,000 3,379,150
Republic of Argentina, Global, 11.375%, 1/30/17............. Argentina 160,000 155,200
Republic of Brazil, 8.875%, 11/05/01........................ Brazil 2,295,000 2,094,188
Republic of Brazil, 9.375%, 4/07/08......................... Brazil 3,000,000 2,055,000
Republic of Brazil, 6.188%, 4/15/12......................... Brazil $ 300,000 $ 159,189
Republic of Brazil, 10.125%, 5/15/27........................ Brazil 2,200,000 1,524,600
Republic of Brazil, C Bond, 5.00%, 4/15/14 ................. Brazil 2,355,240 1,474,335
Republic of Bulgaria, floating rate deb., Series A, 6.688%, 7/28/11 Bulgaria 4,820,000 3,235,425
Republic of Bulgaria, floating rate deb., 6.688%, 7/28/11... Bulgaria 110,000 73,838
Republic of Ecuador Disc, 6.625%, 2/28/25 .................. Ecuador 1,250,000 642,188
Republic of Ecuador, unsub., 11.25%, 4/25/02 ............... Ecuador 1,500,000 1,215,000
Republic of Ecuador, unsub., 144A, 11.25%, 4/25/02 ......... Ecuador 750,000 607,500
Republic of Panama, 8.875%, 9/30/27......................... Panama Republic of 1,500,000 1,383,750
Republic of Turkey, 144A, 9.875%, 2/23/05 .................. Turkey 850,000 707,625
Republic of Turkey, 144A, 10.00%, 9/19/07................... Turkey 875,000 755,781
Republic of Venezuela, 6.625%, 12/18/07..................... Venezuela 904,762 554,732
Republic of Venezuela, 9.25%, 9/15/27....................... Venezuela 5,383,000 3,310,545
Republic of Venezuela, Disc. W-A, 6.563%, 3/31/20........... Venezuela 250,000 153,750
Republic of Venezuela, senior unsub. notes, 9.125%, 6/18/07. Venezuela 1,200,000 807,000
Republic of Venezuela, 144A, 9.125%, 6/18/07................ Venezuela 100,000 67,250
Russian Federation, 10.00%, 6/26/07......................... Russia 8,000,000 1,970,000
SEI Holdings IX, Inc., senior notes, 144A, 11.00%, 11/30/00 Trinidad And Tobago 125,000 118,750
Spanish Government, 8.80%, 4/30/06 ......................... Spain 200,000,000 ESP 1,817,248
Swedish Government, 10.25%, 5/05/03......................... Sweden 7,000,000 SEK 1,115,395
Treuhandanstalt, 7.75%, 10/01/02............................ Germany 1,530,000 DEM 1,062,002
Turkey Republic of, 144A, 9.875%, 2/23/05 .................. Turkey 1,680,000 1,398,600
Turkey Republic of, Reg S, 10.00%, 9/19/07 ................. Turkey 1,315,000 1,135,831
United Kingdom Treasury, 9.50%, 4/18/05 .................... United Kingdom 880,000 GBP 1,820,893
United Kingdom Treasury, 7.50%, 4/18/06 .................... United Kingdom 1,681,000 GBP 3,248,608
United Mexican States, 9.75%, 2/06/01....................... Mexico 1,950,000 2,013,375
United Mexican States, 8.625%, 3/12/08 ..................... Mexico 7,470,000 6,708,060
United Mexican States, 11.375%, 9/15/16 .................... Mexico 2,810,000 2,799,463
United Mexican States, 11.50%, 5/15/26 ..................... Mexico 2,850,000 2,949,750
World Bank IBRD-Global Bond, 4.50%, 3/20/03 ................ Japan 45,000,000 JPY 454,409
-----------
Total Foreign Government and Agency Securities (Cost $94,817,958) 89,924,323
-----------
Total Long Term Investments (Cost $235,176,429) ............ 224,040,040
-----------
cRepurchase Agreement 4.5%...................................
Joint Repurchase Agreement, 5.350%, 11/02/98, (Maturity Value
$10,687,852) (Cost $10,683,089)........................... United States $10,683,089 $ 10,683,089
Barclays Capital Group, Inc. (Maturity Value $1,098,541)
Chase Securities, Inc. (Maturity Value $1,098,541)
CIBC Wood Gundy Securities Corp. (Maturity Value $1,098,541)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $1,098,541)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $1,098,541)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $800,983)
Greenwich Capital Markets, Inc. (Maturity Value $1,098,541)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $1,098,541)
Paribas Corp. (Maturity Value $1,098,541)
SBC Warburg Dillon Read, Inc. (Maturity Value $1,098,541)
Collateralized by U.S. Treasury Bills and Notes -----------
Total Investments (Cost $245,859,518) 97.7%................. 234,723,129
Other Assets, less Liabilities 2.3%......................... 5,620,061
-----------
Net Assets 100.0% .......................................... $240,343,190
-----------
Currency Abbreviations
AUD -Australian Dollar
BEF -Belguim Franc
CAD -Canadian Dollar
DEM -German Mark
DKK -Danish Krone
ESP -Spanish Peseta
FRF -French Franc
GBP -British Pound
ITL -Italian Lira
JPY -Japanese Yen
NEG -Netherland Guilder
NZD -New Zealand Dollar
SEK -Swedish Krona
*Securities traded in U.S. dollars unless otherwise indicated.
aNon-income producing.
bSufficient collateral has been segregated for securities traded on a when issued or delayed delivery.
cSee Note 1(c) regarding joint repurchase agreement.
dSee Note 7 regarding defaulted securities.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements
Statements of Assets and Liabilities
October 31, 1998 (unaudited)
Franklin Franklin Franklin
Biotechnology Blue Chip California
Discovery Fund Fund Growth Fund
-----------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost - Unaffiliated issuers........................ $63,266,852 $17,474,285 $654,470,383
Cost - Non-controlled affiliated issuers........... -- -- 14,288,521
-----------------------------------------------
Value - Unaffiliated issuers....................... 55,470,153 19,376,412 708,333,430
Value - Non-controlled affiliated issuers.......... -- -- 8,118,750
Repurchase agreements, at value and cost............ 8,605,154 3,028,354 70,171,082
Cash................................................ 164,587 79,794 2,134,042
Receivables:
Investment securities sold......................... 54,998 67,745 114,058
Capital shares sold................................ 184,456 10,938 632,775
Dividends and interest............................. -- 24,427 575,173
Affiliates......................................... -- 12,705 --
Deposits with brokers for securities sold short..... 4,645,845 -- --
-----------------------------------------------
Total assets......................................... 69,125,193 22,600,375 790,079,310
-----------------------------------------------
Liabilities:
Payables:
Investment securities purchased.................... -- 29,812 --
Capital shares redeemed............................ 46,074 13,325 888,938
Affiliates......................................... 216,628 20,103 1,097,045
Shareholders....................................... 3,216 184,849 671,073
Other liabilities................................... 36,721 29,782 64,729
-----------------------------------------------
Total liabilities.................................... 302,639 277,871 2,721,785
-----------------------------------------------
Net assets, at value................................ $68,822,554 $22,322,504 $787,357,525
===============================================
Net assets consist of:
Undistributed net investment income (loss).......... $ (254,973) $ 97,402 $ 1,809,446
Net unrealized appreciation (depreciation).......... (7,796,699) 1,902,864 47,693,276
Accumulated net realized loss....................... (1,076,282) (538,148) (33,386,136)
Capital shares...................................... 77,950,508 20,860,386 771,240,939
-----------------------------------------------
Net assets, at value................................. $68,822,554 $22,322,504 $787,357,525
===============================================
Franklin Franklin Franklin
Biotechnology Blue Chip California
Discovery Fund Fund Growth Fund
Class I:
Net assets, at value................................ $68,822,554 $22,322,504 $661,395,057
===============================================
Shares outstanding.................................. 3,001,137 1,842,461 30,586,754
===============================================
Net asset value per share*.......................... $22.93 $12.12 $21.62
===============================================
Maximum offering price per share
(net asset value per share / 94.25%).............. $24.33 $12.86 $22.94
===============================================
Class II:
Net assets, at value................................ -- -- $125,962,468
===============================================
Shares outstanding.................................. -- -- 5,873,153
===============================================
Net asset value per share*.......................... -- -- $21.45
===============================================
Maximum offering price per share
(net asset value per share / 99.00%).............. -- -- $21.67
===============================================
*Redemption price is equal to net asset value less any applicable contingent deferred sales charge.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Assets and Liabilities (cont.)
October 31, 1998 (unaudited)
Franklin Franklin Franklin
Global Health Global MidCap
Care Fund Utilities Fund Growth Fund
-----------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost - Unaffiliated issuers........................ $117,752,450 $154,665,866 $21,523,954
Cost - Non-controlled affiliated issuers........... 7,353,447 -- --
-----------------------------------------------
Value - Unaffiliated issuers....................... 110,811,145 196,222,471 22,763,696
Value - Non-controlled affiliated issuers.......... 1,216,500 -- --
Repurchase agreements, at value and cost............ 15,096,582 14,774,353 6,360,656
Cash................................................ -- -- 57,596
Receivables:
Investment securities sold......................... 4,421,110 548,746 23,645
Capital shares sold................................ 150,701 167,415 47,157
Dividends and interest............................. 5,293 300,864 19,093
-----------------------------------------------
Total assets......................................... 131,701,331 212,013,849 29,271,843
-----------------------------------------------
Liabilities:
Payables:
Investment securities purchased.................... -- -- 31,500
Capital shares redeemed............................ 458,549 521,283 38,809
Affiliates......................................... 257,114 271,698 33,504
Shareholders....................................... 226,060 215,389 4,997
Other liabilities................................... 23,464 5,540 --
-----------------------------------------------
Total liabilities.................................... 965,187 1,013,910 108,810
-----------------------------------------------
Net assets, at value................................ $130,736,144 $210,999,939 $29,163,033
===============================================
Net assets consist of:
Undistributed net investment income (loss).......... $ (796,124) $ 2,148,363 $ 28,654
Net unrealized appreciation (depreciation).......... (13,078,252) 41,557,823 1,239,742
Accumulated net realized loss....................... (3,641,897) (4,184,889) (2,002,155)
Capital shares...................................... 148,252,417 171,478,642 29,896,792
-----------------------------------------------
Net assets, at value................................. $130,736,144 $210,999,939 $29,163,033
-----------------------------------------------
Franklin Franklin Franklin
Global Health Global MidCap
Care Fund Utilities Fund Growth Fund
-----------------------------------------------
Class I:
<S> <C> <C> <C>
Net assets, at value................................ $111,930,388 $195,108,025 $29,163,033
===============================================
Shares outstanding.................................. 7,399,617 12,661,219 2,126,354
===============================================
Net asset value per share*.......................... $15.13 $15.41 $13.72
===============================================
Maximum offering price per share
(net asset value per share / 94.25%).............. $16.05 $16.35 $14.56
===============================================
Class II:
Net assets, at value................................ $ 18,805,756 $ 15,891,914 --
===============================================
Shares outstanding.................................. 1,255,570 1,039,843 --
===============================================
Net asset value per share*.......................... $14.98 $15.28 --
===============================================
Maximum offering price per share
(net asset value per share / 99.00%).............. $15.13 $15.43 --
===============================================
*Redemption price is equal to net asset value less any applicable contingent deferred sales charge.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Assets and Liabilities (cont.)
October 31, 1998 (unaudited)
Franklin Franklin Franklin
Natural Resources Small Cap Strategic
Fund Growth Fund Income Fund
--------------------------------------------------
Assets:
Investments in securities:
<S> <C> <C> <C>
Cost - Unaffiliated issuers........................ $44,449,432 $2,594,798,322 $235,176,429
Cost - Non-controlled affiliated issuers........... -- 1,492,106,757 --
--------------------------------------------------
Value - Unaffiliated issuers....................... 37,385,416 2,499,492,851 224,040,040
Value - Non-controlled affiliated issuers.......... -- 1,196,274,027 --
Repurchase agreements, at value and cost............ 4,230,981 655,542,812 10,683,089
Cash................................................ 7,216 10,533,465 566,582
Receivables:
Investment securities sold......................... 14,859 3,707,601 1,298,496
Capital shares sold................................ 31,972 12,531,007 767,016
Dividends and interest............................. 30,498 1,654,946 4,756,761
Affiliates......................................... -- -- 44,550
Unrealized gain on forward exchange contracts (Note 6) -- -- 51,086
--------------------------------------------------
Total assets......................................... 41,700,942 4,379,736,709 242,207,620
--------------------------------------------------
Liabilities:
Payables:
Investment securities purchased.................... -- 48,974,888 1,327,977
Capital shares redeemed............................ 43,528 12,073,297 144,246
Affiliates......................................... 42,343 5,278,752 183,576
Shareholders....................................... 74,690 1,128,294 71,102
Payable upon return of securities loaned (Note 10).. 617,967 125,442,031 --
Unrealized loss on forward exchange contracts (Note 6) -- -- 98,567
Other liabilities................................... 15,198 181,368 38,962
--------------------------------------------------
Total liabilities.................................... 793,726 193,078,630 1,864,430
--------------------------------------------------
Net assets, at value................................ $40,907,216 $4,186,658,079 $240,343,190
==================================================
Net assets consist of:
Undistributed net investment income................. $ 214,800 $ 7,081,080 $ 457,081
Net unrealized depreciation......................... (7,063,928) (391,138,201) (11,087,275)
Accumulated net realized loss....................... (3,242,626) (112,107,738) (1,477,742)
Capital shares...................................... 50,998,970 4,682,822,938 252,451,126
--------------------------------------------------
Net assets, at value................................. $40,907,216 $4,186,658,079 $240,343,190
==================================================
Franklin Franklin Franklin
Natural Resources Small Cap Strategic
Fund Growth Fund Income Fund
==================================================
Class I:
<S> <C> <C> <C>
Net assets, at value................................ $40,491,217 $3,401,892,984 $218,226,419
==================================================
Shares outstanding.................................. 3,546,439 172,126,040 20,850,948
==================================================
Net assets value per share*......................... $11.42 $19.76 $10.47
==================================================
Maximum offering price per share
(net asset value per share / 94.25%,
94.25%, 95.75%, respectively)................... $12.12 $20.97 $10.93
==================================================
Class II:
Net assets, at value................................ -- $ 643,993,026 $ 22,116,771
==================================================
Shares outstanding.................................. -- 33,144,437 2,112,826
==================================================
Net asset value per share*.......................... -- $19.43 $10.47
==================================================
Maximum offering price per share (net asset
value per share / 99.00%)......................... -- $19.63 $10.58
==================================================
Advisor Class:
Net assets, at value................................ $ 415,999 $ 140,772,069 --
==================================================
Shares outstanding.................................. 36,424 7,093,446 --
==================================================
Net asset value and maximum offering price per share $11.42 $19.85 --
==================================================
*Redemption price is equal to net asset value less any applicable contingent deferred sales charge.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Operations
for the six months ended October 31, 1998 (unaudited)
Franklin Franklin Franklin
Biotechnology Blue Chip California
Discovery Fund Fund Growth Fund
-----------------------------------------------
Investment income:*
<S> <C> <C> <C>
Dividends........................................... $-- $107,743 $ 4,403,937
Interest............................................ 414,929 57,718 2,165,168
-----------------------------------------------
Total investment income.............................. 414,929 165,461 6,569,105
-----------------------------------------------
Expenses:
Management fees (Note 3)............................ 211,008 71,771 1,934,213
Administrative fees (Note 3)........................ 50,772 -- --
Distribution fees (Note 3)
Class I.............................................. 105,344 28,540 858,983
Class II............................................. -- -- 622,225
Transfer agent fees (Note 3)........................ 193,573 22,799 754,190
Custodian fees...................................... 4,865 2,243 8,191
Reports to shareholders............................. 15,047 5,595 222,628
Registration and filing fees........................ 38,224 14,675 180,038
Professional fees................................... 23,701 1,423 12,079
Trustees' fees and expenses......................... 3,326 44 5,304
Amortization of offering costs (Note 1)............. 19,669 -- --
Other............................................... 4,373 8,227 42,945
-----------------------------------------------
Total expenses....................................... 669,902 155,317 4,640,796
Expenses waived/paid by affiliate (Note 3).......... -- (35,875) --
-----------------------------------------------
Net expenses......................................... 669,902 119,442 4,640,796
-----------------------------------------------
Net investment income (loss)........................ (254,973) 46,019 1,928,309
-----------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments.......................................... (2,094,618) (107,443) (55,132,178)
Foreign currency transactions........................ -- (2,490) --
Securities sold short................................ 1,107,625 -- --
-----------------------------------------------
Net realized loss................................... (986,993) (109,933) (55,132,178)
Net unrealized appreciation (depreciation) on:
Investments........................................ (10,447,353) (409,913) (66,108,116)
Translation of assets and liabilities
denominated in foreign currencies................. -- 4,694 --
-----------------------------------------------
Net unrealized depreciation......................... (10,447,353) (405,219) (66,108,116)
-----------------------------------------------
Net realized and unrealized loss..................... (11,434,346) (515,152) (121,240,294)
-----------------------------------------------
Net decrease in net assets resulting from operations. $(11,689,319) $(469,133) $(119,311,985)
===============================================
*Net of foreign taxes of $7,169 for the Franklin Blue Chip Fund.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Operations (cont.)
for the six months ended October 31, 1998 (unaudited)
Franklin Franklin Franklin
Global Health Global MidCap
Care Fund Utilities Fund Growth Fund
-----------------------------------------------
Investment income:*
<S> <C> <C> <C>
Dividends........................................... $ 95,332 $ 3,080,958 $ 106,471
Interest............................................ 228,783 282,057 98,152
-----------------------------------------------
Total investment income.............................. 324,115 3,363,015 204,623
-----------------------------------------------
Expenses:
Management fees (Note 3)............................ 456,985 625,182 94,854
Distribution fees (Note 3)
Class I............................................ 174,049 263,812 38,030
Class II........................................... 105,695 80,772 --
Transfer agent fees (Note 3)........................ 267,490 145,543 22,929
Custodian fees...................................... 8,414 17,907 142
Reports to shareholders............................. 64,049 41,600 6,430
Registration and filing fees........................ 34,726 17,326 11,145
Professional fees................................... 3,998 4,094 1,883
Trustees' fees and expenses......................... 1,014 1,054 202
Other............................................... 3,819 6,002 354
-----------------------------------------------
Total expenses....................................... 1,120,239 1,203,292 175,969
-----------------------------------------------
Net investment income (loss)........................ (796,124) 2,159,723 28,654
-----------------------------------------------
Realized and unrealized gains (losses):
Net realized loss from:
Investments:
Unaffiliated issuers.............................. (3,657,354) (15,482,006) (2,321,733)
Non-controlled affiliated issuers................. (86,485) -- --
Foreign currency transactions...................... (14,137) (25,730) --
-----------------------------------------------
Net realized loss................................... (3,757,976) (15,507,736) (2,321,733)
Net unrealized appreciation (depreciation) on:
Investments........................................ (36,588,074) (12,917,733) (4,750,062)
Translation of assets and liabilities denominated
in foreign currencies............................ -- 1,314 --
-----------------------------------------------
Net unrealized depreciation......................... (36,588,074) (12,916,419) (4,750,062)
-----------------------------------------------
Net realized and unrealized loss..................... (40,346,050) (28,424,155) (7,071,795)
-----------------------------------------------
Net decrease in net assets resulting from operations. $(41,142,174) $(26,264,432) $(7,043,141)
===============================================
*Net of foreign taxes of $1,255, $67,048, and $424 for the Franklin Global
Health Care Fund, the Franklin Global Utilities Fund, and the Franklin MidCap
Growth Fund, respectively.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Operations (cont.)
for the six months ended October 31, 1998 (unaudited)
Franklin Franklin Franklin
Natural Resources Small Cap Strategic
Fund Growth Fund Income Fund
---------------------------------------------------
Investment income:*
Dividends:
<S> <C> <C> <C>
Unaffiliated issuers ................................ $ 251,438 $ 12,796,304 $ 259,749
Non-controlled affiliated issuers (Note 9)........... -- 2,093,374 --
Interest............................................ 178,911 15,115,984 8,608,348
---------------------------------------------------
Total investment income.............................. 430,349 30,005,662 8,868,097
---------------------------------------------------
Expenses:
Management fees (Note 3)............................ 142,518 9,709,133 587,713
Distribution fees (Note 3)
Class I............................................ 67,215 4,375,163 250,607
Class II........................................... -- 3,339,823 37,506
Transfer agent fees (Note 3)........................ 60,781 3,481,031 73,454
Custodian fees...................................... 2,914 33,104 15,184
Reports to shareholders............................. 20,176 794,984 26,100
Registration and filing fees........................ 24,906 1,047,485 79,749
Professional fees................................... 1,678 54,073 2,572
Trustees' fees and expenses......................... 344 32,552 1,209
Other............................................... 2,314 57,234 24,002
---------------------------------------------------
Total expenses....................................... 322,846 22,924,582 1,098,096
Expenses waived/paid by affiliate (Note 3).......... (105,762) -- (545,713)
---------------------------------------------------
Net expenses......................................... 217,084 22,924,582 552,383
---------------------------------------------------
Net investment income............................... 213,265 7,081,080 8,315,714
---------------------------------------------------
Realized and unrealized gains (losses):
Net realized loss from:
Investments:
Unaffiliated issuers ............................... (2,625,865) (87,998,287) (1,240,583)
Non-controlled affiliated issuers................... -- (86,562,766) --
Foreign currency transactions...................... (3,884) (6,201) (102,982)
---------------------------------------------------
Net realized loss................................... (2,629,749) (174,567,254) (1,343,565)
Net unrealized appreciation (depreciation) on:
Investments........................................ (13,386,471) (1,037,140,271) (13,430,188)
Translation of assets and liabilities denominated
In foreign currencies............................ 88 -- 90,438
---------------------------------------------------
Net unrealized depreciation......................... (13,386,383) (1,037,140,271) (13,339,750)
---------------------------------------------------
Net realized and unrealized loss..................... (16,016,132) (1,211,707,525) (14,683,315)
---------------------------------------------------
Net decrease in net assets resulting from operations. $(15,802,867) $(1,204,626,445) $ (6,367,601)
===================================================
*Net of foreign taxes of $9,453 and $78,512 for the Franklin Natural Resources Fund and the Franklin Small Cap
Growth Fund, respectively.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Changes in Net Assets
for the six months ended October 31, 1998 (unaudited)
and the year ended April 30, 1998
Franklin Biotechnology Franklin
Discovery Fund Blue Chip Fund
----------------------------------------------------------------
Six Months Year Six Months Year
Ended Ended Ended Ended
October 31, 1998 April 30, 1998* October 31, 1998 April 30, 1998
----------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income (loss).................. $ (254,973) $ (137,225) $ 46,019 $ 109,740
Net realized gain (loss) from investments and
foreign currency transactions.................. (986,993) 78,552 (109,933) (371,433)
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies.. (10,447,353) 2,650,654 (405,219) 2,021,063
----------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations...................... (11,689,319) 2,591,981 (469,133) 1,759,370
Distributions to shareholders from:
Net investment income:
Class I....................................... -- -- -- (61,919)
Net realized gains:
Class I....................................... -- (92,644) -- (81,033)
----------------------------------------------------------------
Total distributions to shareholders............. -- (92,644) -- (142,952)
Capital share transactions: (Note 2)
Class I........................................ 6,965,716 71,046,820 5,955,517 9,619,758
----------------------------------------------------------------
Net increase (decrease) in net assets......... (4,723,603) 73,546,157 5,486,384 11,236,176
Net assets:
Beginning of period............................ 73,546,157 -- 16,836,120 5,599,944
----------------------------------------------------------------
End of period.................................. $68,822,554 $73,546,157 $22,322,504 $16,836,120
================================================================
Undistributed net investment income (loss)
included in net assets
End of period................................. $ (254,973) $-- $ 97,402 $ 51,383
================================================================
*For the period September 15, 1997 (effective date) to April 30, 1998.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
for the six months ended October 31, 1998 (unaudited)
and the year ended April 30, 1998
Franklin Franklin
California Growth Fund Global Health Care Fund
----------------------------------------------------------------
Six Months Year Six Months Year
Ended Ended Ended Ended
October 31, 1998 April 30, 1998 October 31, 199 April 30, 1998
----------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income (loss).................. $ 1,928,309 $ 3,338,627 $ (796,124) $ (1,510,292)
Net realized gain (loss) from investments and
foreign currency transactions.................. (55,132,178) 42,533,146 (3,757,976) 7,343,486
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies.. (66,108,116) 104,216,403 (36,588,074) 39,299,172
----------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations...................... (119,311,985) 150,088,176 (41,142,174) 45,132,366
Distributions to shareholders from:
Net investment income:
Class I....................................... (1,290,440) (2,778,436) -- (839,395)
Class II...................................... -- (56,235) -- --
Net realized gains:
Class I....................................... -- (20,449,548) -- (10,783,573)
Class II...................................... -- (2,848,861) -- (1,181,824)
----------------------------------------------------------------
Total distributions to shareholders............. (1,290,440) (26,133,080) -- (12,804,792)
Capital share transactions: (Note 2)
Class I........................................ 42,420,021 328,134,373 (28,989,391) (4,628,248)
Class II....................................... 21,584,845 84,411,109 (997,926) 13,414,237
----------------------------------------------------------------
Total capital share transactions................ 64,004,866 412,545,482 (29,987,317) 8,785,989
----------------------------------------------------------------
Net increase (decrease) in net assets........... (56,597,559) 536,500,578 (71,129,491) 41,113,563
Net assets:
Beginning of period............................ 843,955,084 307,454,506 201,865,635 160,752,072
----------------------------------------------------------------
End of period.................................. $787,357,525 $843,955,084 $130,736,144 $201,865,635
================================================================
Undistributed net investment income (loss)
included in net assets
End of period................................. $ 1,809,446 $ 1,171,577 $ (796,124) $--
================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
for the six months ended October 31, 1998 (unaudited)
and the year ended April 30, 1998
Franklin Franklin
Global Utilities Fund MidCap Growth Fund
----------------------------------------------------------------
Six Months Year Six Months Year
Ended Ended Ended Ended
October 31, 1998 April 30, 1998 October 31, 1998 April 30, 1998
----------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income (loss).................. $ 2,159,723 $ 4,178,656 $ 28,654 $ (6,092)
Net realized gain (loss) from investments and
foreign currency transactions.................. (15,507,736) 22,067,993 (2,321,733) 899,279
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies.. (12,916,419) 39,396,240 (4,750,062) 4,795,383
----------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations...................... (26,264,432) 65,642,889 (7,043,141) 5,688,570
Distributions to shareholders from:
Net investment income:
Class I....................................... (1,491,278) (4,337,700) -- --
Class II...................................... (75,147) (173,616) -- --
Net realized gains:
Class I....................................... -- (20,433,197) -- (759,611)
Class II...................................... -- (1,296,647) -- --
----------------------------------------------------------------
Total distributions to shareholders............. (1,566,425) (26,241,160) -- (759,611)
Capital share transactions: (Note 2)
Class I........................................ (5,644,039) 15,321,019 6,342,512 12,082,084
Class II....................................... 1,556,848 5,705,054 -- --
----------------------------------------------------------------
Total capital share transactions................ (4,087,191) 21,026,073 6,342,512 12,082,084
----------------------------------------------------------------
Net increase (decrease) in net assets........... (31,918,048) 60,427,802 (700,629) 17,011,043
Net assets:
Beginning of period............................ 242,917,987 182,490,185 29,863,662 12,852,619
----------------------------------------------------------------
End of period.................................. $210,999,939 $242,917,987 $29,163,033 $29,863,662
================================================================
Undistributed net investment income
included in net assets
End of period.................................. $ 2,148,363 $ 1,555,065 $ 28,654 $--
================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
for the six months ended October 31, 1998 (unaudited)
and the year ended April 30, 1998
Franklin Franklin
Natural Resources Fund Small Cap Growth Fund
------------------------------------------------------------------
Six Months Year Six Months Year
Ended Ended Ended Ended
October 31, 1998 April 30, 1998 October 31, 1998 April 30, 1998
------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income......................... $ 213,265 $ 387,952 $ 7,081,080 $ 6,367,212
Net realized gain (loss) from investments and
foreign currency transactions.................. (2,629,749) 3,269,031 (174,567,254) 168,905,582
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies.. (13,386,383) 4,698,245 (1,037,140,271) 660,877,005
------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations...................... (15,802,867) 8,355,228 (1,204,626,445) 836,149,799
Distributions to shareholders from:
Net investment income:
Class I....................................... (283,075) (290,715) -- (10,251,644)
Advisor Class................................. (8,766) (11,637) -- (376,164)
Net realized gains:
Class I....................................... -- (3,235,588) -- (103,290,267)
Class II...................................... -- -- -- (19,206,121)
Advisor Class................................. -- (65,092) -- (2,705,237)
------------------------------------------------------------------
Total distributions to shareholders............. (291,841) (3,603,032) -- (135,829,433)
Capital share transactions: (Note 2)
Class I........................................ (5,900,107) 12,387,988 421,462,438 2,294,635,207
Class II....................................... -- -- 103,625,056 492,492,347
Advisor Class.................................. (264,004) (483,354) 57,834,242 84,621,122
------------------------------------------------------------------
Total capital share transactions................ (6,164,111) 11,904,634 582,921,736 2,871,748,676
------------------------------------------------------------------
Net increase (decrease) in net assets........... (22,258,819) 16,656,830 (621,704,709) 3,572,069,042
Net assets:
Beginning of period............................ 63,166,035 46,509,205 4,808,362,788 1,236,293,746
------------------------------------------------------------------
End of period.................................. $40,907,216 $63,166,035 $4,186,658,079 $4,808,362,788
==================================================================
Undistributed net investment income
included in net assets
End of period................................. $ 214,800 $ 293,376 $ 7,081,080 $--
==================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
for the six months ended October 31, 1998 (unaudited)
and the year ended April 30, 1998
Franklin
Strategic Income Fund
---------------------------------
Six Months Year Ended
Ended Ended
October 31, 1998 April 30, 1998
---------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C>
Net investment income................................................ $ 8,315,714 $ 6,590,381
Net realized gain (loss) from investments and foreign
currency transactions.............................................. (1,343,565) 335,312
Net unrealized appreciation (depreciation) on investments
and translation of assets and
liabilities denominated in foreign currencies......................... (13,339,750) 2,122,179
---------------------------------
Net increase (decrease) in net assets resulting from operations........ (6,367,601) 9,047,872
Distributions to shareholders from:
Net investment income:
Class I.............................................................. (7,628,162) (6,541,159)
Class II............................................................. (361,518) --
Net realized gains:
Class I.............................................................. -- (692,982)
Class II............................................................. -- --
---------------------------------
Total distributions to shareholders.................................... (7,989,680) (7,234,141)
Capital share transactions: (Note 2)
Class I............................................................... 65,392,664 129,955,768
Class II.............................................................. 22,674,409 --
---------------------------------
Total distributions to shareholders.................................... 88,067,073 129,955,768
Net increase in net assets............................................. 73,709,792 131,769,499
Net assets:
Beginning of period................................................... 166,633,398 34,863,899
---------------------------------
End of period......................................................... $240,343,190 $166,633,398
=================================
Undistributed net investment income included in net assets
End of period......................................................... $ 457,081 $ 131,047
=================================
See notes to financial statements.
</TABLE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (the Trust) is registered under the Investment Company
Act of 1940 as an open-end investment company, consisting of nine separate
series (the Funds). All Funds are non-diversified except the Franklin Blue Chip
Fund, the Franklin MidCap Growth Fund, and the Franklin Small Cap Growth Fund.
The Funds and their investment policies are:
<TABLE>
<CAPTION>
Capital Growth Growth and Income Total Return
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Biotechnology Discovery Fund Strategic Income Fund Global Utilities Fund
Blue Chip Fund Natural Resources Fund
California Growth Fund
Global Health Care Fund
MidCap Growth Fund
Small Cap Growth Fund
</TABLE>
The following summarizes the Funds' significant accounting policies.
a. Security Valuation:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Trustees.
b. Foreign Currency Translation:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. Joint Repurchase Agreement:
The Funds may enter into a joint repurchase agreement whereby their uninvested
cash balance is deposited into a joint cash account to be used to invest in one
or more repurchase agreements. The value and face amount of the joint repurchase
agreement are allocated to the Funds based on their pro-rata interest. A
repurchase agreement is accounted for as a loan by the Funds to the seller,
collateralized by securities which are delivered to the Funds' custodian. The
market value, including accrued interest, of the initial collateralization is
required to be at least 102% of the dollar amount invested by the Funds, with
the value of the underlying securities marked to market daily to maintain
coverage of at least 100%. At October 31, 1998, all outstanding repurchase
agreements had been entered into on October 30, 1998.
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)
d. Forward Exchange Contracts:
The Strategic Income Fund may enter into forward exchange contracts to hedge
against foreign exchange risks. These contracts are valued daily and the Fund's
equity therein is included in the Statement of Assets and Liabilities. Realized
and unrealized gains and losses are included in the Statement of Operations.
e. Securities Sold Short:
The Biotechnology Discovery Fund is engaged in selling securities short, which
obligates the Fund to replace a security borrowed by purchasing the same
security at the current market value. The Fund would incur a loss if the price
of the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund would realize a gain if
the price of the security declines between those dates.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit for the broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short.
f. Income Taxes:
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
distribute all of its taxable income.
g. Security Transactions, Investment Income, Expenses and Distributions:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount is
amortized on an income tax basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.
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. Other expenses are
charged to each Fund on a specific identification basis.
Distributions received by the Trust from securities may be a return of capital
(ROC). Such distributions reduce the cost basis of the securities, and any
distributions in excess of the cost basis are recognized as capital gains.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
h. Offering Costs:
Offering costs are amortized on a straight-line basis over twelve months.
i. Accounting Estimates:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the Funds are indicated below. The
shares have the same rights except for their initial sales load, distribution
fees, voting rights on matters affecting a single class and the exchange
privilege of each class.
<TABLE>
<CAPTION>
Class I, Class II,
Class I Class I & Class II Class I & Advisor Class & Advisor Class
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Biotechnology Discovery Fund California Growth Fund Natural Resources Fund Small Cap Growth Fund
Blue Chip Fund Global Health Care Fund
MidCap Growth Fund Global Utilities Fund
Strategic Income Fund
</TABLE>
At October 31, 1998, there were an unlimited number of shares authorized ($.01
par value). Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>
Franklin Biotechnology Franklin Franklin
Discovery Fund Blue Chip Fund California Growth Fund
-----------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
-----------------------------------------------------------------------------------
Class I Shares:
Six months ended October 31,1998
<S> <C> <C> <C> <C> <C> <C>
Shares sold 830,603 $19,698,279 1,022,297 $12,293,012 8,195,755 $184,761,654
Shares issued in reinvestment
of distributions -- -- -- -- 51,921 1,181,762
Shares redeemed (564,525) (12,732,563) (531,076) (6,337,495) (6,543,531) (143,523,395)
-----------------------------------------------------------------------------------
Net increase 266,078 $ 6,965,716 491,221 $ 5,955,517 1,704,145 $ 42,420,021
===================================================================================
Year ended April 30, 19981
Shares sold 3,010,054 $77,917,478 1,118,441 $12,925,246 20,145,768 $465,817,703
Shares issued in reinvestment
of distributions 3,075 72,075 12,437 135,809 978,677 21,399,872
Shares redeemed (278,070) (6,942,733) (295,806) (3,441,297) (6,859,634) (159,083,202)
-----------------------------------------------------------------------------------
Net increase 2,735,059 $71,046,820 835,072 $ 9,619,758 14,264,811 $328,134,373
===================================================================================
Class II Shares:
Six months ended October 31,1998
Shares sold............................................................................ 1,658,254 $ 37,616,971
Shares redeemed........................................................................ (729,923) (16,032,126)
----------------------------
Net increase........................................................................... 928,331 $ 21,584,845
============================
Year ended April 30, 1998
Shares sold............................................................................ 4,008,172 $ 92,395,912
Shares issued in reinvestment of distributions......................................... 122,953 2,681,530
Shares redeemed........................................................................ (460,393) (10,666,333)
----------------------------
Net increase........................................................................... 3,670,732 $ 84,411,109
============================
1For the Biotechnology Fund, for the period September 15,1997 (effective date) to April 30, 1998.
</TABLE>
<TABLE>
<CAPTION>
2. SHARES OF BENEFICIAL INTEREST (cont.)
Franklin Franklin Franklin
Global Health Care Fund Global Utilities Fund MidCap Growth Fund
------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------------
Class I Shares:
Six months ended October 31,1998
<S> <C> <C> <C> <C> <C> <C>
Shares sold........................ 4,078,597 $ 66,128,445 1,750,468 $28,580,744 691,251 $10,444,854
Shares issued in reinvestment
of distributions................... -- -- 76,618 1,248,894 -- --
Shares redeemed.................... (5,835,388) (95,117,836) (2,216,664) (35,473,677) (276,855) (4,102,342)
------------------------------------------------------------------------------------
Net increase (decrease)............ (1,756,791) $ (28,989,391) (389,578) $ (5,644,039) 414,396 $ 6,342,512
====================================================================================
Year ended April 30, 1998
Shares sold........................ 5,859,007 $114,702,245 3,212,803 $52,323,466 1,253,115 $20,195,538
Shares issued in reinvestment
of distributions................... 579,437 10,337,126 1,370,293 20,834,692 47,614 724,287
Shares redeemed.................... (6,631,021) (129,667,619) (3,569,029) (57,837,139) (551,956) (8,837,741)
------------------------------------------------------------------------------------
Net increase (decrease)............ (192,577) $ (4,628,248) 1,014,067 $15,321,019 748,773 $12,082,084
====================================================================================
Class II Shares:
Six months ended October 31, 1998
Shares sold........................ 203,557 $ 3,390,527 236,326 $ 3,793,734
Shares issued in reinvestment
of distributions................... -- -- 3,803 61,656
Shares redeemed.................... (269,088) (4,388,453) (146,512) (2,298,542)
----------------------------------------------------------
Net increase (decrease)............ (65,531) $ (997,926) 93,617 $ 1,556,848
==========================================================
Year ended April 30, 1998
Shares sold........................ 977,854 $ 18,978,351 374,083 $ 6,062,631
Shares issued in reinvestment
of distributions................... 59,618 1,060,013 83,729 1,266,098
Shares redeemed.................... (344,952) (6,624,127) (100,619) (1,623,675)
----------------------------------------------------------
Net increase....................... 692,520 $ 13,414,237 357,193 $ 5,705,054
==========================================================
</TABLE>
<TABLE>
<CAPTION>
2. SHARES OF BENEFICIAL INTEREST (cont.)
Franklin Franklin Franklin
Natural Resources Fund Small Cap Growth Fund Strategic Income Fund
--------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------------------
Class I Shares:
Six months ended October 31, 1998
<S> <C> <C> <C> <C> <C> <C>
Shares sold........................ 1,271,855 $15,290,724 72,157,670 $1,535,901,300 9,640,705 $103,649,227
Shares issued in reinvestment
of distributions................... 20,556 260,542 -- -- 446,281 4,757,015
Shares redeemed.................... (1,774,449) (21,451,373) (52,670,437) (1,114,438,862) (4,067,306) (43,013,578)
--------------------------------------------------------------------------------------
Net increase (decrease)............ (482,038) $ (5,900,107) 19,487,233 $ 421,462,438 6,019,680 $ 65,392,664
======================================================================================
Year ended April 30, 1998
Shares sold........................ 3,460,003 $53,383,689 136,826,460 $3,281,727,105 13,008,094 $145,482,936
Shares issued in reinvestment
of distributions................... 233,153 3,232,567 4,660,368 102,667,738 433,246 4,823,299
Shares redeemed.................... (2,890,715) (44,228,268) (45,358,271) (1,089,759,636) (1,820,464) (20,350,467)
--------------------------------------------------------------------------------------
Net increase....................... 802,441 $12,387,988 96,128,557 $2,294,635,207 11,620,876 $129,955,768
======================================================================================
Class II Shares:
Six months ended October 31, 1998
Shares sold.................................................. 8,777,974 $ 189,231,387 2,250,351 $ 24,100,571
Shares issued in reinvestment of distributions............... -- -- 22,716 235,997
Shares redeemed.............................................. (4,232,415) (85,606,331) (160,241) (1,662,159)
-----------------------------------------------------------
Net increase................................................. 4,545,559 $ 103,625,056 2,112,826 $ 22,674,409
===========================================================
Year ended April 30, 1998
Shares sold.................................................. 22,584,756 $ 535,761,867
Shares issued in reinvestment of distributions............... 771,371 16,815,889
Shares redeemed.............................................. (2,541,642) (60,085,409)
------------------------------
Net increase................................................. 20,814,485 $ 492,492,347
==============================
</TABLE>
<TABLE>
<CAPTION>
Advisor Class Shares:
Six months ended October 31, 1998
<S> <C> <C> <C> <C>
Shares sold........................ 75,954 $ 1,017,947 3,809,840 $ 83,434,404
Shares issued in reinvestment
of distributions................... 693 8,766 -- --
Shares redeemed.................... (97,861) (1,290,717) (1,279,877) (25,600,162)
-------------------------------------------------------
Net increase (decrease)............ (21,214) $ (264,004) 2,529,963 $ 57,834,242
=======================================================
Year ended April 30, 1998
Shares sold........................ 477,715 $ 7,274,080 3,919,786 $ 93,330,082
Shares issued in reinvestment
of distributions................... 5,516 76,729 90,328 1,991,723
Shares redeemed.................... (505,389) (7,834,163) (436,261) (10,700,683)
-------------------------------------------------------
Net increase (decrease)............ (22,158) $ (483,354) 3,573,853 $ 84,621,122
=======================================================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers and/or directors of
Franklin Advisers, Inc. (Advisers), Franklin/Templeton Distributors, Inc.
(Distributors), Franklin Templeton Services, Inc. (FT Services), and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Funds'
investment manager, principal underwriter, administrative manager and transfer
agent, respectively.
All Funds, except the Blue Chip Fund and the MidCap Growth Fund, pay an
investment management fee to Advisers based on the average net assets of the
Funds as follows:
Annualized
Fee Rate Average Daily Net Assets
--------------------------------------------------------------
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% Over $250 million, up to and including $10 billion
Fees are further reduced on net assets over $10 billion.
The Blue Chip Fund pays an investment management fee to Advisers based on the
average net assets of the Fund as follows:
Annualized
Fee Rate Average Daily Net Assets
------------------------------------------------------------
.750% First $500 million
.625% Over $500 million, up to and including $1 billion
.500% Over $1 billion
The MidCap Growth Fund pays an investment management fee to Advisers of .650%
per year of the average daily net assets of the Fund.
The Biotechnology Discovery Fund pays an administrative fee to FT Services based
on the Fund's average net assets as follows:
Annualized
Fee Rate Average Daily Net Assets
--------------------------------------------------------------
.150% First $200 million
.135% Over $200 million, up to and including $700 million
.100% Over $700 million, up to and including $1.2 billion
.075% Over $1.2 billion
Under a subadvisory agreement, Templeton Investment Counsel, Inc. (TICI)
provides subadvisory services to the Strategic Income Fund and receives from
Advisers fees based on the average daily net assets of the Fund.
Under an agreement with Advisers, FT Services provides administrative services
to the Funds, except the Biotechnology Discovery Fund. The fee is paid by
Advisers based on the average daily net assets, and is not an additional expense
of the Funds.
Advisers agreed in advance to waive management fees for the Blue Chip Fund, the
Natural Resources Fund, and the Strategic Income Fund, as noted in the
Statements of Operations.
3. TRANSACTIONS WITH AFFILIATES (cont.)
The Funds reimburse Distributors annually based on their average daily net
assets for costs incurred in marketing the Funds' shares as follows:
<TABLE>
<CAPTION>
Biotechnology Discovery Fun California Growth Fund
Blue Chip Fund Global Health Care Fund
MidCap Growth Fund Global Utilities Fund
Strategic Income Fund Natural Resources Fund Small Cap Growth Fund
------------------------------------------------------------------------
<S> <C> <C> <C>
Class I ............................. .25% .35% .25%
Class II ............................ .65% -- 1.00%
</TABLE>
Distributors received (paid) net commission on sales of the Funds' shares, and
received contingent deferred sales charges for the period as follows:
<TABLE>
<CAPTION>
Franklin Franklin Franklin Franklin Franklin
Biotechnology Blue California Global Health Global
Discovery Fund Chip Fund Growth Fund Care Fund Utilities Fund
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net commissions received (paid)... $70,273 $18,387 $(335,840) $(56,042) $(11,591)
Contingent deferred sales charges. $ -- $ -- $ 50,533 $12,642 $ 3,626
</TABLE>
<TABLE>
<CAPTION>
Franklin Franklin Franklin Franklin
MidCap Natural Resources Small Cap Strategic
Growth Fund Fund Growth Fund Income Fund
--------------------------------------------------------
<S> <C> <C> <C> <C>
Net commissions received (paid)...................... $3,225 $15,103 $(2,430,935) $(182,499)
Contingent deferred sales charges.................... $ 510 $ -- $ 265,915 $ 3,720
</TABLE>
The Funds paid transfer agent fees of $5,021,790, of which $3,796,709 was paid
to Investor Services.
4. INCOME TAXES
At April 30, 1998, the Blue Chip Fund, the Natural Resources Fund and the
Strategic Income Fund had deferred capital losses occurring subsequent to
October 31, 1997 of $428,215, $542,930, and $132,813, respectively. For tax
purposes, such losses will be reflected in the year ending April 30, 1999.
At October 31, 1998, the net unrealized appreciation (depreciation) based on the
cost of investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
Franklin Franklin Franklin Franklin Franklin
Biotechnology Blue California Global Health Global
Discovery Fund Chip Fund Growth Fund Care Fund Utilities Fund
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at cost.................... $73,872,217 $20,502,639 $739,077,699 $139,969,301 $169,442,037
===========================================================================
Unrealized appreciation................ $ 4,211,805 $ 2,693,631 $111,339,269 $ 23,835,799 $ 52,024,026
Unrealized depreciation................ (14,008,715) (791,504) (63,793,706) (36,680,873) (10,469,239)
---------------------------------------------------------------------------
Net unrealized appreciation (depreciation) $(9,796,910) $ 1,902,127 $ 47,545,563 $(12,845,074) $ 41,554,787
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
4. INCOME TAXES (cont.)
Franklin Franklin Franklin Franklin
MidCap Natural Resources Small Cap Strategic
Growth Fund Fund Growth Fund Income Fund
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments at cost.................... $27,895,715 $48,680,485 $4,742,494,664 $245,959,472
=============================================================
Unrealized appreciation................ $ 2,949,072 $ 1,587,978 $ 443,614,483 $ 4,611,335
Unrealized depreciation................ (1,720,435) (8,652,066) (834,799,457) (15,847,678)
-------------------------------------------------------------
Net unrealized appreciation (depreciation) $ 1,228,637 $ (7,064,088 $(391,184,974) $ (11,236,343)
=============================================================
</TABLE>
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of \oreign currency transactions and passive foreign
investment company shares.
Net realized capital gains differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, and passive foreign investment company shares.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended October 31, 1998 were as follows:
<TABLE>
<CAPTION>
Franklin Franklin Franklin Franklin Franklin
Biotechnology Blue California Global Health Global
Discovery Fund Chip Fund Growth Fund Care Fund Utilities Fund
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases....................... $34,692,479 $6,029,697 $187,469,560 $14,679,261 $57,248,894
Sales........................... $35,817,395 $1,879,256 $129,914,153 $51,981,141 $71,043,722
</TABLE>
<TABLE>
<CAPTION>
Franklin Franklin Franklin Franklin
MidCap Natural Resources Small Cap Strategic
Growth Fund Fund Growth Fund Income Fund
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases................................... $10,272,232 $13,976,784 $1,260,102,884 $131,454,400
Sales....................................... $ 6,217,226 $17,049,517 $ 677,475,315 $ 45,147,812
</TABLE>
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK\][poiu8ytrq?.,
The Strategic Income Fund has been a party to financial instruments with
off-balance sheet risk, primarily forward exchange contracts, in order to
minimize the impact on the Fund from adverse changes in the relationship between
the U.S. dollar and foreign currencies and interest rates. These instruments
involve market risk in excess of the amount recognized on the Statement of
Assets and Liabilities. Some of these risks have been minimized by offsetting
contracts. Risks arise from the possible inability of counterparties to meet the
terms of their contracts, future movement in currency values and interest rates
and contract positions that are not exact offsets. The contract amount indicates
the extent of the Fund's involvement in such contracts.
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. At October 31,
1998, the Strategic Income Fund has outstanding forward exchange contracts for
the sale of a currency as set out on the next page. The contracts are reported
in the financial statements at the Fund's net equity, as measured by the
difference between the forward exchange rates at the reporting date and the
forward exchange rates at the day of entry into the contracts.
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (cont.)
<TABLE>
<CAPTION>
Unrealized
Contracts to Sell (Foreign exchange currency) In Exchange for Settlement Date Gain (Loss)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4,000,000 Australian Dollar U.S.$ 2,500,000 11/04/98 U.S. $10,892
3,000,000 Deutschemark 1,818,182 11/05/98 6,433
3,000,000 Deutschemark 1,837,560 11/23/98 24,128
---------- -------
U.S.$ 6,155,742 41,453
========== =======
Contracts to Buy (Foreign exchange currency)
825,000 British Pound U.S.$ 1,373,127 11/24/98 6,580
280,000 British Pound 465,128 11/24/98 3,053
---------- -------
U.S.$ 1,838,255 9,633
========== -------
Unrealized gain on forward foreign currency contracts 51,086
=======
Contracts to Sell (Foreign exchange currency)
825,000 British Pound U.S.$ 1,333,621 11/24/98 (46,097)
280,000 British Pound 453,085 11/27/98 (15,096)
2,500,000 Deutschemarks 1,500,781 11/02/98 (8,777)
51,200,000 Japanese Yen 435,745 11/16/98 (4,632)
---------- -------
U.S.$ 3,723,232 (74,602)
========== =======
Contracts to Buy (Foreign exchange currency)
4,000,000 Australian Dollar U.S.$ 2,496,000 11/04/98 (6,892)
2,500,000 Deutschemark 1,511,853 11/02/98 (2,296)
3,000,000 Deutschemark 1,828,209 11/23/98 (14,777)
---------- -------
U.S.$16,959,036 (23,965)
========== -------
Unrealized loss on forward foreign currency contracts (98,567)
-------
Net unrealized loss on forward foreign currency contracts U.S.$(47,481)
=======
</TABLE>
7. CREDIT RISK AND DEFAULTED SECURITIES
The Strategic Income Fund has 56% of its portfolio invested in lower rated and
comparable quality unrated high yield securities, which tend to be more
sensitive to economic conditions than higher rated securities. 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. At October 31, 1998, the
Fund held defaulted securities with a value aggregating $48,000 representing
.02% of the Fund's net assets. For information as to specific securities, see
the accompanying Statement of Investments.
For financial reporting purposes, the Fund discontinues accruing income on
defaulted bonds and provides an estimate for losses on interest receivable.
The Strategic Income Fund has investments in excess of 10% of its total net
assets in Foreign Government Bonds. Such concentration may subject the Fund more
significantly to economic changes occurring within those sectors.
8. RESTRICTED SECURITIES
The Funds may purchase securities through a private offering that generally
cannot be resold to the public without prior registration under the Securities
Act of 1933. The cost of registering such securities are paid by the issuer.
Restricted securities held at October 31, 1998 were as follows:
<TABLE>
<CAPTION>
Shares Issuer Acquisition Date Cost Value
- ---------------------------------------------------------------------------------------------------------------
Franklin California Growth Fund
<S> <C> <C> <C> <C>
359,922 Pacific Retail Trust (.51% of Net Assets).............. 8/30/96 - 12/16/97 $4,267,257 $3,984,337
Franklin Global Utilities Fund
35,000 CMS Energy Trust I, 7.75% cvt. pfd. (.90% of Net Assets) 6/18/97 $1,750,000 $1,892,188
</TABLE>
9. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" as investments
in portfolio companies in which the Funds own 5% or more of the outstanding
voting securities. Investments in "affiliated companies" including dividends and
interest income, at October 31, 1998 were as shown below.
<TABLE>
<CAPTION>
Number of Shares Number of Shares
Held At Gross Gross Held At Value At Dividend
Name of Issuer Beginning of Period Additions Reductions End of Perio End of Period Income
- ----------------------------------------------------------------------------------------------------------------------------
Franklin California Growth Fund:
<S> <C> <C> <C> <C> <C> <C>
Cohr, Inc. ....................... 425,000 -- -- 425,000 $ 1,275,000 --
RemedyTemp, Inc., Class A ........ 350,000 25,000 -- 375,000 6,843,750 --
Total non-controlled affiliated issuers 8,118,750 --
Franklin Global Health Care Fund:
CIMA Labs, Inc. .................. 625,000 -- 187,500 437,500 * --
Cohr, Inc. ....................... 405,500 -- -- 405,500 1,216,500 --
Penederm, Inc. ................... 525,000 -- 525,000 -- * --
Total non-controlled affiliated issuers 1,216,500 --
Franklin Small Cap Growth Fund:
Access Health, Inc. .............. 975,750 -- -- 975,750 * --
Activision, Inc. ................. 1,344,400 -- -- 1,344,400 14,200,225 --
Advanced Energy Industries, Inc. . 1,374,300 244,700 -- 1,619,000 21,249,375 --
Advanced Health Corp. ............ 970,000 -- 970,000 -- * --
Applied Graphics Technologies, Inc. 960,100 408,900 -- 1,369,000 16,342,438 --
Arch Communications Group, Inc. .. 2,000,000 -- 2,000,000 -- * --
Atlantic Coast Airlines, Inc. .... 700,000 700,000 -- 1,400,000 33,600,000 --
Atwood Oceanics, Inc. ............ 1,216,600 -- -- 1,216,600 34,216,875 --
Barrett Resources Corp. .......... 1,683,900 107,000 -- 1,790,900 42,198,081 --
CapStar Hotel Co. ................ 1,330,000 -- 1,330,000 -- * --
Catalytica, Inc. ................. 2,058,633 140,600 -- 2,199,233 35,737,536 --
Clarify, Inc. .................... 1,297,200 -- 1,297,200 -- * --
Coherent, Inc. ................... 1,763,400 -- -- 1,763,400 20,719,950 --
Consolidated Cigar Holdings, Inc. 988,300 -- -- 988,300 11,365,450 --
</TABLE>
<TABLE>
<CAPTION>
9. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES (cont.)
Number of Shares Number of Shares
Held At Gross Gross Held At Value At Dividend
Name of Issuer Beginning of Period Additions Reductions End of Period End of Period Income
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Core Laboratories NV (Netherlands) 1,700,900 -- 43,500 1,657,400 $ 37,395,088 --
DepoTech Corp. ................... 995,700 -- 197,200 798,500 1,172,837 --
Etec Sysytems, Inc. .............. 983,000 387,500 125,000 1,245,500 42,191,313 --
Executive Risk, Inc. ............. 426,400 305,300 -- 731,700 34,755,750 25,268
Expeditors International of
Washington, Inc. ............... 1,016,100 265,000 -- 1,281,100 43,397,263 89,271
FLIR Systems ..................... 184,800 843,800 -- 1,028,600 17,357,625 --
Gibraltar Steel Corp. ............ 1,012,800 -- -- 1,012,800 19,623,000 --
Harmonic Lightwaves, Inc. ........ 961,500 -- 266,600 694,900 7,600,469 --
H.T.E., Inc. ..................... 665,400 665,400 -- 1,330,800 13,474,350 --
Inhale Therapeutic Systems ....... 811,000 -- -- 811,000 21,288,750 --
Innkeepers USA Trust ............. 2,102,800 -- -- 2,102,800 24,182,200 1,177,568
Integrated Systems, Inc. ......... 2,091,300 -- -- 2,091,300 23,527,125 --
Itron, Inc. ...................... 1,157,700 100,000 -- 1,257,700 9,747,175 --
K2, Inc. ......................... 960,500 -- 433,400 527,100 * 208,780
Komag, Inc. ...................... 3,811,600 395,500 -- 4,207,100 23,664,938 --
Ladish Co., Inc. ................. 802,300 180,000 -- 982,300 8,410,944 --
Lomak Petroleum, Inc. ............ 1,890,000 -- 1,890,000 -- * 56,700
Marquee Group, Inc. .............. 1,327,500 -- -- 1,327,500 3,899,531 --
Meristar Hospitality Corp. ....... -- 2,330,000 -- 2,330,000 43,105,000 470,837
Mesa Air Group, Inc. ............. 1,646,100 -- 28,900 1,617,200 8,187,075 --
Micromuse, Inc. .................. 754,500 355,500 -- 1,110,000 18,939,375 --
Natural Microsystems Corp. ....... 646,600 -- -- 646,600 5,799,226 --
Newfield Exploration Co. ......... 938,600 1,400,000 -- 2,338,600 56,857,213 --
Newport Corp. .................... -- 512,500 -- 512,500 7,303,125 5,250
Omtool, Ltd. ..................... 938,600 -- 199,300 739,300 2,125,488 --
Pediatrix Medical Group, Inc. .... 1,101,500 -- 25,000 1,076,500 50,191,813 --
Penederm, Inc. ................... 531,200 -- 531,200 -- * --
Perceptron, Inc. ................. 793,500 -- -- 793,500 4,513,031 --
Pharmaceutical Product
Development, Inc. .............. 1,000,000 300,000 -- 1,300,000 35,100,000 --
Prime Hospitality Corp ........... 1,720,500 1,300,000 -- 3,020,500 27,562,063 --
Primus Telecommunications Group, Inc. 1,003,000 403,100 -- 1,406,100 15,554,981 --
Rainbow Technologies, Inc. ....... 532,000 369,500 -- 901,500 12,733,688 --
Range Resources Corp ............. -- 1,990,000 -- 1,990,000 11,318,125 59,700
RemedyTemp, Inc., Class A ........ 319,300 -- -- 319,300 * --
RockShox, Inc. ................... 965,800 -- 965,800 -- * --
Rural Cellular Corp., Class A .... 700,800 -- -- 700,800 8,409,600 --
SOS Staffing Services, Inc. ...... 872,400 -- -- 872,400 7,360,875 --
Security Dynamics ................ 650,000 1,795,000 -- 2,445,000 25,061,250 --
Serologicals Corp. ............... 1,381,800 690,900 -- 2,072,700 46,894,838 --
Silicon Valley Bancshares ........ 490,600 803,000 -- 1,293,600 26,518,800 --
Spectra-Physics Lasers, Inc. ..... 1,016,300 -- -- 1,016,300 7,590,541 --
Spectralink Corp. ................ 1,050,000 -- 183,200 866,800 * --
</TABLE>
<TABLE>
<CAPTION>
9. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES (cont.)
Number of Shares Number of Shares
Held At Gross Gross Held At Value At Dividend
Name of Issuer Beginning of Perio Additions Reductions End of Period End of Period Income
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tom Brown, Inc. .................. 2,095,800 -- -- 2,095,800 $ 30,127,125 --
Transcrypt International, Inc. ... 1,212,700 -- 665,600 547,100 * --
Tropical Sportswear International
Corp. .......................... 413,200 -- -- 413,200 8,264,000 --
U.S. Liquids, Inc. ............... 726,200 377,700 -- 1,103,900 16,696,488 --
Vans, Inc. ....................... 1,045,500 -- 1,045,500 -- * --
Varco International, Inc. ........ 3,462,500 1,700,000 -- 5,162,500 55,819,531 --
West Marine, Inc. ................ 1,474,800 -- 1,319,200 155,600 * --
Western Wireless Corp., Class A .. 1,719,200 250,000 -- 1,969,200 39,876,300 --
Wind River Systems, Inc. ......... 834,000 681,600 76,600 1,439,000 63,046,188 --
XcelleNet, Inc. .................. 780,100 -- 780,100 -- * --
Total non-controlled affiliated issuers .................................................. 1,196,274,027 2,093,374
</TABLE>
10. LENDING OF PORTFOLIO SECURITIES
The Natural Resources Fund and the Small Cap Growth Fund loan securities to
certain brokers for which they receive cash collateral against the loaned
securities in an amount equal to at least 102% of the market value of the loaned
securities. Net interest income from the investment of the cash collateral
received was $45,875, and $2,301,140, respectively, for the period ended October
31, 1998. The value of the loaned securities for the Natural Resources Fund and
the Small Cap Growth Fund was $585,000, and $125,255,500, respectively, at
October 31, 1998. The risks to the Funds of securities lending are that the
borrower may not provide additional collateral when required or return the
securities when due.
Franklin Strategic Series
Semiannual Report
October 31, 1998
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM
304(a) OF REGULATIONS - T)
GRAPHIC MATERIAL (1)
This charts shows in pie format the portfolio industry breakdown of Franklin
Biotechnology Discovery Fund, based on total net assets as of 10/31/98.
Biotechnology 50.4%
Medical Specialties 14.8%
Other Pharmaceuticals 9.4%
Major Pharmaceuticals 4.2%
Precision Instruments 1.8%
Cash & Equivalents 19.4%
GRAPHIC MATERIAL (2)
This chart lists the top 10 holdings, including industry, of Franklin
Biotechnology Discovery Fund, based on total net assets as of 10/31/98.
Inhale Therapeutic Systems, Medical Specialties 4.77%
Chiron Corp., Biotechnology 4.41%
Chiroscience Group Plc., Major Pharmaceuticals 4.24%
Gilead Sciences, Biotechnology 4.12%
Aviron, Other Pharmaceuticals 4.03%
Amgen, Inc., Biotechnology 4.03%
Synaptic Pharmaceutical Corp., Biotechnology 3.17%
Ligand Pharmaceuticals, Biotechnology 3.16%
IDEC Pharmaceuticals Corp., Biotechnology 3.04%
Zonagen, Inc., Medical Specialties 2.88%
GRAPHIC MATERIAL (3)
This chart shows in pie format the geographic distribution breakdown of the
fund's securities on October 31, 1998, based on total net assets.
Geographic Distribution
United States 60.9%
Europe 16.4%
Japan 4.4%
Pacific Rim (excluding Japan) 2.4%
Latin America 1.9%
South Africa 0.8%
Cash & Equivalents 13.2%
GRAPHIC MATERIAL (4)
This chart shows in bar format the portfolio breakdown of the fund's
securities on October 31, 1998, based on total net assets.
Portfolio Breakdown
Consumer Non-Durables 17.1%
Health Technology 12.1%
Finance 11.7%
Electronic Technology 10.2%
Energy Minerals 5.7%
Utilities & Telecommunications 5.0%
Producer Manufacturing 4.6%
Technology Services 3.8%
Other Industries 16.6%
Cash & Equivalents 13.2%
GRAPHIC MATERIAL (5)
This chart lists the top 10 holdings, including industry, of Franklin Blue
Chip Fund, based on total net assets as of 10/31/98.
American International Group Inc,. Finance, U.S. 2.6%
General Electric Co.; Producer Manufacturing, U.S. 2.1%
The Coca Cola Co., Consumer Non-Durables, U.S. 2.1%
The AES Corp., Industrial Services, U.S. 2.0%
Wm. Wrigly Jr. Co., Consumer Non-Durables, U.S. 1.9%
Novartis, AG, Health Technology, Switzerland 1.9%
Nestle, SA, Registered Shares, Consumer Non-Durables; Switzerland 1.8%
Merck & Co. Inc., Heath Technology, Switzerland 1.8%
Avery Dennison Corp.; Process Industries, U.S. 1.7%
Royal Dutch Petroleum Co., New York Shares 1.7%
Energy Minerals, Netherlands
GRAPHIC MATERIAL (6)
This chart shows in bar format the portfolio breakdown of Franklin California
Growth Fund, based on total net asset as of 10/31/98
Electronic Technology 22.3%
Technology Services 10.1%
Finance 9.3%
Real Estate 7.2%
Energy Minerals 6.2%
Retail 5.1%
Health Technology 4.3%
Other 26.5%
Cash & Equivalents 9.0%
[Top Holdings]
GRAPHIC MATERIAL (7)
This chart lists the top 10 holdings, including industry, of Franklin
California Growth Fund, based on total net assets as of 10/31/98.
Cisco Systems, Inc., Electronic Technology 2.70%
Safeway, Inc., Retail Trade 1.88%
Synopsys, Inc., Technology Services 1.87%
Sun Microsystems, Inc., Electronic Technology 1.85%
Chevron Corp., Energy Minerals 1.81%
Wind River Systems, Inc., Technology Services 1.81%
Mattel, Inc., Consumer Durables 1.71%
Sempra Energy, Utilities & Telecommunications 1.69%
Computer Sciences Corp., Electronic Technology 1.67%
AirTouch Communications, Inc., Utilities & Telecommunications 1.60%
GRAPHIC MATERIAL (8)
This chart shows in pie format the geographic distribution breakdown of the
fund's securities on October 31, 1998, based on total net assets.
Geographic Distribution
United States 76.9%
Switzerland 4.0%
Israel 2.7%
United Kingdom 1.2%
Australia 0.9%
Cash & Equivalents 14.3%
GRAPHIC MATERIAL (9)
This chart shows in bar format the portfolio breakdown of Franklin Global
Heath Care Fund, based on total net asset as of 10/31/98
Medical Specialties 27.8%
Services to the Health Industry 13.0%
Medical/Nursing Services 12.0%
Biotechnology 7.8%
Generic Drugs 6.5%
Major Pharmaceuticals 5.2%
Other Pharmaceuticals 4.6%
Hospital/Nursing Management 4.1%
Medical Electronics 1.9%
Managed Health Care 1.7%
Medical/Dental Distributors 1.1%
Cash & Equivalents 14.3%
GRAPHIC MATERIAL (10)
This chart lists the top 10 holdings, including industry, of Franklin Global
Heath Care Fund, based on total net assets as of 10/31/98.
Renal Care Group Inc., Alternate Site Providers, U.S. 6.68%
Mylan Laboratories, Specialty Pharmaceuticals, U.S. 6.56%
Serologicals Corp., Biotechnology, U.S. 5.86%
Inhale Therapeutics, Specialty Pharmaceuticals, U.S. 5.05%
Access Health Inc., Software and Information Systems, U.S. 4.80%
Novartis AG, Pharmaceuticals, Switzerland 4.00%
Molecular Devices Corp., Medical Technology and Supplies, U.S. 3.92%
Algos Pharmaceutical Corp., Specialty Pharmaceuticals, U.S. 3.92%
Vertex Pharmaceuticals, Inc., Biotechnology, U.S. 3.43%
Total Renal Care Holdings, Inc., Alternate Site Providers, U.S. 3.06%
GRAPHIC MATERIAL (11)
This chart shows in pie format the geographic distribution breakdown of the
fund's securities on October 31, 1998, based on total net assets.
Geographic Distribution
United States 63.2%
Continental Europe 20.2%
Latin America 5.0%
Asia 2.7%
United Kingdom 1.9%
Cash & Equivalents 7.0%
GRAPHIC MATERIAL (12)
This chart lists the top 10 holdings, including industry, of Franklin Global
Utilities Fund, based on total net assets as of 10/31/98.
AirTouch Communications Inc. 3.6%
Utilities and Telecommunications, U.S.
Sempra Energy 3.3%
Utilities and Telecommunications, U.S.
Enron Corp. 3.2%
Utilities and Telecommunications, U.S.
Duke Energy Corp. 2.9%
Utilities and Telecommunications, U.S.
Global TeleSystems Group Inc. 2.8%
Utilities and Telecommunications, U.S.
The AES Corp. 2.7%
Industrial Services, U.S.
Portugal Telecom, SA 2.7%
Utilities and Telecommunications, U.S.
SBC Communications Inc. 2.5%
Utilities and Telecommunications, U.S.
National Fuel Gas Co. 2.4%
Utilities and Telecommunications, U.S.
Telecom Italia, SpA 2.4%
Utilities and Telecommunications, U.S.
GRAPHIC MATERIAL (13)
This chart shows in bar format the portfolio breakdown of the fund's
securities on
October 31, 1998, based on total net assets.
Portfolio Breakdown
Consumer Services 11.1%
Financials 11.0%
Electronic Technology 7.8%
Industrial Services 6.2%
Retail Trade 5.7%
Health Technology 4.5%
Commercial Services 4.3%
Technology Services 4.1%
Real Estate 3.8%
Consumer Non-Durables 3.5%
Other 16.1%
Cash & Equivalents 21.9%
GRAPHIC MATERIAL (14)
This chart lists the top 10 holdings, including industry, of Franklin MidCap
Growth Fund, based on total net assets as of 10/31/98.
Sylvan Learning Systems Inc. 2.2%
Commercial Services
Apollo Group Inc., Class A 2.0%
Consumer Services
Expeditors International of Washington Inc. 2.0%
Transportation
DeVry Inc. 1.9%
Consumer Services
The Estee Lauder Cos. Inc.,
Class A 1.9%
Consumer Non-Durables
Chancellor Media Corp. 1.6%
Consumer Services
Transocean Offshore Inc. 1.5%
Industrial Services
Family Dollar Store Inc. 1.5%
Retail Trade
Clayton Homes Inc. 1.4%
Consumer Durables
ITT Educational Services Inc. 1.4%
Consumer Services
GRAPHIC MATERIAL (15)
This chart shows in bar format the portfolio breakdown of the fund's
securities on
October 31, 1998, based on total net assets.
Portfolio Breakdown
Energy Minerals 29.2%
Industrial Services 21.3%
Non-Energy Minerals 21.0%
Process Industries 11.5%
REITs 4.1%
Utilities and Telecommunications 2.6%
Service/Related Industries 1.7%
Cash & Equivalents 8.6%
GRAPHIC MATERIAL (16)
This chart shows in bar format the geographic distribution breakdown of the
fund's securities on October 31, 1998, based on total net assets.
Geographic Distribution
United States 66.4%
Canada 11.6%
Latin America 4.8%
Europe 4.2%
Asia 2.6%
Africa 1.6%
Australia 0.2%
Cash & Equivalents 8.6%
GRAPHIC MATERIAL (17)
This chart lists the top 10 holdings, including industry, of Franklin Natural
Resources Fund, based on total net assets as of 10/31/98.
Weatherford International Inc. 4.2%
Industrial Services, U.S.
Barrett Resources Corp. 4.1%
Energy Minerals, U.S.
Newfield Exploration Co. 3.6%
Energy Minerals, U.S.
YPF, SA, Sponsored ADR 3.1%
Energy Minerals, Argentina
Gulf Canada Resources Ltd. 2.9%
Energy Minerals, Canada
Transocean Offshore, Inc. 2.4%
Industrial Services, U.S.
Enron Oil and Gas Co. 2.4%
Energy Minerals, U.S.
Nuevo Energy Co. 2.3%
Energy Minerals, U.S.
Enron Corp. 2.2%
Utilities and Telecommunications, U.S.
The AES Corp. .1%
Industrial Services, U.S.
GRAPHIC MATERIAL (18)
This chart shows in pie format the portfolio breakdown of the fund's
securities on
October 31, 1998, based on total net assets.
Portfolio Breakdown
Technology Services 17.6%
Electronic Technology 16.7%
Finance 9.6%
Health Services 5.3%
Industrial Services 5.2%
Energy Minerals 4.3%
Utilities and Telecommunications 4.2%
Other 25.4%
Cash & Equivalents 11.7%
GRAPHIC MATERIAL (19)
This chart lists the top 10 holdings, including industry, of Franklin Small
Cap Growth Fund, based on total net assets as of 10/31/98.
Synopsys Inc. 1.5%
Technology Services
Wind River Systems Inc. 1.5%
Technology Services
Affiliated Computer Systems Inc., Class A 1.5%
Technology Services
Newfield Exploration Co. 1.4%
Energy Minerals
Waters Corp. 1.4%
Electronic Technology
Varco International Inc. 1.3%
Industrial Services
Gemstar International Group Ltd. 1.3%
Electronic Technology
Intuit Inc. 1.2%
Technology Services
Uniphase Corp. 1.2%
Health Technology
Pediatrix Medical Group Inc. 1.2%
Health Services
ANNUAL
REPORT
SEPTEMBER 30, 1998
FRANKLIN MANAGED TRUST
Franklin Investment Grade Income Fund
Franklin Rising Dividends Fund
Thank you for investing with Franklin Templeton. We encourage our investors
to maintain a long-term perspective and remember that all securities markets
move both up and down, as do mutual fund share prices. We appreciate your
past support and look forward to serving your investment needs in the years
ahead.
William J. Lippman
President
Franklin Managed Trust
CONTENTS
Shareholder Letter........................ 1
Fund Reports
Franklin Investment Grade
Income Fund ............................. 4
Franklin Rising
Dividends Fund .......................... 14
Financial Highlights &
Statement of Investments ................. 28
Financial Statements ..................... 37
Notes to
Financial Statements ..................... 41
Report of
Independent Accountants .................. 45
Tax Information........................... 46
SHAREHOLDER LETTER
Dear Shareholder:
It's a pleasure to bring you Franklin Managed Trust's annual report for the
period ended September 30, 1998.
Foreign Storms Bring Rain
Although El Nino's effects on domestic weather subsided in June, the U.S.
stock market faced its own version of adverse elements in August. By the end
of the reporting period, financial events at home mirrored the downpour
abroad, where washed-out currencies flooded foreign markets. On August 31,
storm clouds rained on American stock markets, washing away much of the first
half of 1998's spectacular gains. On that day the Dow Jones(R) Industrial
Average (DJIA) lost 512.61 points or 6.37% of its value.1 Many analysts
attributed this slide to concerns about Russia's economic and political
stability as well as evidence that the Asian countries' economic problems are
more deep-seated than originally believed. At home, 1998 U.S. corporate
profits, through the end of the reporting period, fell dramatically from 1997
levels. Those companies with significant Asian exports, competing with Asian
products or those in commodity businesses like paper, oil and steel were
especially hard hit.
1. Source: Bloomberg.
At the same time, the very factors negatively impacting the U.S. stock
market -- the slowing domestic economy and Russian and Asian economic
turmoil -- provided a boost to the U.S. bond market. Low inflation at home and
foreign investors flocking to U.S. bonds, especially U.S. Treasuries, as a
"safe haven" from stock market volatility abroad, drove bond prices higher.
Bond price and yield move in an inverse relationship, so yields on long-term
bonds fell to their lowest levels in years. The benchmark 30-year U.S.
Treasury bond ended the reporting period yielding 4.98%, compared with 6.41%
a year earlier.2
What is an investor to do faced with steeply fluctuating markets? While the
phrase "investment value may go down as well as up" abounds in financial
literature, the stock market's unusually high gains in the past few years may
have led many investors to believe otherwise. Putting the 1990s into
historical perspective, it is worth noting that the average yearly gain in
the S&P 500(R), which paints a broader picture of the U.S. market than the
DJIA, has been +10.51% since 1930; however, from January 1, 1990, through
June 30, 1998, the S&P 500 rose an average of +17.81% a year.3 Also, there
have been fewer market corrections during the 1990s than previous decades,
with a market correction being defined as a 10% or greater decline over a
period of days, weeks or months.
2. Ibid.
3. Source: Stocks, Bonds, and Inflation 1998 Yearbook, Ibbotson Associates.
Weatherproofing Your Portfolio
In times like these, it's easy to understand why people can become emotional
about their investments. That's why I believe investors should call their
investment representatives, and plan to cover three points in their
conversations. One, review their current financial plans, recalling their
goals and why they made their investment choices in the first place. Two,
discuss the value of diversification, which can help reduce the risk that any
one type of security will have a negative impact on an overall portfolio, and
check if their investments are still properly diversified. As shown during
the reporting period, the bond and stock markets often behave differently. In
each of the five years since 1973 that stocks posted negative annual returns,
bonds posted positive returns.4 Three, review their investment timeframe to
help put recent market declines into perspective and avoid turning what could
be only a temporary paper loss into a permanent one. Maintaining a long-term
outlook is one of the keys to weathering market volatility.
An important component of a long-term approach is having a regular investment
plan. Investing on a scheduled basis, regardless of market directions, can
help investors take advantage of market downturns when prices are low, and
benefit from any market rallies. We encourage you to contact your investment
representative to discuss setting up a regular investment plan. While
investment success is the primary objective of investment planning, one
important by-product of a good plan can be peace of mind.
As always, we appreciate your support, welcome your questions and comments
and look forward to serving your investment needs in the years ahead.
Sincerely,
William J. Lippman
President
Franklin Managed Trust
4. Source: For bond market statistics based on the Lehman Brothers
Government/Corporate Bond Index - Lehman Brothers; for stock market measured
by the S&P 500 Index - Standard & Poor's(R).
FRANKLIN INVESTMENT GRADE
INCOME FUND
Your Fund's Goal: Franklin Investment Grade Income Fund seeks a maximum level
of income consistent with prudent exposure to risk. The fund pursues this
goal by investing in investment-grade debt securities having primarily
intermediate maturities. The fund also seeks to offer a higher total return
than a money market fund, generally with less risk to principal than a fund
composed of either long-term securities or securities that are below
investment-grade quality.1
1. Generally, long-term securities and lower-quality securities provide
higher yields.
A money-market fund seeks a stable $1.00 per share net asset value.
During the one-year reporting period, the fund's Class I share price, as
measured by net asset value, rose modestly, increasing from $9.08 to $9.22.
Our continuing emphasis on purchasing securities with limited maturities
contributed to this share price increase. Because long-term instruments often
exhibit relatively greater price volatility, both up and down, many investors
embrace the more stable short- and intermediate-term investment instruments,
which the fund typically purchases.
Also, contributing to the fund's performance was our focus on purchasing
high-quality issues and using "put" bonds. As the chart illustrates, 69% of
the fund's total net assets were invested in AAA-rated issues (the
highest-rated securities available), while 24% were A-rated with the
remainder in BBB-rated instruments.
The use of put bonds remains an integral part of our conservative investment
strategy. A put bond is one that can be redeemed before maturity, at face
value (par). Thus, if interest rates rise, we can redeem a put bond early, at
par on the optional retirement date, and reinvest the proceeds at the new,
higher interest rate. Conversely, if interest rates decline by the security's
optional retirement date, we can either keep the higher-yielding bond, or
sell it at a favorable price.
On September 30, 1998, 42% of the portfolio's total net assets consisted of
government bonds, 38% corporate and government agency put bonds, and 20% cash
and cash equivalents. The fund's average weighted maturity was 1.8 years,
using the optional put dates as effective maturities, and 12.1 years, using
the stated maturities.
We will continue to maintain our emphasis on put bonds and bonds with a
limited maturity structure. It is our belief that this strategy can enable us
to produce solid total returns without subjecting the portfolio's share price
to significant price volatility. Please remember, this discussion reflects
our views, opinions and portfolio holdings as of September 30, 1998, the end
of the reporting period. However, market and economic conditions are changing
constantly, which can be expected to affect our strategies and the fund's
portfolio composition. Although historical performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Class I
Franklin Investment Grade Income Fund - Class I share price, as measured by
net asset value, increased 14 cents, from $9.08 on September 30, 1997, to
$9.22 on September 30, 1998. During the one-year reporting period,
shareholders received dividend income totaling 43.3 cents ($0.433) per share.
Dividends will vary based on portfolio earnings, and past distributions are
not indicative of future trends.
The fund's distribution rate was 4.11%, based on an annualization of
September's monthly dividend of 3.3 cents ($0.033) per share and the maximum
offering price of $9.63 on September 30, 1998.
For the one-year period ended September 30, 1998, your fund produced a +6.50%
cumulative total return. Cumulative total return reflects the change in value
of an investment, assuming reinvestment of all distributions and does not
include the sales charge.
The graph on page 8 compares the performance of the fund's Class I shares
with that of the Lehman Brothers Government/Corporate Bond Index. Keep in
mind an unmanaged index has inherent performance differentials in comparison
with any fund. An index doesn't pay management fees to cover salaries of
securities analysts or portfolio managers, or pay commissions or market
spreads to buy and sell securities. Unlike an index, mutual funds are never
fully invested because they need cash on hand to redeem shares. In addition,
the performance shown for the fund includes the maximum initial sales charge,
all fund expenses and account fees. If operating expenses such as Franklin
Investment Grade Income Fund's had been applied to the index, its performance
would have been lower. Please remember that an index is simply a measure of
performance and one cannot invest in it directly.
The performance of your fund's shares exceeded the rate of inflation, as
measured by the Consumer Price Index (CPI), keeping your purchasing power
well ahead of inflation -- a primary goal of any investment.
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Since
Inception
1-Year 5-Year 10-Year (1/14/87)
Cumulative Total Return1 +6.50% +25.66% +98.23% +99.83%
Average Annual Total Return2 +2.00% +3.78% +6.62% +5.70%
Distribution Rate3 4.11%
30-Day Standardized Yield 44.08%
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the current, maximum
4.25% initial sales charge. Prior to July 1, 1994, fund shares were offered
at a lower initial sales charge, with dividends reinvested at the offering
price. Thus actual total returns would differ.
3. Distribution rate is based on an annualization of September's 3.3 cent per
share monthly dividend and the maximum offering price of $9.63 on September
30, 1998.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended September 30, 1998.
All total return calculations assume reinvestment of dividends and capital
gains at net asset value. Since markets can go down as well as up, investment
return and principal value will fluctuate with market conditions, and you may
have a gain or loss when you sell your shares.
Advisor Class
Franklin Investment Grade Income Fund - Advisor Class share price, as
measured by net asset value, increased 15 cents, from $9.07 on September 30,
1997, to $9.22 on September 30, 1998. During the one-year reporting period,
shareholders received dividend income totaling 45.79 cents ($0.4579) per
share. Dividends will vary based on portfolio earnings, and past
distributions are not indicative of future trends.
The fund's distribution rate was 4.54%, based on an annualization of
September's monthly dividend of 3.49 cents ($0.0349) per share and the net
asset value price of $9.22 on September 30, 1998.
For the one-year period ended September 30, 1998, your fund produced a +6.91%
cumulative total return. Cumulative total return reflects the change in value
of an investment, assuming reinvestment of all distributions.
The graph on page 12 compares the performance of the fund's Advisor Class
shares with that of the Lehman Brothers Government/
Corporate Bond Index. Keep in mind an unmanaged index has inherent
performance differentials in comparison with any fund.
An index doesn't pay management fees to cover salaries of securities analysts
or portfolio managers, or pay commissions or market spreads to buy and sell
securities. Unlike an index, mutual funds are never fully invested because
they need cash on hand to redeem shares. In addition, the performance shown
for the fund includes all fund expenses and account fees. If operating
expenses such as Franklin Investment Grade Income Fund's had been applied to
the index, its performance would have been lower. Please remember that an
index is simply a measure of performance and one cannot invest in it directly.
The performance of your fund's shares exceeded the rate of inflation, as
measured by the Consumer Price Index (CPI), keeping your purchasing power
well ahead of inflation -- a primary goal of any investment.
GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 5 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Since
Inception
1-Year* 5-Year* 10-Year* (1/14/87)*
Cumulative Total Return1+ 6.91%+ 26.23%+ 99.14% +100.73%
Average Annual Total Return1+6.91% +4.77% +7.13% +6.13%
Distribution Rate2 4.54%
30-Day Standardized Yield3 4.38%
1. Cumulative total return represents the change in value of an investment
over the periods indicated. Average annual total return represents the
average annual change in value of an investment over the periods indicated.
2. Distribution rate is based on an annualization of September's 3.49 cent
per share monthly dividend and the net asset value price of $9.22 on
September 30, 1998.
3. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended September 30, 1998.
*On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges
or a Rule 12b-1 plan. Performance quotations have been calculated as follows:
(a) For periods prior to January 2, 1997, figures reflect the fund's Class I
performance, excluding the effect of the Class I sales charge, but including
the effect of Class I expenses, including Rule 12b-1 fees; and (b) for
periods after January 1, 1997, figures reflect actual Advisor Class
performance, including the deduction of all fees and expenses applicable only
to that class. Since January 2, 1997 (commencement of sales), the cumulative
total return of Advisor Class shares was 11.18%.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
FRANKLIN RISING DIVIDENDS FUND
Your Fund's Goal: Franklin Rising Dividends Fund seeks long-term capital
appreciation. Preservation of capital is also an important consideration. The
fund invests in the equity securities of companies that have paid
consistently rising dividends over the past ten years.
Our investment strategy is based on our belief that companies
with consistently rising dividends should, over time, also realize
appreciation in their stock prices. We select portfolio securities based on
several criteria. To be eligible for purchase, stocks must pass certain
investment "screens," or screening procedures, requiring consistent and
substantial dividend increases, strong balance sheets and relatively low
price/earnings ratios. We seek fundamentally sound companies that meet our
standards and attempt to acquire them at attractive prices, often when they
are out of favor with other investors.
During the fiscal year ended September 30, 1998, the domestic economy
demonstrated solid growth, low inflation and sharply falling interest rates.
This benign environment led to strong equity market performance through the
first half of the fund's fiscal year. By the last half of the year, however,
declining corporate profit growth began to weigh heavily on the market as all
major stock market indices fell through the summer.
While earnings of consumer stocks generally continued to be strong, growth in
the manufacturing sector slowed. In many ways the consumer benefited from the
economic problems in Asia. Weak Asian economies, for example, are widely
cited as a leading reason for the significant fall in Treasury bond yields in
the past year. Manufacturers, on the other hand, were hurt by the Asian
crisis. They often either compete with Asian companies globally, or were
disappointed with sales to the region. As a result, most consumer-oriented
stocks performed better than stocks of manufacturers.
A striking feature of the past year was the much stronger performance of
large capitalization stocks relative to medium and small capitalization
stocks. The consumer orientation of many large-cap stocks partially explains
this outperformance. Another factor, however, was the portfolio shift by many
global investors out of Asia and into the U.S. Much of this money flowed into
the largest and most liquid U.S. stocks. Within this environment, the
Wilshire MidCap Growth Index, the fund's benchmark, returned -21.58% for the
one-year period ended September 30, 1998, while Franklin Rising Dividends
Fund posted -9.05% cumulative total return.
Retailers were standout performers during this period, particularly large cap
companies like Wal-Mart Stores, Inc. Sales were strong at all of Wal-Mart's
domestic formats and international prospects continue to be promising. The
portfolio's largest position, Family Dollar Stores, Inc., as well as Rite Aid
Corp. also performed well, although both lagged behind Wal-Mart.
Another particularly strong performer was Allied Group, Inc., a midwestern
property and casualty insurance company. Allied agreed to be acquired by
Nationwide Mutual Insurance Co. at a substantial premium to its previous
trading range.
The portfolio's worst-performing stocks during the year were primarily
smaller, manufacturing-oriented companies. These included M. A. Hanna Co. and
Watts Industries, Inc., which were impacted by the industrial slowdown and,
as a result, had weaker than expected quarterly earnings. Two other
disappointing holdings were Circle International Group, Inc. and Wallace
Computer Services, Inc. Despite Circle's healthy earnings growth, investors
are fearful that the weakening global economy will eventually have a negative
impact on the company's freight forwarding business. Wallace reported weak
quarterly earnings recently due to pricing pressures in certain paper product
categories, despite relatively strong unit growth.
New positions added to the portfolio during the period included Pall Corp.,
Diebold, Inc., Bemis Company, Inc., ReliaStar Financial Corp. and Reynolds and
Reynolds Co. Pall makes fluid filtration devices for a variety of industries
including health care. Pall's most promising market is blood filtration, as a
number of countries have recently announced plans to make filtration mandatory
for all blood transfusions. Diebold is known for manufacturing automated teller
machines and has increased its dividend for an exceptional 45 straight years.
Although earnings slipped in 1998 as a result of slowing orders, Diebold is
well-positioned longer-term to benefit from the increasing use of automation to
deliver consumer products and services. Bemis is a leading manufacturer of
flexible packaging for use by the food industry. ReliaStar, a provider of a
broad range of insurance related investment products, has increased its dividend
for 27 years. Reynolds is a leading provider of information management systems
used primarily by automobile dealerships.
A significant addition to the portfolio was West Company, Inc. The company's
products are used in the packaging and delivery of health care products. West
recently acquired drug delivery technologies that have the potential to
accelerate the company's growth rate.
Several positions were eliminated from the portfolio including Nike, Inc.;
Allied Group, Inc. and Merck & Co., Inc. Nike's operating results suffered as
falling demand for its products led to excess inventory. As previously
mentioned, Allied Group was acquired by Nationwide Mutual. We sold Merck, as
it became less attractively valued than other alternative investments.
Notable year-over-year dividend increases during the past year came from
National Commerce Bancorp. (+45.5%), Cohu, Inc. (+33.3%), First Union Corp.
(+31.3), Avery Dennison Corp. (+23.5%), Mercury General Corp. (+20.7%),
Alberto-Culver Co. (+20%), Myers Industries, Inc. (+20%) and ReliaStar
Financial Corp. (+19.4%).
GRAPHIC MATERIAL 6 OMITTED - SEE APPENDIX AT END OF DOCUMENT
As the table shows, our ten largest positions on September 30, 1998,
comprised 32.0% of the fund's total net assets. It is interesting to note how
these ten companies would, in the aggregate, respond to the fund's screening
criteria based on a simple average of statistical measures. On average, these
10 companies have raised their dividends 17 years in a row and by 304% in the
last 10 years (excluding Fannie Mae's 1,500% increase). Their most recent
dividend increases averaged 13.8%, for a yield of 2.2% on September 30, 1998,
and a dividend payout ratio of 34%. Long-term debt averaged 23% of
capitalization, and the average price/earnings ratio was 16.4 versus 22.0 for
that of the unmanaged Standard & Poor's(R) 500 Stock Index on the same date. It
is our opinion that these companies are representative of the portfolio's
fundamentally high quality. We also believe that, over time, companies that
increase cash payments to shareholders, year after year, will be superior
builders of wealth.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of September 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected
to affect our strategies and the fund's portfolio composition. Although
historical performance is no guarantee of future results, these insights may
help you understand our investment and management philosophy.
Class I
Franklin Rising Dividends Fund - Class I produced a -9.05% cumulative total
return for the one-year period ended September 30, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment
of all distributions and does not include the sales charge. We have always
maintained a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner. As you can see
from the table on page 23, the fund's Class I shares delivered a +228.88%
cumulative total return since inception on January 14, 1987.
The fund's share price, as measured by net asset value, decreased $5.40, from
$26.93 on September 30, 1997, to $21.53 on September 30, 1998. During the
one-year reporting period, shareholders received per-share distributions
consisting of dividend income totaling 10.5 cents ($0.105), $2.8451 in
long-term capital gains and 35.29 cents ($0.3529) in short-term capital
gains. Distributions will vary based on the fund's income and any profits
realized from the sale of securities in the fund's portfolio. Past
distributions are not predictive of future trends.
The graph on page 22 compares the performance of the fund's Class I shares
with that of the fund's unmanaged benchmark index, the Wilshire MidCap Growth
Index, and the Consumer Price Index (CPI), a common measure of inflation. As
you can see, your investment returns have surpassed the rate of inflation, as
measured by the CPI, a primary goal of any investment. Please note that the
Wilshire Index differs from the fund as it includes companies with market
capitalizations (the market value of a company's issued and outstanding
stock) ranging from $300 million to $1.3 billion, while your fund's portfolio
includes companies with smaller market capitalizations and ranges from $83
million to $107 billion.
The Wilshire MidCap Growth Index has outperformed the fund's Class I shares
over the 10 years ended September 30, 1998. However, Franklin Rising
Dividends Fund outperformed the index during some of the U.S. stock markets'
most volatile periods -- the one-, three- and five-year periods ended on the
same date. For the one-year period, the index saw a -21.58% cumulative total
return, compared with the fund's -9.05%. The fund produced a cumulative total
return of +54.43% and +79.51% for the respective three- and five-year periods
ended September 30, 1998, while the index returned +13.95% and +63.75%,
respectively.
Keep in mind an unmanaged index has inherent performance differentials in
comparison with any fund. An index doesn't pay management fees to cover
salaries of securities analysts or portfolio managers, or pay commissions or
market spreads to buy and sell securities. Unlike an index, mutual funds are
never fully invested because they need cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial
sales charge, all fund expenses and account fees. If operating expenses such
as Franklin Rising Dividends Fund's had been applied to the index, its
performance would have been lower. Please remember that an index is simply a
measure of performance and one cannot invest in it directly.
GRAPHIC MATERIAL 7 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Rising Dividends Fund - Class I
Periods ended 9/30/98
Since
Inception
1-Year 5-Year 10-Year (1/14/87)
Cumulative Total Return1 -9.05% +79.51% +210.02% +228.88%
Average Annual Total Return2 -14.27% +11.09% +11.32% +10.14%
Distribution Rate3 0.81%
30-Day Standardized Yield4 0.80%
Value of $10,000 Investment5 $8,573 $16,920 $29,217 $30,997
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and has been restated to reflect
the current, maximum 5.75% initial sales charge; thus actual returns may
differ. Prior to August 3, 1998, fund shares were offered at a lower initial
sales charge.
3. Distribution rate is based on an annualization of September's 4.6 cent per
share quarterly dividend and the maximum offering price of $22.84 on
September 30, 1998.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended September 30, 1998.
5. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the current, maximum 5.75%
initial sales charge; thus actual returns may differ. Prior to August 3,
1998, fund shares were offered at a lower initial sales charge.
All total return calculations assume reinvestment of dividends and capital
gains at net asset value. Since markets can go down as well as up, investment
return and principal value will fluctuate with market conditions, and you may
have a gain or loss when you sell your shares.
Franklin Rising Dividends Fund - Class I paid distributions derived from
long-term capital gains of $2.8451 per share in December 1997. The fund
hereby designates such distributions as capital gain dividends per Internal
Revenue Code Section 852 (b)(3).
Class II
Franklin Rising Dividends Fund - Class II produced a -9.48% cumulative total
return for the one-year period ended September 30, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment
of all distributions and does not include sales charges. We have always
maintained a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner. As you can see
from the table on page 27, the fund's Class II shares delivered a +71.59%
cumulative total return since the shares became available on May 1, 1995.
The fund's share price, as measured by net asset value, decreased $5.40, from
$26.85 on September 30, 1997, to $21.45 on September 30, 1998. During the
one-year reporting period, shareholders received per-share distributions
consisting of dividend income totaling 0.14 cents ($0.0014), $2.8451 in
long-term capital gains and 35.29 cents ($0.3529) in short-term capital
gains. Distributions will vary based on the fund's income and any profits
realized from the sale of securities in the fund's portfolio. Past
distributions are not predictive of future trends.
The graph on page 26 compares the performance of the fund's Class II shares
since inception with that of the unmanaged Wilshire MidCap Growth Index, and
the Consumer Price Index (CPI), a common measure of inflation. As you can
see, your investment returns have surpassed the rate of inflation, as
measured by the CPI, a primary goal of any investment. Please note that the
Wilshire Index differs from the fund as it includes companies with market
capitalizations (the market value of a company's issued and outstanding
stock) ranging from $300 million to $1.3 billion, while your fund's portfolio
includes companies with smaller market capitalizations and ranges from $83
million to $107 billion.
Keep in mind an unmanaged index has inherent performance differentials in
comparison with any fund. An index doesn't pay management fees to cover
salaries of securities analysts or portfolio managers, or pay commissions or
market spreads to buy and sell securities. Unlike an index, mutual funds are
never fully invested because they need cash on hand to redeem shares. In
addition, the performance shown for the fund includes the sales charges, all
fund expenses and account fees. If operating expenses such as Franklin Rising
Dividends Fund's had been applied to the index, its performance would have
been lower. Please remember that an index is simply a measure of performance
and one cannot invest in it directly.
GRAPHIC MATERIAL 8 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Rising Dividends Fund - Class II
Periods ended 9/30/98
Since
Inception
1-Year 3-Year (5/1/95)
Cumulative Total Return1 -9.48% +52.05% +71.59%
Average Annual Total Return2 -11.17% +14.62% +16.77%
Distribution Rate 30.03%
30-Day Standardized Yield4 0.31%
Value of $10,000 Investment5 $8,883 $15,057 $16,983
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the 1.0% initial
sales charge and the 1.0% contingent deferred sales charge, as applicable.
3. Distribution rate is based on an annualization of September's 0.14 cent
per share quarterly dividend and the maximum offering price of $21.67 on
September 30, 1998.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended September 30, 1998.
5. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include sales charges.
All total return calculations assume reinvestment of dividends and capital
gains at net asset value. Since markets can go down as well as up, investment
return and principal value will fluctuate with market conditions, and you may
have a gain or loss when you sell your shares.
Franklin Rising Dividends Fund - Class II paid distributions derived from
long-term capital gains of $2.8451 per share in December 1997. The fund
hereby designates such distributions as capital gain dividends per Internal
Revenue Code Section 852 (b)(3).
<TABLE>
<CAPTION>
FRANKLIN MANAGED TRUST
Financial Highlights
Franklin Investment Grade Income Fund
Class I
Year Ended September 30,
------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year................... $9.08 $9.01 $9.04 $8.82 $9.31
------------------------------------------------------
Income from investment operations:
Net investment income............................... .43 .41 .44 .44 .45
Net realized and unrealized gains (losses).......... .14 .09 (.06) .26 (.54)
------------------------------------------------------
Total from investment operations..................... .57 .50 .38 .70 (.09)
------------------------------------------------------
Less distributions from:
Net investment income............................... (.43) (.43) (.41) (.48) (.40)
------------------------------------------------------
Net asset value, end of year......................... $9.22 $9.08 $9.01 $9.04 $8.82
======================================================
Total return*........................................ 6.50% 5.68% 4.25% 8.21% (1.02%)
Ratios/supplemental data:
Net assets, end of year (000's)...................... $54,958 $43,568 $29,372 $29,824 $29,553
Ratios to average net assets:
Expenses............................................ 1.10% 1.05% 1.06% 1.09% 1.05%
Net investment income............................... 4.74% 4.73% 4.81% 4.96% 4.91%
Portfolio turnover rate.............................. 20.80% 41.32% 20.06% 64.70% 10.57%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at offering price.
<TABLE>
<CAPTION>
FRANKLIN MANAGED TRUST
Financial Highlights (continued)
Franklin Investment Grade Income Fund
Advisor Class
Year Ended September 30,
1998 19971
----------------------
<S> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year................................................... $9.07 $9.03
----------------------
Income from investment operations:
Net investment income............................................................... .43 .28
Net realized and unrealized gains................................................... .19 .07
----------------------
Total from investment operations..................................................... .62 .35
----------------------
Less distributions from:
Net investment income............................................................... (.46) (.31)
-----------------------
Net asset value, end of year......................................................... $9.23 $9.07
======================
Total return*........................................................................ 7.02% 3.98%
Ratios/supplemental data:
Net assets, end of year (000's)...................................................... $2,505 $39
Ratios to average net assets:
Expenses............................................................................ .82% .85%**
Net investment income............................................................... 5.02% 4.84%**
Portfolio turnover rate.............................................................. 20.80% 41.32%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
1For the period January 2, 1997 (effective date) to September 30, 1997.
See notes to financial statements.
<TABLE>
<CAPTION>
FRANKLIN MANAGED TRUST
Statement of Investments, September 30, 1998
PRINCIPAL
Franklin Investment Grade Income Fund AMOUNT VALUE
<S> <C> <C>
U.S. Government Securities and Agencies 46.0%
Tennessee Valley Authority, bonds, (putable* 7/15/01, callable 7/15/20), 6.235%, 7/15/45 $2,000,000 $ 2,104,436
U.S. Treasury Notes, 5.875%, 1/31/99......................................... 2,000,000 2,008,752
U.S. Treasury Notes, 5.875%, 3/31/99......................................... 1,000,000 1,006,563
U.S. Treasury Notes, 6.00%, 6/30/99.......................................... 2,000,000 2,020,626
U.S. Treasury Notes, 5.875%, 7/31/99......................................... 2,000,000 2,020,002
U.S. Treasury Notes, 5.875%, 8/31/99......................................... 3,000,000 3,033,753
U.S. Treasury Notes, 5.75%, 9/30/99.......................................... 1,000,000 1,011,251
U.S. Treasury Notes, 5.625%, 11/30/99........................................ 2,000,000 2,023,752
U.S. Treasury Notes, 5.625%, 12/31/99........................................ 2,000,000 2,026,252
U.S. Treasury Notes, 5.50%, 3/31/00.......................................... 2,000,000 2,029,376
U.S. Treasury Notes, 6.00%, 8/15/00.......................................... 2,000,000 2,057,502
U.S. Treasury Notes, 5.275%, 8/31/00......................................... 3,000,000 3,043,128
U.S. Treasury Notes, 5.375%, 2/15/01......................................... 2,000,000 2,045,626
--------------
Total U.S. Government Securities and Agencies (Cost $26,058,103)............. 26,431,019
--------------
Corporate Bonds 34.3%
Commercial Services 2.7%
Xerox Corp., notes, (putable* 5/05/99), 5.90% 5/05/37 ....................... 1,500,000 1,559,865
--------------
Consumer Non-Durable 3.7%
Coca-Cola Enterprises, deb., (putable* 10/15/03), 6.70% 10/15/36 ............ 2,000,000 2,133,926
--------------
Finance 10.7%
Aetna Services Inc., (putable* 8/15/04), 6.97%, 8/15/36...................... 2,000,000 2,112,648
Sears Roebuck Acceptance Corp.,
(putable* 11/15/00), 6.13%, 11/15/05......................................... 775,000 799,656
(putable* 11/15/00), 6.15%, 11/15/05......................................... 725,000 751,287
Southtrust Bank, (putable* 2/06/01), 5.58%, 2/06/06.......................... 2,500,000 2,509,005
--------------
6,172,596
--------------
Industrial Services 3.6%
WMX Technologies, Inc., notes, (putable* 5/15/00), 6.65% 5/15/05............. 2,000,000 2,050,958
--------------
Process Industries 7.2%
Bausch & Lomb, notes, (putable* 8/31/01), 6.56%, 8/12/26 .................... 2,000,000 2,099,670
Sherwin-Williams Co., notes, (putable* 10/15/99), 5.50%, 10/15/27 ........... 2,000,000 2,024,746
--------------
4,124,416
--------------
Retail Trade 2.8%
Penney J.C. & Co., Inc., deb., (putable* 8/15/03), 6.90% 8/15/26............. 1,500,000 1,628,928
--------------
Utilities 3.6%
Bellsouth Corp., deb., (putable* 11/15/00), 5.85%, 11/15/45.................. 2,000,000 2,049,370
--------------
Total Corporate Bonds (Cost $19,136,674)..................................... 19,720,059
--------------
Total Long Term Investments (Cost $45,194,777)............................... 46,151,078
--------------
a Repurchase Agreement 21.1%
Joint Repurchase Agreement, 5.275%, 10/01/98,
(Maturity Value $12,144,747) (Cost $12,142,967) ................................ $12,142,967 $12,142,967
BancAmerica Robertson Stephens, (Maturity Value $1,223,700)
Barclays Capital Group, Inc., (Maturity Value $1,131,441)
BT Alex Brown, Inc., (Maturity Value $1,223,701)
Chase Securities, Inc., (Maturity Value $1,223,700)
CIBC Wood Gundy Securities Corp., (Maturity Value $1,223,701)
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $1,223,700)
Dresdner Kleinwort Benson, North America, L.L.C., (Maturity Value $1,223,701)
Greenwich Capital Markets, Inc., (Maturity Value $1,223,701)
Paribas Corp., (Maturity Value $1,223,701)
SBC Warburg Dillon Read, Inc., (Maturity Value $1,223,701)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $57,337,744) 101.4%.................................. 58,294,045
Other Assets, less Liabilities (1.4%)........................................ (830,441)
--------------
Net Assets 100.0% ........................................................... $57,463,604
==============
</TABLE>
*Holder may redeem at par on put date.
aSee Note 1(b) regarding joint repurchase agreement.
<TABLE>
<CAPTION>
FRANKLIN MANAGED TRUST
Financial Highlights
Franklin Rising Dividends Fund
Class I
-------------------------------------------------------
Year Ended September 30,
-------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year................... $26.93 $20.03 $17.31 $14.67 $15.43
-------------------------------------------------------
Income from investment operations:
Net investment income............................... .13 .16 .28 .33 .28
Net realized and unrealized gains (losses).......... (2.22) 8.23 2.78 2.61 (.80)
-------------------------------------------------------
Total from investment operations..................... (2.09) 8.39 3.06 2.94 (.52)
-------------------------------------------------------
Less distributions from:
Net investment income............................... (.11) (.18) (.34) (.30) (.24)
Net realized gains.................................. (3.20) (1.31) -- -- --
-------------------------------------------------------
Total distributions.................................. (3.31) (1.49) (.34) (.30) (.24)
-------------------------------------------------------
Net asset value, end of year......................... $21.53 $26.93 $20.03 $17.31 $14.67
=======================================================
Total return*........................................ (9.05)% 44.10% 17.83% 20.32% (3.38)%
Ratios/supplemental data:
Net assets, end of year (000's)...................... $407,336 $394,873 $277,746 $260,917 $261,461
Ratios to average net assets:
Expenses............................................ 1.39% 1.41% 1.40% 1.43% 1.43%
Net investment income............................... .51% .71% 1.49% 2.10% 1.81%
Portfolio turnover rate.............................. 23.99% 39.47% 31.55% 14.60% 25.75%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at offering price.
<TABLE>
<CAPTION>
FRANKLIN MANAGED TRUST
Financial Highlights (continued)
Franklin Rising Dividends Fund
Class II
------------------------------------------
Year Ended September 30,
------------------------------------------
1998 1997 1996 19951
------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year............................... $26.85 $19.98 $17.28 $15.47
------------------------------------------
Income from investment operations:
Net investment income........................................... -- .08 .21 .11
Net realized and unrealized gains (losses)...................... (2.20) 8.17 2.74 1.83
------------------------------------------
Total from investment operations................................. (2.20) 8.25 2.95 1.94
------------------------------------------
Less distributions from:
Net investment income........................................... -- (.07) (.25) (.13)
Net realized gains.............................................. (3.20) (1.31) -- --
------------------------------------------
Total distributions.............................................. (3.20) (1.38) (.25) (.13)
------------------------------------------
Net asset value, end of year..................................... $21.45 $26.85 $19.98 $17.28
==========================================
Total return*.................................................... (9.48)% 43.37% 17.16% 12.56%
Ratios/supplemental data:
Net assets, end of year (000's).................................. $43,790 $14,526 $3,882 $1,060
Ratios to average net assets:
Expenses........................................................ 1.94% 1.95% 1.95% 1.90%**
Net investment income (loss).................................... (.05)% .17% .94% 1.92%**
Portfolio turnover rate.......................................... 23.99% 39.47% 31.55% 14.60%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
1For the period May 1, 1995 (effective date) to September 30, 1995.
See notes to financial statements.
<TABLE>
<CAPTION>
FRANKLIN MANAGED TRUST
Statement of Investments, September 30, 1998
Franklin Rising Dividends Fund SHARES VALUE
<S> <C> <C>
Common Stocks 97.8%
Banks/Thrifts 14.6%
First Union Corp. ........................................................... 271,650 $ 13,905,084
Mercantile Bankshares Corp. ................................................. 170,950 4,807,969
National Commerce Bancorp. .................................................. 568,600 9,381,900
State Street Corp. .......................................................... 98,200 5,358,038
TrustCo Bank Corp., N.Y. Shs. ............................................... 268,116 7,188,860
U.S. Bancorp................................................................. 215,000 7,645,938
Washington Mutual, Inc. ..................................................... 379,000 12,791,250
Wilmington Trust Corp. ...................................................... 96,200 5,002,397
---------------
66,081,436
---------------
Commercial Services 5.2%
Ennis Business Forms, Inc. .................................................. 228,700 2,287,000
Standard Register Co. ....................................................... 282,700 7,685,906
Wallace Computer Services, Inc. ............................................. 753,200 13,510,525
---------------
23,483,431
---------------
Consumer Durables 4.1%
Leggett & Platt, Inc. ....................................................... 526,400 10,922,800
Newell Co. .................................................................. 167,200 7,701,650
---------------
18,624,450
---------------
Consumer Non-Durables 8.0%
Alberto-Culver Co., Class A.................................................. 504,100 10,775,138
Block Drug Co., Inc., Class A................................................ 108,659 3,911,724
DIMON, Inc. ................................................................. 483,300 5,104,856
Philip Morris Cos., Inc. .................................................... 158,700 7,310,119
Universal Corp. ............................................................. 252,300 9,019,725
---------------
36,121,562
---------------
Electronic Technology 2.4%
Cohu, Inc. .................................................................. 311,200 5,134,800
Hewlett-Packard Co. ......................................................... 75,100 3,975,606
Rockwell International Corp. ................................................ 52,300 1,889,338
---------------
10,999,744
---------------
Energy Minerals 1.0%
Royal Dutch Petroleum Co., N.Y. Shs., ADR (Netherlands)...................... 93,700 4,462,463
---------------
Government Sponsored Corporation 2.3%
Fannie Mae................................................................... 159,000 10,215,750
---------------
Health Technology 4.7%
Becton, Dickinson & Co. ..................................................... 74,200 3,051,475
Superior Surgical Manufacturing Co., Inc. ................................... 178,300 2,206,463
West Co., Inc. .............................................................. 553,900 15,924,625
---------------
21,182,563
---------------
Insurance - Life 2.5%
American Heritage Life Investment Corp. ..................................... 78,900 $ 1,799,906
ReliaStar Financial Corp. ................................................... 239,400 9,336,600
---------------
11,136,506
---------------
Insurance - Property/Casualty 8.8%
American International Group, Inc. .......................................... 60,375 4,648,875
Chubb Corp. ................................................................. 113,000 7,119,000
Harleysville Group, Inc. .................................................... 74,700 1,540,688
Mercury General Corp. ....................................................... 245,200 9,195,000
MMI Cos., Inc. .............................................................. 395,400 7,092,488
RLI Corp. ................................................................... 186,562 7,089,356
St. Paul Cos., Inc. ......................................................... 94,400 3,068,000
---------------
39,753,407
---------------
Non-Energy Minerals 1.1%
Nucor Corp. ................................................................. 120,900 4,911,563
Process Industries 13.5%
Bemis Co., Inc. ............................................................. 332,600 11,661,788
Brady Corp., Class A......................................................... 144,300 2,994,225
Donaldson Co., Inc. ......................................................... 126,900 2,030,400
M.A. Hanna Co. .............................................................. 463,200 5,211,000
Millipore Corp. ............................................................. 238,300 4,542,594
Myers Industries, Inc. ...................................................... 290,880 6,690,240
Pall Corp. .................................................................. 936,300 20,774,156
Sherwin-Williams Co. ........................................................ 328,000 7,093,000
---------------
60,997,403
---------------
Producer Manufacturing 16.7%
Avery Dennison Corp. ........................................................ 157,100 6,863,306
Baldor Electric Co. ......................................................... 257,366 5,629,881
Diebold, Inc. ............................................................... 294,000 6,468,000
Dover Corp. ................................................................. 278,400 8,595,600
Flowserve Corp. ............................................................. 156,200 3,163,050
General Electric Co. ........................................................ 54,000 4,296,375
Graco, Inc. ................................................................. 93,800 2,180,850
Hubbell, Inc., Class B....................................................... 187,300 6,649,150
Kaydon Corp. ................................................................ 383,700 10,096,106
Kimball International, Inc., Class B......................................... 408,000 6,273,000
Superior Industries International, Inc. ..................................... 167,800 3,838,425
Teleflex, Inc. .............................................................. 70,000 2,450,000
Watts Industries, Inc., Class A.............................................. 483,000 8,694,000
---------------
75,197,743
---------------
Retail Trade 10.2%
Family Dollar Stores, Inc. .................................................. 1,516,700 23,888,025
Rite Aid Corp. .............................................................. 237,800 8,441,900
Schultz Sav-O Stores, Inc. .................................................. 165,000 2,598,750
Retail Trade (cont.)
The Limited, Inc. ........................................................... 200,200 $ 4,391,888
Wal-Mart Stores, Inc. ....................................................... 125,800 6,871,825
---------------
46,192,388
---------------
Technology Services 1.7%
Reynolds and Reynolds Co., Class A........................................... 428,400 7,630,875
---------------
Transportation 1.0%
Circle International Group, Inc. ............................................ 321,000 4,494,000
---------------
Total Common Stocks (Cost $406,685,441)...................................... 441,485,284
---------------
Convertible Preferred Stock .2%
American Heritage Life Investment Corp., 8.50% cvt. pfd. (Cost $625,000)..... 12,500 787,500
---------------
Total Long Term Investments (Cost $407,310,441).............................. 442,272,784
---------------
PRINCIPAL
AMOUNT
a Repurchase Agreement 1.8%
Joint Repurchase Agreement, 5.275%, 10/01/98,
(Maturity Value $7,977,690) (Cost $7,976,521) .................................. $7,976,521 7,976,521
BancAmerica Robertson Stephens, (Maturity Value $803,832)
Barclays Capital Group, Inc., (Maturity Value $743,202)
BT Alex Brown, Inc., (Maturity Value $803,832)
Chase Securities, Inc., (Maturity Value $803,832)
CIBC Wood Gundy Securities Corp., (Maturity Value $803,832)
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $803,832)
Dresdner Kleinwort Benson, North America, L.L.C., (Maturity Value $803,832)
Greenwich Capital Markets, Inc., (Maturity Value $803,832)
Paribas Corp., (Maturity Value $803,832)
SBC Warburg Dillion Read, Inc., (Maturity Value $803,832)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $415,286,962) 99.8% ................................. 450,249,305
Other Assets, less Liabilities .2% .......................................... 876,444
---------------
Net Assets 100.0% ........................................................... $451,125,749
===============
aSee Note 1(b) regarding joint repurchase agreement.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN MANAGED TRUST
Financial Statements
Statement of Assets and Liabilities
September 30, 1998
FRANKLIN FRANKLIN
INVESTMENT GRADE RISING
INCOME FUND DIVIDENDS FUND
<S> <C> <C>
Assets:
Investments in securities:
Cost....................................................................... $45,194,777 $407,310,441
=============================
Value...................................................................... 46,151,078 442,272,784
Repurchase agreements, at value and cost.................................... 12,142,967 7,976,521
Cash........................................................................ -- 553,852
Receivables:
Investment securities sold................................................. -- 1,117,015
Capital shares sold........................................................ 56,154 197,212
Dividends and interest..................................................... 578,216 727,922
Other assets................................................................ 3,725 --
-----------------------------
Total assets................................................................. 58,932,140 452,845,306
-----------------------------
Liabilities:
Payables:
Investment securities purchased............................................ -- 137,596
Capital shares redeemed.................................................... 1,367,418 493,636
Affiliates................................................................. 51,747 762,828
Shareholders............................................................... 34,142 286,298
Other liabilities........................................................... 15,229 39,199
-----------------------------
Total liabilities............................................................ 1,468,536 1,719,557
-----------------------------
Net assets, at value........................................................ $57,463,604 $451,125,749
=============================
Net assets consist of:
Undistributed net investment income......................................... $ 305,768 $ 736,183
Net unrealized appreciation................................................. 956,301 34,962,343
Accumulated net realized gain (loss)........................................ (740,192) 40,943,155
Capital shares.............................................................. 56,941,727 374,484,068
-----------------------------
Net assets, at value ........................................................ $57,463,604 $451,125,749
=============================
FRANKLIN FRANKLIN
INVESTMENT GRADE RISING
INCOME FUND DIVIDENDS FUND
<S> <C> <C>
CLASS I:
Net assets, at value........................................................ $54,958,417 $407,336,106
=============================
Shares outstanding.......................................................... 5,959,513 18,917,914
=============================
Net asset value per share*.................................................. $9.22 $21.53
=============================
Maximum offering price per share
(net asset value per share / 95.75% and 94.25%, respectively)............... $9.63 $22.84
=============================
Class II:
Net assets, at value........................................................ $ 43,789,643
===============
Shares outstanding.......................................................... 2,041,512
===============
Net asset value per share*.................................................. $21.45
===============
Maximum offering price per share (net asset value per share / 99%).......... $21.67
===============
Advisor Class:
Net assets, at value........................................................ $ 2,505,187
==============
Shares outstanding.......................................................... 271,551
==============
Net asset value and maximum offering price per share........................ $9.23
==============
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See notes to financial statements.
<TABLE>
<CAPTION>
FRANKLIN MANAGED TRUST
Financial Statements (continued)
Statement of Operations
for the year ended September 30, 1998
FRANKLIN FRANKLIN
INVESTMENT GRADE RISING
INCOME FUND DIVIDENDS FUND
<S> <C> <C>
Investment income:
Dividends................................................................... $-- $ 8,333,734
Interest ................................................................... 2,935,984 778,232
----------------------------
Total investment income ..................................................... 2,935,984 9,111,966
----------------------------
Expenses:
Management fees (Note 3).................................................... 251,633 3,577,836
Distribution fees (Note 3)
Class I.................................................................... 140,894 2,055,618
Class II................................................................... -- 322,448
Transfer agent fees (Note 3) ............................................... 50,222 574,615
Custodian fees.............................................................. 648 6,375
Reports to shareholders .................................................... 20,726 129,466
Accounting fees (Note 3) ................................................... 40,000 40,000
Registration and filing fees ............................................... 25,146 62,099
Professional fees .......................................................... 13,023 40,401
Trustees' fees and expenses ................................................ 3,835 31,174
Other....................................................................... 5,456 10,522
----------------------------
Total expenses .............................................................. 551,583 6,850,554
----------------------------
Net investment income ...................................................... 2,384,401 2,261,412
----------------------------
Realized and unrealized gains (losses):
Net realized gain from investments ......................................... 7,326 45,956,036
Net unrealized appreciation (depreciation) on investments................... 840,370 (99,023,374)
----------------------------
Net realized and unrealized gain (loss)...................................... 847,696 (53,067,338)
----------------------------
Net increase (decrease) in net assets resulting from operations ............. $3,232,097 $(50,805,926)
============================
</TABLE>
See notes to financial statements.
<TABLE>
<CAPTION>
FRANKLIN MANAGED TRUST
Financial Statements (continued)
Statements of Changes in Net Assets
for the years ended September 30, 1998 and 1997
FRANKLIN INVESTMENT GRADE FRANKLIN
INCOME FUND RISING DIVIDENDS FUND
-------------------------------------------------------------
1998 1997 1998 1997
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................... $ 2,384,401 $ 1,724,716 $ 2,261,412 $ 2,313,467
Net realized gain from investments........ 7,326 344,319 45,956,036 49,210,010
Net unrealized appreciation (depreciation)
on investments............................. 840,370 (78,808) (99,023,374) 70,034,445
-------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations.................. 3,232,097 1,990,227 (50,805,926) 121,557,922
Distributions to shareholders from:
Net investment income:
Class I................................... (2,346,104) (1,686,440) (1,828,381) (2,490,290)
Class II.................................. -- -- (4,086) (8,072)
Advisor Class............................. (2,510) (1,534) -- --
Net realized gains:
Class I................................... -- -- (48,479,814) (18,098,843)
Class II.................................. -- -- (2,105,211) (288,240)
--------------------------------------------------------------
Total distributions to shareholders......... (2,348,614) (1,687,974) (52,417,492) (20,885,445)
Capital share transactions (Note 2)
Class I................................... 10,523,609 13,893,814 107,238,762 18,867,160
Class II.................................. -- -- 37,710,977 8,231,696
Advisor Class............................. 2,448,896 39,376 -- --
-------------------------------------------------------------
Total capital share transactions............ 12,972,505 13,933,190 144,949,739 27,098,856
Net increase in net assets.................. 13,855,988 14,235,443 41,726,321 127,771,333
Net assets:
Beginning of year.......................... 43,607,616 29,372,173 409,399,428 281,628,095
-------------------------------------------------------------
End of year................................ $57,463,604 $43,607,616 $451,125,749 $409,399,428
=============================================================
Undistributed net investment
income included in net assets:
End of year................................ $ 305,768 $ 269,981 $ 736,183 $--
=============================================================
</TABLE>
See notes to financial statements.
FRANKLIN MANAGED TRUST
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Managed Trust (the Trust) is registered under the Investment Company
Act of 1940 as an open-end, diversified investment company, consisting of two
series (the Funds). The Funds and their investment objectives are:
Fund Objective
- ---------------------------------------------------------------------------
Franklin Investment Grade Income Fund Income
Franklin Rising Dividends FundGrowth and Income
On July 15, 1998, the Franklin Corporate Qualified Dividend Fund (a fund of the
Trust) ceased operations pursuant to a resolution approved by the Board of
Trustees.
The following summarizes the Funds' significant accounting policies.
a. Security Valuation:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.
b. Joint Repurchase Agreement:
The Funds may enter into a joint repurchase agreement whereby its uninvested
cash balance is deposited into a joint cash account to be used to invest in one
or more repurchase agreements. The value and face amount of the joint repurchase
agreement are allocated to the Funds based on their pro-rata interest. A
repurchase agreement is accounted for as a loan by the Fund to the seller,
collateralized by securities which are delivered to the Fund's custodian. The
market value, including accrued interest, of the initial collateralization is
required to be at least 102% of the dollar amount invested by the Funds, with
the value of the underlying securities marked to market daily to maintain
coverage of at least 100%. At September 30, 1998, all outstanding repurchase
agreements had been entered into on that date.
c. Income Taxes:
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
distribute all of its taxable income.
d. Security Transactions, Investment Income, Expenses and Distributions:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expense are accrued daily. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
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. Other expenses are
charged to each Fund on a specific identification basis.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)
e. Accounting Estimates:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
The Funds offer three classes of shares: Class I, Class II and Advisor Class.
The shares have the same rights except for their initial sales load,
distribution fees, voting rights on matters affecting a single class and the
exchange privilege of each class.
At September 30, 1998, there were an unlimited number of shares authorized
($0.01 par value). Transactions in each of the Fund's shares were as follows:
<TABLE>
<CAPTION>
FRANKLIN INVESTMENT FRANKLIN RISING
GRADE INCOME FUND DIVIDENDS FUND
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Class I Shares
1998
Shares sold ........................................ 3,275,365 $29,782,945 6,690,317 $168,552,709
Shares issued in reinvestment of distributions...... 219,360 1,989,262 1,767,518 42,544,929
Shares redeemed ....................................(2,335,040) (21,248,598) (4,203,389)(103,858,876)
-----------------------------------------------------
Net increase........................................ 1,159,685 $10,523,609 4,254,446 $107,238,762
====================================================
1997
Shares sold ........................................ 3,081,133 $27,806,195 2,748,993 $ 64,035,322
Shares issued in reinvestment of distributions...... 148,291 1,335,521 803,577 16,782,484
Shares redeemed ....................................(1,688,767) (15,247,902) (2,754,192) (61,950,646)
-----------------------------------------------------
Net increase........................................ 1,540,657 $13,893,814 798,378 $ 18,867,160
====================================================
Class II Shares
1998
Shares sold .................................................................... 1,797,364 $ 45,013,886
Shares issued in reinvestment of distributions.................................. 76,771 1,845,670
Shares redeemed ................................................................ (373,593) (9,148,579)
-------------------------
Net increase.................................................................... 1,500,542 $ 37,710,977
========================
1997
Shares sold .................................................................... 428,747 $ 10,143,144
Shares issued in reinvestment of distributions.................................. 11,554 239,444
Shares redeemed................................................................. (93,599) (2,150,892)
-------------------------
Net increase.................................................................... 346,702 $ 8,231,696
========================
</TABLE>
2. SHARES OF BENEFICIAL INTEREST (cont.)
FRANKLIN INVESTMENT
GRADE INCOME FUND
SHARES AMOUNT
Advisor Class Shares
1998
Shares sold ........................................ 267,539 $ 2,451,802
Shares issued in reinvestment of distributions...... 315 2,853
Shares redeemed .................................... (634) (5,759)
------------------------
Net increase......................................... 267,220 $ 2,448,896
=======================
1997*
Shares sold ........................................ 14,121 $ 127,787
Shares issued in reinvestment of distributions ..... 133 1,192
Shares redeemed .................................... (9,923) (89,603)
------------------------
Net increase......................................... 4,331 $ 39,376
=======================
*Effective date of Advisor Class shares was January 2, 1997.
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Funds are also officers and/or trustees of
Franklin Investment Advisory Services, Inc. (Advisory Services),
Franklin/Templeton Distributors, Inc. (Distributors), Franklin Templeton
Services, Inc (FT Services) and Franklin/Templeton Investor Services, Inc.
(Investor Services) the Funds' investment manager, principal underwriter,
administrative manager and transfer agent, respectively.
The Funds pay an investment management fee to Advisory Services based on the
average net assets of each Fund as follows:
FRANKLIN FRANKLIN
INVESTMENT RISING
GRADE DIVIDENDS
INCOME FUND FUND
Average Daily Net Assets
First $500 million.......................... .50% .75%
Over $500 million, up to and
including $1 billion ...................... .45% .625%
In excess of $1 billion..................... .40% .50%
Each of the Funds also pays accounting fees to Advisory Services.
Under an agreement with Advisory Services, FT Services provides administrative
services to the Funds. The fee is paid by Advisory Services based on average
daily net assets, and is not an additional expense of the Funds.
The Franklin Rising Dividends Fund reimburses Distributors up to .50% and 1.00%
per year of its average daily net assets of Class I and Class II, respectively,
and the Franklin Investment Grade Income Fund reimburses Distributors up to .25%
per year of the average daily net assets of Class I, for costs incurred in
marketing the Fund's shares.
3. TRANSACTIONS WITH AFFILIATES (cont.)
Distributors paid net commissions on sales of the Funds' shares, and received
contingent deferred sales charges for the year as follows:
FRANKLIN FRANKLIN
INVESTMENT RISING
GRADE DIVIDENDS
INCOME FUND FUND
Net Commissions paid...................... $39,980 $451,232
Contingent deferred sales charges......... $ 184 $ 20,936
The Funds paid transfer agent fees of $624,837, of which $421,594 was paid to
Investor Services.
4. INCOME TAXES
At September 30, 1998, the Franklin Investment Grade Income Fund had tax basis
capital losses of $740,192 which may be carried over to offset future capital
gains. Such losses expire as follows:
Capital loss carryovers expiring in:
1999............................... $117,414
2003............................... 254,062
2004............................... 368,716
-------------
$740,192
=============
On September 30, 1998, the Franklin Investment Grade Income Fund had expired
capital loss carryovers of $62,907 which were reclassified to paid-in capital.
At September 30, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes was as follows:
Franklin Franklin
Investment Rising
Grade Dividends
INCOME FUND FUND
Investment at cost............ $57,337,744 $415,448,272
=================================
Unrealized appreciation ...... $ 956,301 $ 86,792,019
Unrealized depreciation ...... -- (51,990,986)
----------------------------------
Net unrealized appreciation .. $ 956,301 $ 34,801,033
=================================
Net realized capital gains differ for financial statement and tax purposes
primarily due to differing treatment of wash sales.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended September 30, 1998, were as follows:
FRANKLIN FRANKLIN
INVESTMENT RISING
GRADE DIVIDENDS
INCOME FUND FUND
Purchases ................ $20,352,020 $208,058,353
Sales .................... $ 8,500,000 $110,166,062
FRANKLIN MANAGED TRUST
Report of Independent Accountants
To the Shareholders and Board of Trustees
of Franklin Managed Trust:
We have audited the accompanying statements of assets and liabilities of the
Franklin Managed Trust (comprised of the Franklin Investment Grade Income Fund
and the Franklin Rising Dividends Fund), including each Fund's statement of
investments in securities and net assets, as of September 30, 1998, 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 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 misstatements. 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
September 30, 1998, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Franklin Investment Grade Income Fund and the Franklin Rising Dividends Fund as
of September 30, 1998, the results of their operations for the year then ended,
the changes in their net assets for each of the two years in the period then
ended, and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
November 5, 1998
FRANKLIN MANAGED TRUST
Tax Information
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Rising Dividends
Fund hereby designates $40,456,757 as a capital gain dividend for the fiscal
year ended September 30, 1998.
Under Section 854(b)(2) of the Internal Revenue Code, the Franklin Rising
Dividends Fund hereby designates 100% of ordinary income dividends as income
qualifying for the dividends received deduction for the fiscal year ended
September 30, 1998.
Franklin Managed Trust
Annual Report
September 30, 1998.
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM 304
(a) OF REGULATION S-T)
GRAPHIC MATERIAL (1)
This chart shows in pie format the credit quality breakdown of the Franklin
Investment Grade Income Fund based on total net assets on 9/30/98.
AAA 69%
A 24%
BBB 7%
GRAPHIC MATERIAL (2)
This chart shows the dividend distributions for Franklin Investment Grade Income
Fund - Class I from 5/1/97 to 9/30/98.
Dividend
MONTH PER SHARE
- --------------------------------
October 3.3 cents
November 3.3 cents
December 7.0 cents
January 3.3 cents
February 3.3 cents
March 3.3 cents
April 3.3 cents
May 3.3 cents
June 3.3 cents
July 3.3 cents
August 3.3 cents
SEPTEMBER 3.3 CENTS
- --------------------------------
Total 43.3 cents
GRAPHIC MATERIAL (3)
The following line graph compares the performance of the Franklin Investment
Grade Income Fund - Class I shares to that of the Lehman Brothers
Government/Corporate Bond Index, and to the Consumer Price Index based on a
$10,000 investment from 10/1/88 to 9/30/98.
Franklin Alabama Lehman Brothers
Date Tax-Free Municipal CPI
Income Fund-Class I Bond Index
10/1/88 $9,575 $10,000 $10,000
10/31/88 $9,636 1.77% $10,177 0.33% $10,033
11/30/88 $9,621 -1.13% $10,062 0.08% $10,041
12/31/88 $9,650 0.34% $10,096 0.17% $10,058
1/31/89 $9,735 1.33% $10,230 0.50% $10,108
2/28/89 $9,742 -0.76% $10,153 0.41% $10,150
3/31/89 $9,794 0.53% $10,207 0.58% $10,209
4/30/89 $9,870 2.12% $10,423 0.65% $10,275
5/31/89 $9,992 2.46% $10,679 0.57% $10,334
6/30/89 $10,115 3.26% $11,027 0.24% $10,358
7/31/89 $10,287 2.08% $11,257 0.24% $10,383
8/31/89 $10,199 -1.55% $11,082 0.16% $10,400
9/30/89 $10,230 0.44% $11,131 0.32% $10,433
10/31/89 $10,365 2.53% $11,413 0.48% $10,483
11/30/89 $10,442 0.90% $11,515 0.24% $10,508
12/31/89 $10,470 0.15% $11,533 0.16% $10,525
1/31/90 $10,387 -1.37% $11,375 1.03% $10,634
2/28/90 $10,453 0.22% $11,400 0.47% $10,684
3/31/90 $10,457 0.01% $11,401 0.55% $10,742
4/30/90 $10,423 -0.92% $11,296 0.16% $10,760
5/31/90 $10,629 2.90% $11,624 0.23% $10,784
6/30/90 $10,747 1.62% $11,812 0.54% $10,843
7/31/90 $10,877 1.24% $11,958 0.38% $10,884
8/31/90 $10,827 -1.45% $11,785 0.92% $10,984
9/30/90 $10,867 0.83% $11,883 0.84% $11,076
10/31/90 $10,960 1.33% $12,041 0.60% $11,143
11/30/90 $11,120 2.18% $12,303 0.22% $11,167
12/31/90 $11,203 1.51% $12,489 0.00% $11,167
1/31/91 $11,325 1.12% $12,629 0.60% $11,234
2/28/91 $11,462 0.86% $12,738 0.15% $11,251
3/31/91 $11,566 0.69% $12,825 0.15% $11,268
4/30/91 $11,713 1.15% $12,973 0.15% $11,285
5/31/91 $11,791 0.47% $13,034 0.30% $11,319
6/30/91 $11,787 -0.11% $13,020 0.29% $11,351
7/31/91 $11,923 1.26% $13,184 0.15% $11,368
8/31/91 $12,158 2.30% $13,487 0.29% $11,401
9/30/91 $12,380 2.09% $13,769 0.44% $11,452
10/31/91 $12,532 0.89% $13,891 0.15% $11,469
11/30/91 $12,686 1.00% $14,030 0.29% $11,502
12/31/91 $13,061 3.37% $14,503 0.07% $11,510
1/31/92 $12,905 -1.48% $14,288 0.15% $11,527
2/29/92 $12,924 0.53% $14,364 0.36% $11,569
3/31/92 $12,870 -0.55% $14,285 0.51% $11,628
4/30/92 $12,978 0.60% $14,371 0.14% $11,644
5/31/92 $13,146 1.94% $14,650 0.14% $11,660
6/30/92 $13,345 1.47% $14,865 0.36% $11,702
7/31/92 $13,681 2.56% $15,245 0.21% $11,727
8/31/92 $13,806 0.89% $15,381 0.28% $11,760
9/30/92 $14,015 1.36% $15,590 0.28% $11,793
10/31/92 $13,844 -1.53% $15,352 0.35% $11,834
11/30/92 $13,764 -0.09% $15,338 0.14% $11,851
12/31/92 $13,866 1.72% $15,602 -0.07% $11,842
1/31/93 $14,096 2.18% $15,942 0.49% $11,900
2/28/93 $14,423 2.08% $16,274 0.35% $11,942
3/31/93 $14,451 0.34% $16,329 0.35% $11,984
4/30/93 $14,590 0.77% $16,455 0.28% $12,017
5/31/93 $14,546 -0.05% $16,446 0.14% $12,034
6/30/93 $14,757 2.27% $16,820 0.14% $12,051
7/31/93 $14,808 0.64% $16,927 0.00% $12,051
8/31/93 $15,086 2.30% $17,317 0.28% $12,085
9/30/93 $15,105 0.35% $17,377 0.21% $12,110
10/31/93 $15,142 0.41% $17,449 0.41% $12,160
11/30/93 $15,066 -1.13% $17,251 0.07% $12,168
12/31/93 $15,120 0.44% $17,327 0.00% $12,168
1/31/94 $15,289 1.50% $17,587 0.27% $12,201
2/28/94 $15,063 -2.18% $17,204 0.34% $12,243
3/31/94 $14,869 -2.45% $16,782 0.34% $12,284
4/30/94 $14,791 -0.83% $16,643 0.14% $12,301
5/31/94 $14,797 -0.18% $16,613 0.07% $12,310
6/30/94 $14,818 -0.23% $16,575 0.34% $12,352
7/31/94 $14,991 2.00% $16,906 0.27% $12,385
8/31/94 $15,014 0.04% $16,913 0.40% $12,435
9/30/94 $14,951 -1.51% $16,658 0.27% $12,468
10/31/94 $14,973 -0.11% $16,639 0.07% $12,477
11/30/94 $14,927 -0.18% $16,609 0.13% $12,493
12/31/94 $14,944 0.66% $16,719 0.00% $12,493
1/31/95 $15,129 1.92% $17,040 0.40% $12,543
2/28/95 $15,333 2.32% $17,435 0.40% $12,593
3/31/95 $15,397 0.67% $17,552 0.33% $12,635
4/30/95 $15,532 1.39% $17,796 0.33% $12,677
5/31/95 $15,826 4.19% $18,542 0.20% $12,702
6/30/95 $15,962 0.80% $18,690 0.20% $12,727
7/31/95 $15,974 -0.39% $18,617 0.00% $12,727
8/31/95 $16,094 1.28% $18,856 0.26% $12,761
9/30/95 $16,178 1.02% $19,048 0.20% $12,786
10/31/95 $16,309 1.47% $19,328 0.33% $12,828
11/30/95 $16,495 1.65% $19,647 -0.07% $12,819
12/31/95 $16,590 1.47% $19,936 -0.07% $12,810
1/31/96 $16,705 0.62% $20,059 0.59% $12,886
2/29/96 $16,546 -2.12% $19,634 0.32% $12,927
3/31/96 $16,533 -0.84% $19,469 0.52% $12,994
4/30/96 $16,502 -0.69% $19,335 0.39% $13,045
5/31/96 $16,508 -0.17% $19,302 0.19% $13,070
6/30/96 $16,624 1.34% $19,560 0.06% $13,078
7/31/96 $16,667 0.23% $19,605 0.19% $13,103
8/31/96 $16,710 -0.24% $19,558 0.19% $13,127
9/30/96 $16,865 1.78% $19,907 0.32% $13,169
10/31/96 $17,058 2.33% $20,370 0.32% $13,212
11/30/96 $17,196 1.84% $20,745 0.19% $13,237
12/31/96 $17,169 -1.11% $20,515 0.00% $13,237
1/31/97 $17,213 0.12% $20,540 0.32% $13,279
2/28/97 $17,257 0.21% $20,583 0.31% $13,320
3/31/97 $17,224 -1.19% $20,338 0.25% $13,353
4/30/97 $17,327 1.46% $20,635 0.12% $13,370
5/31/97 $17,429 0.93% $20,827 -0.06% $13,361
6/30/97 $17,532 1.20% $21,077 0.12% $13,378
7/31/97 $17,713 3.06% $21,721 0.12% $13,394
8/31/97 $17,700 -1.12% $21,478 0.19% $13,419
9/30/97 $17,823 1.57% $21,815 0.25% $13,453
10/31/97 $17,927 1.60% $22,164 0.25% $13,486
11/30/97 $17,993 0.53% $22,282 -0.06% $13,478
12/31/97 $18,092 1.05% $22,516 -0.12% $13,462
1/31/98 $18,238 1.41% $22,833 0.19% $13,488
2/28/98 $18,244 -0.20% $22,788 0.19% $13,513
3/31/98 $18,311 0.31% $22,858 0.19% $13,539
4/30/98 $18,357 0.50% $22,973 0.18% $13,563
5/31/98 $18,465 1.07% $23,218 0.18% $13,588
6/30/98 $18,572 1.02% $23,455 0.12% $13,604
7/31/98 $18,599 0.08% $23,474 0.12% $13,620
8/31/98 $18,769 1.95% $23,932 0.12% $13,637
9/30/98 $18,981 2.86% $24,616 0.12% $13,653
Total 89.81% 146.16% 36.53%
Return
GRAPHIC MATERIAL (4)
This chart shows the dividend distributions for Franklin Investment Grade Income
Fund - Advisor Class from 10/1/97 to 9/30/98.
Dividend
MONTH PER SHARE
- --------------------------------
October 3.41 cents
November 3.45 cents
December 7.52 cents
January 3.49 cents
February 3.49 cents
March 3.49 cents
April 3.49 cents
May 3.49 cents
June 3.49 cents
July 3.49 cents
August 3.49 cents
SEPTEMBER 3.49 CENTS
- --------------------------------
Total 45.79 cents
GRAPHIC MATERIAL (5)
The following line graph compares the performance of the Franklin Investment
Grade Income Fund - Advisor Class shares to that of the Lehman Brothers
Government/Corporate Bond Index, and to the Consumer Price Index based on a
$10,000 investment from 10/1/88 to 9/30/98.
Franklin Investment Lehman Brothers
Grade Municipal
Date Income Fund-Advisor Class Bond Index CPI
10/1/88 $10,000 $10,000 $10,000
10/31/88 $10,064 1.77% $10,177 0.33% $10,033
11/30/88 $10,048 -1.13% $10,062 0.08% $10,041
12/31/88 $10,078 0.34% $10,096 0.17% $10,058
1/31/89 $10,167 1.33% $10,230 0.50% $10,108
2/28/89 $10,174 -0.76% $10,153 0.41% $10,150
3/31/89 $10,229 0.53% $10,207 0.58% $10,209
4/30/89 $10,308 2.12% $10,423 0.65% $10,275
5/31/89 $10,436 2.46% $10,679 0.57% $10,334
6/30/89 $10,564 3.26% $11,027 0.24% $10,358
7/31/89 $10,743 2.08% $11,257 0.24% $10,383
8/31/89 $10,652 -1.55% $11,082 0.16% $10,400
9/30/89 $10,684 0.44% $11,131 0.32% $10,433
10/31/89 $10,825 2.53% $11,413 0.48% $10,483
11/30/89 $10,905 0.90% $11,515 0.24% $10,508
12/31/89 $10,934 0.15% $11,533 0.16% $10,525
1/31/90 $10,848 -1.37% $11,375 1.03% $10,634
2/28/90 $10,917 0.22% $11,400 0.47% $10,684
3/31/90 $10,921 0.01% $11,401 0.55% $10,742
4/30/90 $10,885 -0.92% $11,296 0.16% $10,760
5/31/90 $11,100 2.90% $11,624 0.23% $10,784
6/30/90 $11,224 1.62% $11,812 0.54% $10,843
7/31/90 $11,359 1.24% $11,958 0.38% $10,884
8/31/90 $11,307 -1.45% $11,785 0.92% $10,984
9/30/90 $11,349 0.83% $11,883 0.84% $11,076
10/31/90 $11,446 1.33% $12,041 0.60% $11,143
11/30/90 $11,613 2.18% $12,303 0.22% $11,167
12/31/90 $11,700 1.51% $12,489 0.00% $11,167
1/31/91 $11,828 1.12% $12,629 0.60% $11,234
2/28/91 $11,970 0.86% $12,738 0.15% $11,251
3/31/91 $12,079 0.69% $12,825 0.15% $11,268
4/30/91 $12,232 1.15% $12,973 0.15% $11,285
5/31/91 $12,315 0.47% $13,034 0.30% $11,319
6/30/91 $12,310 -0.11% $13,020 0.29% $11,351
7/31/91 $12,452 1.26% $13,184 0.15% $11,368
8/31/91 $12,697 2.30% $13,487 0.29% $11,401
9/30/91 $12,929 2.09% $13,769 0.44% $11,452
10/31/91 $13,088 0.89% $13,891 0.15% $11,469
11/30/91 $13,249 1.00% $14,030 0.29% $11,502
12/31/91 $13,641 3.37% $14,503 0.07% $11,510
1/31/92 $13,478 -1.48% $14,288 0.15% $11,527
2/29/92 $13,498 0.53% $14,364 0.36% $11,569
3/31/92 $13,441 -0.55% $14,285 0.51% $11,628
4/30/92 $13,553 0.60% $14,371 0.14% $11,644
5/31/92 $13,729 1.94% $14,650 0.14% $11,660
6/30/92 $13,937 1.47% $14,865 0.36% $11,702
7/31/92 $14,288 2.56% $15,245 0.21% $11,727
8/31/92 $14,418 0.89% $15,381 0.28% $11,760
9/30/92 $14,637 1.36% $15,590 0.28% $11,793
10/31/92 $14,458 -1.53% $15,352 0.35% $11,834
11/30/92 $14,374 -0.09% $15,338 0.14% $11,851
12/31/92 $14,481 1.72% $15,602 -0.07% $11,842
1/31/93 $14,722 2.18% $15,942 0.49% $11,900
2/28/93 $15,063 2.08% $16,274 0.35% $11,942
3/31/93 $15,092 0.34% $16,329 0.35% $11,984
4/30/93 $15,238 0.77% $16,455 0.28% $12,017
5/31/93 $15,191 -0.05% $16,446 0.14% $12,034
6/30/93 $15,412 2.27% $16,820 0.14% $12,051
7/31/93 $15,465 0.64% $16,927 0.00% $12,051
8/31/93 $15,755 2.30% $17,317 0.28% $12,085
9/30/93 $15,775 0.35% $17,377 0.21% $12,110
10/31/93 $15,814 0.41% $17,449 0.41% $12,160
11/30/93 $15,734 -1.13% $17,251 0.07% $12,168
12/31/93 $15,790 0.44% $17,327 0.00% $12,168
1/31/94 $15,967 1.50% $17,587 0.27% $12,201
2/28/94 $15,731 -2.18% $17,204 0.34% $12,243
3/31/94 $15,529 -2.45% $16,782 0.34% $12,284
4/30/94 $15,448 -0.83% $16,643 0.14% $12,301
5/31/94 $15,453 -0.18% $16,613 0.07% $12,310
6/30/94 $15,475 -0.23% $16,575 0.34% $12,352
7/31/94 $15,657 2.00% $16,906 0.27% $12,385
8/31/94 $15,680 0.04% $16,913 0.40% $12,435
9/30/94 $15,614 -1.51% $16,658 0.27% $12,468
10/31/94 $15,637 -0.11% $16,639 0.07% $12,477
11/30/94 $15,590 -0.18% $16,609 0.13% $12,493
12/31/94 $15,607 0.66% $16,719 0.00% $12,493
1/31/95 $15,801 1.92% $17,040 0.40% $12,543
2/28/95 $16,013 2.32% $17,435 0.40% $12,593
3/31/95 $16,081 0.67% $17,552 0.33% $12,635
4/30/95 $16,221 1.39% $17,796 0.33% $12,677
5/31/95 $16,528 4.19% $18,542 0.20% $12,702
6/30/95 $16,670 0.80% $18,690 0.20% $12,727
7/31/95 $16,683 -0.39% $18,617 0.00% $12,727
8/31/95 $16,808 1.28% $18,856 0.26% $12,761
9/30/95 $16,896 1.02% $19,048 0.20% $12,786
10/31/95 $17,033 1.47% $19,328 0.33% $12,828
11/30/95 $17,226 1.65% $19,647 -0.07% $12,819
12/31/95 $17,327 1.47% $19,936 -0.07% $12,810
1/31/96 $17,446 0.62% $20,059 0.59% $12,886
2/29/96 $17,280 -2.12% $19,634 0.32% $12,927
3/31/96 $17,267 -0.84% $19,469 0.52% $12,994
4/30/96 $17,234 -0.69% $19,335 0.39% $13,045
5/31/96 $17,240 -0.17% $19,302 0.19% $13,070
6/30/96 $17,362 1.34% $19,560 0.06% $13,078
7/31/96 $17,406 0.23% $19,605 0.19% $13,103
8/31/96 $17,451 -0.24% $19,558 0.19% $13,127
9/30/96 $17,613 1.78% $19,907 0.32% $13,169
10/31/96 $17,815 2.33% $20,370 0.32% $13,212
11/30/96 $17,959 1.84% $20,745 0.19% $13,237
12/31/96 $17,931 -1.11% $20,515 0.00% $13,237
1/31/97 $17,977 0.12% $20,540 0.32% $13,279
2/28/97 $18,033 0.21% $20,583 0.31% $13,320
3/31/97 $17,982 -1.19% $20,338 0.25% $13,353
4/30/97 $18,112 1.46% $20,635 0.12% $13,370
5/31/97 $18,222 0.93% $20,827 -0.06% $13,361
6/30/97 $18,313 1.20% $21,077 0.12% $13,378
7/31/97 $18,505 3.06% $21,721 0.12% $13,394
8/31/97 $18,515 -1.12% $21,478 0.19% $13,419
9/30/97 $18,627 1.57% $21,815 0.25% $13,453
10/31/97 $18,759 1.60% $22,164 0.25% $13,486
11/30/97 $18,830 0.53% $22,282 -0.06% $13,478
12/31/97 $18,945 1.05% $22,516 -0.12% $13,462
1/31/98 $19,102 1.41% $22,833 0.19% $13,488
2/28/98 $19,112 -0.20% $22,788 0.19% $13,513
3/31/98 $19,186 0.31% $22,858 0.19% $13,539
4/30/98 $19,239 0.50% $22,973 0.18% $13,563
5/31/98 $19,355 1.07% $23,218 0.18% $13,588
6/30/98 $19,451 1.02% $23,455 0.12% $13,604
7/31/98 $19,504 0.08% $23,474 0.12% $13,620
8/31/98 $19,708 1.95% $23,932 0.12% $13,637
9/30/98 $19,914 2.86% $24,616 0.12% $13,653
Total 99.14% 146.16% 36.53%
Return
GRAPHIC MATERIAL (6)
This chart shows the top 10 stock holdings by company and industry of the
Franklin Rising Dividends Fund based on total net assets on September 30, 1998.
Company % of Total
INDUSTRY NET ASSETS
Family Dollar Stores, Inc. 5.30%
Retail Trade
Pall Corp. 4.60%
Process Industries
West Co., Inc. 3.53%
Health Technology
First Union Corporation 3.08%
Banks/Thrifts
Wallace Computer Services, Inc. 2.99%
Commercial Services
Washington Mutual, Inc. 2.84%
Banks/Thrifts
Bemis Co., Inc. 2.59%
Process Industries
Leggett & Platt, Inc. 2.42%
Consumer Durables
Alberto-Culver Co., Class A 2.39%
Consumer Non-Durables
Fannie Mae 2.26%
Government Sponsored Corporation
GRAPHIC MATERIAL (7)
The following line graph compares the performance of the Franklin Rising
Dividends Fund - Class I shares to that of the Wilshire MidCap Growth Index, and
to the Consumer Price Index based on a $10,000 investment from 10/1/88 to
9/30/98.
Franklin Rising Wilshire MidCap
Dividends Growth
Date Fund- Class I Index CPI
10/1/88 $9,424 $10,000 $10,000
10/31/88 $9,573 0.19% $10,019 0.33% $10,033
11/30/88 $9,302 -2.90% $9,728 0.08% $10,041
12/31/88 $9,367 3.01% $10,021 0.17% $10,058
1/31/89 $9,650 4.97% $10,519 0.50% $10,108
2/28/89 $9,669 0.31% $10,552 0.41% $10,150
3/31/89 $9,868 1.93% $10,756 0.58% $10,209
4/30/89 $10,115 5.63% $11,361 0.65% $10,275
5/31/89 $10,495 4.37% $11,858 0.57% $10,334
6/30/89 $10,591 -3.34% $11,462 0.24% $10,358
7/31/89 $11,051 7.36% $12,305 0.24% $10,383
8/31/89 $11,166 3.26% $12,706 0.16% $10,400
9/30/89 $11,137 0.10% $12,719 0.32% $10,433
10/31/89 $11,019 -4.09% $12,199 0.48% $10,483
11/30/89 $11,058 -0.36% $12,155 0.24% $10,508
12/31/89 $11,203 0.59% $12,227 0.16% $10,525
1/31/90 $10,666 -9.29% $11,091 1.03% $10,634
2/28/90 $10,803 2.55% $11,374 0.47% $10,684
3/31/90 $10,988 4.49% $11,884 0.55% $10,742
4/30/90 $10,694 -4.85% $11,308 0.16% $10,760
5/31/90 $11,224 10.68% $12,516 0.23% $10,784
6/30/90 $11,323 0.02% $12,518 0.54% $10,843
7/31/90 $11,293 -3.85% $12,036 0.38% $10,884
8/31/90 $10,302 -13.75% $10,381 0.92% $10,984
9/30/90 $9,882 -8.57% $9,491 0.84% $11,076
10/31/90 $9,752 -4.90% $9,026 0.60% $11,143
11/30/90 $10,672 11.20% $10,037 0.22% $11,167
12/31/90 $11,232 5.96% $10,636 0.00% $11,167
1/31/91 $11,613 9.44% $11,640 0.60% $11,234
2/28/91 $12,665 9.29% $12,721 0.15% $11,251
3/31/91 $13,182 6.35% $13,529 0.15% $11,268
4/30/91 $13,293 -0.78% $13,423 0.15% $11,285
5/31/91 $13,917 5.55% $14,168 0.30% $11,319
6/30/91 $13,589 -4.47% $13,535 0.29% $11,351
7/31/91 $13,984 5.42% $14,268 0.15% $11,368
8/31/91 $14,287 3.80% $14,811 0.29% $11,401
9/30/91 $14,394 0.11% $14,827 0.44% $11,452
10/31/91 $14,536 2.61% $15,214 0.15% $11,469
11/30/91 $14,363 -4.18% $14,578 0.29% $11,502
12/31/91 $15,270 13.34% $16,523 0.07% $11,510
1/31/92 $15,362 2.99% $17,017 0.15% $11,527
2/29/92 $15,341 1.69% $17,304 0.36% $11,569
3/31/92 $15,111 -3.99% $16,614 0.51% $11,628
4/30/92 $15,265 -2.38% $16,218 0.14% $11,644
5/31/92 $15,522 -1.25% $16,016 0.14% $11,660
6/30/92 $15,269 -4.54% $15,289 0.36% $11,702
7/31/92 $15,868 5.48% $16,126 0.21% $11,727
8/31/92 $15,682 -2.09% $15,789 0.28% $11,760
9/30/92 $15,967 1.75% $16,066 0.28% $11,793
10/31/92 $16,154 4.08% $16,721 0.35% $11,834
11/30/92 $16,672 7.66% $18,002 0.14% $11,851
12/31/92 $16,854 3.06% $18,553 -0.07% $11,842
1/31/93 $16,687 2.26% $18,972 0.49% $11,900
2/28/93 $16,437 -3.37% $18,333 0.35% $11,942
3/31/93 $16,567 3.07% $18,896 0.35% $11,984
4/30/93 $15,982 -4.18% $18,106 0.28% $12,017
5/31/93 $16,180 5.70% $19,138 0.14% $12,034
6/30/93 $15,997 0.66% $19,264 0.14% $12,051
7/31/93 $16,008 -0.89% $19,093 0.00% $12,051
8/31/93 $16,270 5.07% $20,061 0.28% $12,085
9/30/93 $16,276 2.51% $20,564 0.21% $12,110
10/31/93 $16,508 0.53% $20,673 0.41% $12,160
11/30/93 $16,086 -1.56% $20,351 0.07% $12,168
12/31/93 $16,265 5.53% $21,476 0.00% $12,168
1/31/94 $16,488 3.53% $22,234 0.27% $12,201
2/28/94 $15,884 0.53% $22,352 0.34% $12,243
3/31/94 $15,108 -5.95% $21,022 0.34% $12,284
4/30/94 $15,129 0.40% $21,106 0.14% $12,301
5/31/94 $15,331 -1.53% $20,783 0.07% $12,310
6/30/94 $15,299 -5.04% $19,736 0.34% $12,352
7/31/94 $15,438 2.44% $20,217 0.27% $12,385
8/31/94 $16,099 8.56% $21,948 0.40% $12,435
9/30/94 $15,725 -0.79% $21,774 0.27% $12,468
10/31/94 $15,661 2.44% $22,306 0.07% $12,477
11/30/94 $15,275 -4.43% $21,318 0.13% $12,493
12/31/94 $15,424 1.66% $21,671 0.00% $12,493
1/31/95 $15,824 0.02% $21,676 0.40% $12,543
2/28/95 $16,299 6.00% $22,976 0.40% $12,593
3/31/95 $16,651 3.69% $23,824 0.33% $12,635
4/30/95 $16,770 1.49% $24,179 0.33% $12,677
5/31/95 $17,377 1.64% $24,576 0.20% $12,702
6/30/95 $17,568 6.29% $26,121 0.20% $12,727
7/31/95 $17,992 8.40% $28,316 0.00% $12,727
8/31/95 $18,275 1.53% $28,749 0.26% $12,761
9/30/95 $18,920 2.79% $29,551 0.20% $12,786
10/31/95 $18,745 -3.52% $28,511 0.33% $12,828
11/30/95 $19,706 5.25% $30,008 -0.07% $12,819
12/31/95 $20,090 0.36% $30,116 -0.07% $12,810
1/31/96 $20,497 1.73% $30,637 0.59% $12,886
2/29/96 $20,750 3.74% $31,782 0.32% $12,927
3/31/96 $20,706 1.21% $32,167 0.52% $12,994
4/30/96 $20,628 5.93% $34,075 0.39% $13,045
5/31/96 $21,214 2.99% $35,093 0.19% $13,070
6/30/96 $21,425 -5.45% $33,181 0.06% $13,078
7/31/96 $20,737 -8.56% $30,340 0.19% $13,103
8/31/96 $21,214 7.29% $32,552 0.19% $13,127
9/30/96 $22,293 4.73% $34,092 0.32% $13,169
10/31/96 $22,972 -2.83% $33,127 0.32% $13,212
11/30/96 $24,564 5.63% $34,992 0.19% $13,237
12/31/96 $24,795 -1.32% $34,530 0.00% $13,237
1/31/97 $25,281 2.90% $35,532 0.32% $13,279
2/28/97 $25,969 -1.89% $34,860 0.31% $13,320
3/31/97 $25,160 -6.11% $32,730 0.25% $13,353
4/30/97 $25,790 3.42% $33,850 0.12% $13,370
5/31/97 $27,752 8.27% $36,649 -0.06% $13,361
6/30/97 $28,737 3.47% $37,921 0.12% $13,378
7/31/97 $31,191 7.07% $40,602 0.12% $13,394
8/31/97 $30,548 -0.77% $40,289 0.19% $13,419
9/30/97 $32,124 6.58% $42,940 0.25% $13,453
10/31/97 $31,337 -4.77% $40,892 0.25% $13,486
11/30/97 $32,088 0.59% $41,133 -0.06% $13,478
12/31/97 $32,816 0.85% $41,483 -0.12% $13,462
1/31/98 $32,667 -0.70% $41,192 0.19% $13,488
2/28/98 $35,265 8.24% $44,587 0.19% $13,513
3/31/98 $36,236 1.60% $45,300 0.19% $13,539
4/30/98 $36,087 0.70% $45,617 0.18% $13,563
5/31/98 $34,705 -5.62% $43,053 0.18% $13,588
6/30/98 $34,245 -0.60% $42,795 0.12% $13,604
7/31/98 $33,081 -5.94% $40,253 0.12% $13,620
8/31/98 $27,827 -20.29% $32,086 0.12% $13,637
9/30/98 $29,217 4.95% $33,674 0.12% $13,653
GRAPHIC MATERIAL (8)
The following line graph compares the performance of the Franklin Rising
Dividends Fund - Class II shares to that of the Wilshire MidCap Growth Index,
and to the Consumer Price Index based on a $10,000 investment from 5/1/95 to
9/30/98.
Franklin Rising Wilshire MidCap
Dividends Growth
Date Fund- Class II Index CPI
5/1/95 $9,897 $10,000 $10,000
5/31/95 $10,282 1.64% $10,164 0.20% $10,020
6/30/95 $10,390 6.29% $10,803 0.20% $10,040
7/31/95 $10,635 8.40% $11,711 0.00% $10,040
8/31/95 $10,796 1.53% $11,890 0.26% $10,066
9/30/95 $11,169 2.79% $12,222 0.20% $10,086
10/31/95 $11,059 -3.52% $11,791 0.33% $10,120
11/30/95 $11,622 5.25% $12,411 -0.07% $10,112
12/31/95 $11,842 0.36% $12,455 -0.07% $10,105
1/31/96 $12,076 1.73% $12,671 0.59% $10,165
2/29/96 $12,219 3.74% $13,145 0.32% $10,198
3/31/96 $12,184 1.21% $13,304 0.52% $10,251
4/30/96 $12,125 5.93% $14,093 0.39% $10,291
5/31/96 $12,471 2.99% $14,514 0.19% $10,310
6/30/96 $12,591 -5.45% $13,723 0.06% $10,316
7/31/96 $12,180 -8.56% $12,548 0.19% $10,336
8/31/96 $12,461 7.29% $13,463 0.19% $10,356
9/30/96 $13,086 4.73% $14,100 0.32% $10,389
10/31/96 $13,479 -2.83% $13,701 0.32% $10,422
11/30/96 $14,402 5.63% $14,472 0.19% $10,442
12/31/96 $14,533 -1.32% $14,281 0.00% $10,442
1/31/97 $14,818 2.90% $14,695 0.32% $10,475
2/28/97 $15,209 -1.89% $14,417 0.31% $10,508
3/31/97 $14,735 -6.11% $13,537 0.25% $10,534
4/30/97 $15,090 3.42% $14,000 0.12% $10,547
5/31/97 $16,235 8.27% $15,157 -0.06% $10,540
6/30/97 $16,809 3.47% $15,683 0.12% $10,553
7/31/97 $18,228 7.07% $16,792 0.12% $10,565
8/31/97 $17,850 -0.77% $16,663 0.19% $10,586
9/30/97 $18,761 6.58% $17,759 0.25% $10,612
10/31/97 $18,293 -4.77% $16,912 0.25% $10,639
11/30/97 $18,719 0.59% $17,012 -0.06% $10,632
12/31/97 $19,143 0.85% $17,156 -0.12% $10,619
1/31/98 $19,048 -0.70% $17,036 0.19% $10,640
2/28/98 $20,552 8.24% $18,440 0.19% $10,660
3/31/98 $21,114 1.60% $18,735 0.19% $10,680
4/30/98 $21,019 0.70% $18,866 0.18% $10,699
5/31/98 $20,204 -5.62% $17,806 0.18% $10,719
6/30/98 $19,926 -0.60% $17,699 0.12% $10,731
7/31/98 $19,238 -5.94% $16,648 0.12% $10,744
8/31/98 $16,174 -20.29% $13,270 0.12% $10,757
9/30/98 $16,983 4.95% $13,927 0.12% $10,770
Franklin Strategic Income Fund
Franklin Investment Grade Income Fund
Combined Pro Forma Statement of Investments, October 31, 1998 (unaudited)
<TABLE>
<CAPTION>
Strategic Income Fund
-----------------------------------------------------------
COUNTRY SHARES/ WARRANTS VALUE
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
a Common Stock, Warrants & Rights .0%
Gulf States Steel, warrants United States 200 $ 200
Loral Space & Communications, Ltd., warrants United States 300 2,694
Venezuela Oil Value Recovery, rights Venezuela 3,035 -
-----------------
-----------------
Total Common Stock, Warrants & Rights (Cost $3,731) 2,894
-----------------
Preferred Stocks .2%
a CSC Holdings, Inc., 11.125% pfd. United States 1,331 144,412
Fresenius Medical Care, 9.00% pfd. Germany 100 99,500
Sinclair Capital, 11.625% pfd. United States 3,000 309,750
-----------------
Total Preferred Stocks (Cost $499,966) 553,662
-----------------
Convertible Preferred Stocks 3.7%
El Paso Energy, 4.75% cvt. pfd. United States 32,000 1,552,000
Host Marriott Financial Trust, 6.75%, cvt. pfd. United States 40,000 1,615,000
MediaOne Group, Inc., 6.25% cvt. pfd. United States 33,800 1,820,975
Protective Life Capital Trust II, 6.50% cvt. pfd. United States 12,100 753,225
Ralston Purina Co., 7.00% cvt. pfd. United States 9,300 460,931
Salomon, Inc., 6.25% cvt. pfd. United States 6,700 330,813
Texas Utilities Co., 9.25% cvt. pfd. United States 40,000 2,255,000
Triathlon Broadcasting, 9.00% cvt. pfd. United States 20,000 193,750
Union Pacific Capital Trust, 6.25% cvt. pfd. United States 40,000 1,860,000
-----------------
-----------------
Total Convertible Preferred Stocks (Cost $11,083,904) 10,841,694
-----------------
PRINCIPAL AMOUNT*
---------------------------------------
Bonds 30.5%
Commercial Services 1.3%
Ameriserv Food Co., senior sub. notes, 10.125%, 7/15/07 United States $ 1,000,000 815,000
Ameriserv Food Distribution, senior notes, 8.875%, 10/15/06 United States 500,000 426,250
Big Flower Press Holdings, senior disc. notes, 8.875%, 7/01/07 United States 300,000 290,250
Iron Mountain, Inc., senior sub. notes, 8.75%, 9/30/09 United States 350,000 348,250
Outdoor Systems, Inc., senior sub. notes, 8.875%, 6/15/07 United States 500,000 522,500
Xerox Corp., (putable** 5/05/99), 5.90% 5/05/37 United States
-----------------
2,402,250
-----------------
Consumer Durables .8%
AMF Group, Inc., senior disc. notes, zero coupon to 3/15/00, 12.25% United States 1,118,000 542,230
thereafter, 3/15/06
Revlon Consumer Products Corp., senior sub. notes, 8.625%, 2/01/08 United States 1,500,000 1,361,250
Sealy Corp., senior sub. notes, 9.875%, 12/15/07 United States 200,000 180,000
Sealy Corp., zero coupon to 12/15/02, 10.875% thereafter, 12/15/07 United States 300,000 168,000
-----------------
2,251,480
-----------------
Consumer Non-Durables .9%
Compania Alimentos Fargo, senior notes, 144A, 13.25%, 8/1/08 Argentina 500,000 300,000
Doane Products Co., senior notes, 10.625%, 3/01/06 United States 100,000 116,084
Coca-Cola Enterprises, (putable** 10/15/03), 6.70% 10/15/36 United States
-----------------
-----------------
416,084
-----------------
Consumer Services 5.4%
Chancellor Media Corp., senior sub notes, 144A, 9.00%, 10/01/08 United States 1,000,000 1,010,000
Chancellor Media Corp., senior sub. notes, 8.75%, 6/15/07 United States 500,000 495,000
CSC Holdings, Inc., 9.875%, 4/01/23 United States 1,750,000 1,881,250
Diamond Cable Communications, Plc., senior disc. notes,
zero coupon to 2/15/02, 10.75% United Kingdom 150,000 95,063
thereafter, 2/15/07
Diamond Cable Communications, senior notes,
zero coupon to 12/15/00, 11.75% thereafter, United Kingdom 150,000 113,250
12/15/05
Diamond Holdings PLC., 9.125%, 2/01/08 United Kingdom 1,000,000 932,500
Fox Family Worldwide, Inc., senior disc. notes,
zero coupon to 11/01/02, 10.25% thereafter, United States 150,000 89,250
11/01/07
Fox/Liberty Networks, LLC., senior disc. notes,
zero coupon to 8/15/02, 9.75% United States 2,000,000 1,305,000
thereafter, 8/15/07
LA Petite Academy Inc., Series B, 10.00%, 5/15/08 United States 1,500,000 1,462,500
Lin Holdings Corp. senior disc. notes,
zero coupon to 3/1/03, 10.00% thereafter, 3/1/08 United States 1,500,000 971,250
Prime Hospitality Corp., senior sub. notes, Series B, 9.75%, 4/01/07 United States 2,000,000 1,900,000
Regal Cinemas, Inc., senior sub. notes, 144A, 9.50%, 6/01/08 United States 2,000,000 1,965,000
Sinclair Broadcast Group Inc., senior sub notes, 8.75%, 12/15/07 United States 1,700,000 1,632,000
Six Flags Entertainment., senior notes, 8.875%, 4/01/06 United States 600,000 602,250
Telewest, Plc., senior deb., zero coupon to
10/01/00, 11.00% thereafter, 10/01/07 United Kingdom 2,000,000 1,600,000
-----------------
-----------------
16,054,313
-----------------
Energy Minerals 1.8%
Abraxas Petroleum Corp., senior notes, Series B, 11.50%, 11/01/04 United States 880,000 682,000
Chesapeake Energy Corp., senior notes, Series B, 9.625%, 5/1/05 United States 300,000 256,500
Clark R&M, Inc., senior sub. notes, 8.875%, 11/15/07 United States 1,000,000 855,000
Conproca, SA, S.F., secured senior notes, 144A, 12.00%, 6/16/10 Mexico 1,800,000 1,566,000
Nuevo Energy Co., senior sub notes, Series B, 8.875%, 6/1/08 United States 400,000 398,000
P & L Coal Holdings Corp., senior sub. notes, 144A, 9.625%, 5/15/08 United States 1,500,000 1,492,500
-----------------
-----------------
5,250,000
-----------------
Finance 2.4%
Aetna Services Inc., (putable** 8/15/04), 6.97%, 8/15/36 United States
Homeside Finance, Inc., senior notes, 11.25%, 5/15/03 United States 100,000 117,500
Pera Financial Services, secured notes, 9.375%, 10/15/02 Turkey 1,000,000 695,000
Pera Financial Services, secured notes, 9.375%, 10/15/02 Turkey 160,000 111,200
Sears Roebuck Acceptance Corp.,
(putable** 11/15/00), 6.13%, 11/15/05 United States
(putable** 11/15/00), 6.15%, 11/15/05 United States
Southtrust Bank, (putable** 2/06/01), 5.58%, 2/06/06 United States
-----------------
923,700
-----------------
Health Services 1.2%
Fresenius Medical Care, 7.875%, 2/1/08 Germany 1,000,000 935,000
Magellan Health Services, Inc., senior sub. notes, 9.00%, 2/15/08 United States 1,000,000 832,500
Pharmerica, Inc., senior sub. notes, 8.375%, 4/01/08 United States 350,000 302,750
Tenet Healthcare Corp., senior sub. notes, 8.625%, 1/15/07 United States 200,000 209,000
Vencor Operating Inc., senior sub notes, 9.875%, 5/1/05 United States 1,500,000 1,200,000
-----------------
3,479,250
-----------------
Industrial Services .7%
Dailey International, Inc., senior notes, 9.50%, 2/15/08 United States 300,000 136,500
WMX Technologies, (putable** 5/15/00), 6.65% 5/15/05 United States
-----------------
136,500
Non-Energy Minerals .3%
LTV Corp., senior notes, 8.20%, 9/15/07 United States 1,000,000 950,000
-----------------
Process Industries 4.4%
Anchor Glass, first mortgage notes, 11.25%, 4/01/05 United States 300,000 308,250
Anchor Glass Container, senior notes, 9.875%, 3/15/08 United States 700,000 679,000
Ball Corp., senior notes, 144A, 7.75%, 8/01/06 United States 500,000 520,000
Ball Corp., senior sub.notes, 144A, 8.25%, 8/01/08 United States 350,000 363,125
Bausch & Lomb, (putable** 8/31/01), 6.56%, 8/12/26 United States
Four M Corp., senior notes, Series B, 12.00%, 6/01/06 United States 200,000 151,000
Graham Packaging Corp., senior sub. notes, 8.75%, 1/15/08 United States 200,000 187,500
Graham Packaging Corp., senior disc. notes zero
coupon to 1/15/03,10.75% thereafter, 1/15/09 United States 1,700,000 1,045,500
Huntsman Corp., senior sub. notes, 144A, 9.50%, 7/01/07 United States 1,000,000 945,000
Pillowtex Corp., senior sub. Notes, 9.00%, 12/18/07 United States 2,000,000 2,030,000
Pindo Deli Finance Mauritius, Ltd., senior notes, 10.25%, 10/01/02 Indonesia 700,000 372,750
Purina Mills Inc., senior sub notes, 144A, 9.00%, 3/15/10 United States 600,000 589,500
Repap New Brunswick, senior notes, 9.00%, 6/1/04 Canada 700,000 651,000
Sherwin-Williams Co., (putable** 10/15/99), 5.50%, 10/15/27 United States
Universal Compression Inc., senior disc. Notes,
zero coupon to 2/15/03, 9.875% thereafter, 2/15/08 United States 1,250,000 693,750
Windmere - Durable holdings, senior sub notes, 10.00%, 7/31/08 United States 500,000 427,500
-----------------
8,963,875
-----------------
Producer Manufacturing 2.7%
Aetna Industries, Inc., senior notes, 11.875%, 10/01/06 United States 200,000 203,000
Allied Waste Industries, Inc., senior disc. notes,
zero coupon to 6/01/02, 11.30% United States 500,000 375,000
thereafter, 6/01/07
Cambridge Industries, Inc., senior sub. notes, 10.25%, 7/15/07 United States 600,000 544,500
Collins & Aikman Products, senior sub. notes, 11.50%, 4/15/06 United States 100,000 99,500
Falcon Building Products, Inc., senior disc. sub. notes,
10.50%, 6/15/07 United States 250,000 125,000
Falcon Building Products, Inc., senior sub. notes,
Series B, 9.50%, 6/15/07 United States 1,000,000 827,500
a Harvard Industries, Inc., senior notes, 11.125%, 8/01/05 United States 300,000 48,000
International Comfort Products, senior notes,
Series B, 8.625%, 5/15/08 United States 1,500,000 1,440,000
Intertek Finance, Plc., senior sub. notes,
Series B, 10.25%, 11/01/06 United Kingdom 100,000 90,500
LES, Inc., senior sub. notes, 144A, 9.25%, 6/01/08 United States 1,350,000 1,350,000
LDM Technologies, Inc., senior sub. notes, 10.75%, 1/15/07 United States 200,000 178,000
Nortek, Inc., senior notes, 144A, 8.875%, 8/01/08 United States 500,000 485,000
Nortek, Inc., senior notes, 9.125%, 9/01/07 United States 300,000 294,000
Oshkosh Truck Corp., senior sub. notes 8.75%, 3/01/08 United States 400,000 370,000
Talon Automotive Group, senior sub. Notes,
Series B, 9.625%, 5/1/08 United States 800,000 708,000
Terex Corp., senior sub notes, 8.875%, 4/1/08 United States 1,000,000 910,000
-----------------
8,048,000
-----------------
Retail Trade .8%
Fleming Cos., Inc., senior sub. notes, 10.50%, 12/01/04 United States 500,000 467,500
Penney J.C. & Co., Inc., (putable** 8/15/03), 6.90% 8/15/26 United States
Shoppers Food Warehouse, senior notes, 9.75%, 6/15/04 United States 125,000 133,125
Specialty Retailers, Inc., senior notes, 8.50%, 7/15/05 United States 250,000 231,250
-----------------
-----------------
831,875
-----------------
Transportation .5%
American Commercial Lines, 144A, 10.25%, 6/30/08 United States 1,000,000 980,000
Ultrapetrol (Bahamas) Ltd., mortgage rates, 10.50%, 4/1/08 Bahamas 1,000,000 630,000
-----------------
-----------------
1,610,000
-----------------
Utilities 7.3%
AES Corp., senior sub. notes, 8.50%, 11/01/07 United States 750,000 708,750
AES China Generating Co., Ltd., senior notes, 10.125%, 12/15/06 Bermuda 100,000 57,750
Allegiance Telecom, Inc., senior notes,
zero coupon to 2/15/03, 11.75%, thereafter, 2/15/08 United States 2,000,000 810,000
Arch Communications Group, Inc., senior disc. notes,
zero coupon to 3/15/01, 10.875% United States 300,000 111,000
thereafter, 3/15/08
Bellsouth Corp., (putable** 11/15/00), 5.85%, 11/15/45 United States
Comcast Cellular, senior notes, 9.50%, 5/01/07 United States 400,000 414,000
ESI Tractebel Acq. Corp., 7.99%, 12/30/11 United States 250,000 233,452
Flag Ltd, senior notes, 8.250%, 1/30/08 Bermuda 200,000 186,000
IXC Communications Inc., senior sub. notes, 9.00%, 4/15/08 United States 650,000 641,875
IntelCom Group, Inc., senior disc. notes,
zero coupon to 5/01/01, 12.50% thereafter, 5/01/06 United States 2,250,000 1,552,500
Intermedia Communications, senior disc. notes, 11.25%, 7/15/07 United States 2,000,000 1,330,000
Iridium L.L.C., senior notes, Series D, 10.875%, 7/15/05 United States 2,000,000 1,520,000
Level 3 Communications, senior notes, 9.125%, 5/1/08 United States 2,000,000 1,890,000
Metrocall, Inc., senior sub. notes, 9.75%, 11/01/07 United States 1,000,000 915,000
Microcell Telecommunication, senior disc. notes,
Series B, zero coupon to 12/01/01, 14.00% Canada 600,000 387,000
thereafter, 6/01/06
Millicom International Cellular, SA, senior disc. notes,
zero coupon to 6/01/01, 13.50% Luxembourg 300,000 180,000
thereafter, 6/01/06
Netia Holdings B.V., senior notes,10.25%, 11/01/07 Poland 200,000 154,500
Netia Holdings BV, senior disc. notes, zero coupon
to 11/01/01,11.25% thereafter, 11/01/07 Poland 500,000 256,250
Nextel Communications, senior disc. notes,
zero coupon to 10/31/02, 9.75% thereafter, United States 500,000 280,000
10/31/07
Nextel Communications, senior disc. notes,
zero coupon to 2/15/99, 9.75% thereafter, 8/15/04 United States 500,000 470,000
Nextel Communications, senior disc. notes,
zero coupon to 2/15/03, 9.95% thereafter, 2/15/08 United States 1,300,000 708,500
Nextlink Communications, Inc., senior notes, 9.625%, 10/01/07 United States 250,000 232,500
Nextlink Communications, Inc., senior notes, 9.00%, 3/15/08 United States 750,000 686,250
Nextlink Communications, Inc., senior disc. notes,
zero coupon to 4/15/03, 9.45% thereafter 4/15/08 United States 650,000 354,250
Niagara Mohawk Power Corp., senior disc. notes,
Series H, zero coupon to7/01/03, 8.50% thereafter, 7/01/10 United States 1,500,000 1,106,250
Orion Network Systems, Inc., SA, senior disc. notes,
zero coupon to 1/15/02, 12.50% United States 300,000 178,500
thereafter, 1/15/07
Paging Network, Inc., senior sub. notes, 10.125%, 8/01/07 United States 400,000 392,000
RSL Communications P.L.C., 144A, United Kingdom 1,000,000 500,000
zero coupon to 3/01/03, 10.125% thereafter, 3/1/08
Sprint Spectrum, L.P., senior disc. notes,
zero coupon to 8/01/01, 12.50% thereafter, 8/15/06 United States 300,000 263,250
Sygnet Wireless, Inc., senior notes, 11.50%, 10/01/06 United States 2,000,000 2,250,000
Triton Communications L.L.C., senior disc. notes,
144A, zero coupon to 5/1/03, thereafter United States 1,750,000 700,000
11%, 5/1/08
-----------------
-----------------
19,469,577
-----------------
-----------------
Total Bonds (Cost $96,763,821) 70,786,904
-----------------
Convertible Bonds 2.0%
Electronic Technology .3%
Dovatron International, Inc., cvt., sub. notes, 6.00%, 10/15/02 United States 1,000,000 955,000
-----------------
Finance .3%
Macerich Co., cvt., sub. deb., 144A, 7.25%, 12/15/02 United States 1,000,000 955,000
-----------------
Health Services .7%
Omnicare, Inc., cvt., 5.00%, 12/01/07 United States 2,000,000 2,150,000
-----------------
Industrial Services .7%
Diamond Offshore Drilling, Inc., cvt., 3.75%, 2/15/07 United States 2,000,000 2,007,500
-----------------
-----------------
Total Convertible Bonds (Cost $6,214,493) 6,067,500
-----------------
Other Mortgages 1.9%
MLMI, 1998-C2 A2, 6.39%, 2/15/30 United States 1,500,000 1,525,208
Morgan Stanley Capital I, 6.55%, 12/15/07 United States 2,000,000 2,052,500
Delta Home Equity, 6.37%, 7/15/28 United States 2,000,000 1,965,000
-----------------
Total Other Mortgages (Cost $5,579,900) 5,542,708
-----------------
Us Government Securities And Agencies/Mortgages 17.0%
Us Government Agencies/Mortgages 6.6%
FHLMC, 6.00%, 4/01/09 United States 19,194 19,323
FHLMC, 7.00%, 1/01/09 United States 16,642 16,887
FHLMC, 6.00%, 1/01/11 United States 17,677 17,741
FHLMC, 6.50%, 4/01/11 United States 29,536 29,818
FHLMC, 7.00%, 9/01/11 United States 36,004 36,479
FHLMC, 6.00%, 5/01/13 United States 731,200 735,142
FHLMC, 6.00%, 9/01/13 United States 493,240 495,900
FHLMC, 7.00%, 4/01/24 United States 42,545 43,312
FHLMC, 7.50%, 4/01/24 United States 34,241 35,044
FHLMC, 8.50%, 12/01/24 United States 19,771 20,605
FHLMC, 9.00%, 12/01/24 United States 9,909 10,430
FHLMC, 7.00%, 11/01/25 United States 24,939 25,383
FHLMC, 8.00%, 11/01/25 United States 18,751 19,262
FHLMC, 6.50%, 12/01/25 United States 33,067 33,373
FHLMC, 8.00%, 1/01/26 United States 15,270 15,686
FHLMC, 7.50%, 1/01/26 United States 25,991 26,597
FHLMC, 6.50%, 3/01/26 United States 44,679 45,076
FHLMC, 7.00%, 9/01/26 United States 22,222 22,618
FHLMC, 7.50%, 1/01/27 United States 45,013 46,059
FHLMC, 7.00%, 4/01/28 United States 210,743 215,237
FHLMC., 7.00%, 4/01/28 United States 144,420 147,501
FHLMC, 7.00%, 5/01/28 United States 628,789 642,151
FNMA, 7.50%, 10/01/07 United States 24,147 24,825
FNMA, 6.50%, 2/01/09 United States 23,932 24,353
FNMA, 6.50%, 4/01/11 United States 19,514 19,832
FNMA, 6.50%, 6/01/13 United States 971,531 986,787
FNMA, 6.50%, 1/01/24 United States 30,835 31,125
FNMA, 7.00%, 5/01/24 United States 18,995 19,378
FNMA, 8.00%, 1/01/25 United States 19,343 20,002
FNMA, 9.00%, 3/01/25 United States 8,072 8,512
FNMA, 9.00%, 5/01/25 United States 4,242 4,473
FNMA, 8.50%, 7/01/25 United States 14,034 14,616
FNMA, 8.00%, 12/01/25 United States 653,728 675,876
FNMA, 7.00%, 1/01/26 United States 44,585 45,482
FNMA, 7.00%, 3/01/26 United States 45,356 46,260
FNMA, 7.50%, 3/01/26 United States 27,087 27,729
FNMA, 8.00%, 5/01/26 United States 17,542 18,135
FNMA, 8.00%, 6/01/26 United States 11,840 12,240
FNMA, 7.50%, 8/01/26 United States 26,599 27,230
FNMA, 7.50%, 10/01/26 United States 13,672 13,996
FNMA, 8.00%, 1/01/27 United States 35,865 37,121
FNMA, 7.00%, 4/01/27 United States 879,433 899,645
FNMA, 6.50%, 3/01/28 United States 2,913,759 2,939,482
FNMA, 7.00%, 6/01/28 United States 1,461,529 1,495,213
FNMA, 6.00%, 9/01/28 United States 988,214 977,483
FNMA, 6.00%, 10/01/28 United States 1,009,469 998,507
b FNMA, 6.50%, 11/01/28 United States 1,000,000 1,007,813
GNMA SF, 7.00%, 7/15/08 United States 1,010,000 1,038,674
GNMA, SF, 7.50%, 9/15/23 United States 16,007 16,522
GNMA, SF, 6.50%, 3/15/24 United States 45,709 46,270
GNMA, SF, 8.00%, 6/15/24 United States 37,255 38,649
GNMA, SF, 9.00%, 1/15/25 United States 4,866 5,190
GNMA, SF, 8.00%, 2/15/25 United States 14,788 15,338
GNMA, SF, 9.50%, 6/15/25 United States 9,937 10,736
GNMA, SF, 7.50%, 1/15/26 United States 18,570 19,154
GNMA, SF, 7.50%, 1/15/26 United States 20,570 21,217
GNMA, SF, 7.50%, 2/15/26 United States 21,355 22,026
GNMA, SF, 7.00%, 3/15/26 United States 20,377 20,865
GNMA, SF, 9.00%, 3/15/26 United States 34,259 36,530
GNMA, SF, 8.00%, 6/15/26 United States 41,256 42,782
GNMA, SF, 8.50%, 7/15/26 United States 18,487 19,559
GNMA, SF, 7.50%, 9/15/27 United States 926,806 956,251
GNMA, SF, 8.50%, 8/15/24 United States 9,528 10,099
GNMA SF, 7.50%, 5/15/27 United States 1,009,999 1,042,088
GNMA, SF, 7.00%, 11/15/27 United States 1,009,999 1,034,732
GNMA SF, 8.00%, 4/15/28 United States 992,464 1,029,372
GNMA, SF, 7.00%, 5/15/28 United States 49,340 50,531
GNMA, SF, 7.00%, 6/15/28 United States 1,002,120 1,026,311
-----------------
19,578,635
-----------------
Us Government Securities 10.3%
U.S. Treasury Bonds, 7.125%, 2/15/23 United States 400,000 494,125
U.S. Treasury Note, 5.875%, 1/31/99 United States
U.S. Treasury Note, 5.875%, 3/31/99 United States
U.S. Treasury Note, 6.00%, 6/30/99 United States
U.S. Treasury Note, 5.875%, 7/31/99 United States
U.S. Treasury Note, 5.875%, 8/31/99 United States
U.S. Treasury Note, 5.75%, 9/30/99 United States
U.S. Treasury Note, 5.625%, 11/30/99 United States
U.S. Treasury Note, 5.625%, 12/31/99 United States
U.S. Treasury Note, 5.50%, 3/31/00 United States
U.S. Treasury Note, 6.00%, 8/15/00 United States
U.S. Treasury Note, 5.125%, 8/31/00 United States
U.S. Treasury Note, 5.375%, 2/15/01 United States
U.S. Treasury Note, 5.75%, 11/30/02 United States -
U.S. Treasury Note, 5.625%, 12/31/02 United States 2,500,000 2,617,970
-----------------
-----------------
3,112,095
-----------------
-----------------
Total US Government Securities and 22,690,730
-----------------
Agencies/Mortgages (Cost $49,485,610)
Other Government & Agency Securities 6.7%
Fannie Mae, 5.75%, 4/15/03 United States 11,000,000 11,421,575
Fannie Mae, 5.75%, 6/15/05 United States 6,000,000 6,208,050
Tennessee Valley Authority, United States
-----------------
(putable** 7/15/01, callable 7/15/20), 6.235%, 7/15/45
-----------------
-----------------
Total Other Government & Agency Securities (Cost $19,067,344) 17,629,625
-----------------
Foreign Government And Agency Securities 30.4%
Australian Government, Series 705, 7.50%, 7/15/05 Australia 3,600,000 AUD 2,585,503
Belgium Kingdom, 6.25%, 3/28/07 Belgium 106,245,000 BEF 3,545,958
Bundesobligation, Series 110, 5.375%, 2/22/99 Germany 1,205,000 DEM 731,644
Bundesobligation, Series 118, 5.25%, 2/21/01 Germany 2,565,000 DEM 1,611,295
Bundesrepublic Deutschland, Series 97, 6.00%, 1/04/07 Germany 3,110,000 DEM 2,107,822
Bundesschatzanweisungen, 6.875%, 2/24/99 Germany 1,035,000 DEM 631,111
Buoni Poliennali del Tesoro, 10.50%, 7/15/00 Italy 2,055,000,000 ITL 1,392,119
Buoni Poliennali del Tesoro, 7.75%, 11/01/06 Italy 2,815,000,000 ITL 2,097,869
Deutschland Republic, 6.00%, 1/05/06 Germany 1,175,000 DEM 793,171
Government of Canada, 10.50%, 7/01/00 Canada 935,000 CAD 659,671
Government of Canada, 10.50%, 3/01/01 Canada 1,645,000 CAD 1,196,001
Government of Canada, 10.00%, 5/01/02 Canada 1,515,000 CAD 1,139,776
Government of Canada, 6.50%, 6/01/04 Canada 1,000,000 CAD 696,891
Government of Canada, 10.00%, 6/01/08 Canada 700,000 CAD 618,109
Government of France, 5.50%, 4/25/07 France 6,000,000 FRF 1,181,321
Government of Jamaica, 9.625%, 7/02/02 Jamaica 1,750,000 1,426,250
Kingdom of Denmark, 9.00%, 11/15/00 Denmark 1,785,000 DKK 310,215
Kingdom of Denmark, 7.00%, 12/15/04 Denmark 6,000,000 DKK 1,082,003
Netherlands Government, Series 1 & 2, 6.00%, 1/15/06 Netherlands 2,385,000 NEG 1,424,973
New Zealand Government, 6.50%, 2/15/00 New Zealand 1,295,000 NZD 696,944
Peru - PDI., Series 20YR, 4.00%, 3/07/17 Peru 5,100,000 2,932,500
Republic of Korea, 8.875%, 4/15/08 South Korea 3,100,000 2,865,578
Republic of Argentina, 9.25%, 2/23/01 Argentina 275,000 270,188
Republic of Argentina, 11.00%, 10/09/06 Argentina 2,950,000 2,935,250
Republic of Argentina, 5.75%, 3/31/23 Argentina 2,000,000 1,390,000
Republic of Argentina, 9.75%, 9/19/27 Argentina 730,000 633,731
Republic of Argentina, Bonos Del Tesoro, 8.75%, 5/09/02 Argentina 3,800,000 3,379,150
Republic of Argentina, Global, 11.375%, 1/30/17 Argentina 160,000 155,200
Republic of Brazil, 8.875%, 11/05/01 Brazil 2,295,000 2,094,188
Republic of Brazil, 9.375%, 4/07/08 Brazil 3,000,000 2,055,000
Republic of Brazil, 6.188%, 4/15/12 Brazil 300,000 159,189
Republic of Brazil, 10.125%, 5/15/27 Brazil 2,200,000 1,524,600
Republic of Brazil, C Bond, 5.00%, 4/15/14 Brazil 2,355,240 1,474,335
Republic of Bulgaria, floating rate deb., Series A, 6.688%, 7/28/11 Bulgaria 4,820,000 3,235,425
Republic of Bulgaria, floating rate deb., 6.688%, 7/28/11 Bulgaria 110,000 73,838
Republic of Ecuador Disc, 6.625%, 2/28/25 Ecuador 1,250,000 642,188
Republic of Ecuador, unsub., 11.25%, 4/25/02 Ecuador 1,500,000 1,215,000
Republic of Ecuador, unsub., 144A, 11.25%, 4/25/02 Ecuador 750,000 607,500
Republic of Panama, 8.875%, 9/30/27 Panama Republic Of 1,500,000 1,383,750
Republic of Turkey, 144A, 9.875%, 2/23/05 Turkey 850,000 707,625
Republic of Turkey, 144A, 10.00%, 9/19/07 Turkey 875,000 755,781
Republic of Venezuela, 6.625%, 12/18/07 Venezuela 904,762 554,732
Republic of Venezuela, 9.25%, 9/15/27 Venezuela 5,383,000 3,310,545
Republic of Venezuela, Disc. W-A, 6.563%, 3/31/20 Venezuela 250,000 153,750
Republic of Venezuela, senior unsub. notes, 9.125%, 6/18/07 Venezuela 1,200,000 807,000
Republic of Venezuela, 144A, 9.125%, 6/18/07 Venezuela 100,000 67,250
Russian Federation, 10.00%, 6/26/07 Russia 8,000,000 1,970,000
SEI Holdings IX, Inc., senior notes, 144A, 11.00%, 11/30/00 Trinidad And Tobago 125,000 118,750
Spanish Government, 8.80%, 4/30/06 Spain 200,000,000 ESP 1,817,248
Swedish Government, 10.25%, 5/05/03 Sweden 7,000,000 SEK 1,115,395
Treuhandanstalt, 7.75%, 10/01/02 Germany 1,530,000 DEM 1,062,002
Turkey Republic of, 144A, 9.875%, 2/23/05 Turkey 1,680,000 1,398,600
Turkey Republic of, Reg S, 10.00%, 9/19/07 Turkey 1,315,000 1,135,831
United Kingdom Treasury, 9.50%, 4/18/05 United Kingdom 880,000 GBP 1,820,893
United Kingdom Treasury, 7.50%, 4/18/06 United Kingdom 1,681,000 GBP 3,248,608
United Mexican States, 9.75%, 2/06/01 Mexico 1,950,000 2,013,375
United Mexican States, 8.625%, 3/12/08 Mexico 7,470,000 6,708,060
United Mexican States, 11.375%, 9/15/16 Mexico 2,810,000 2,799,463
United Mexican States, 11.50%, 5/15/26 Mexico 2,850,000 2,949,750
World Bank IBRD-Global Bond, 4.50%, 3/20/03 Japan 45,000,000 JPY 454,409
-----------------
Total Foreign Government and Agency Securities (Cost $94,817,958) 89,924,323
-----------------
-----------------
Total Long Term Investments (Cost $283,516,727) 224,040,040
-----------------
PRINCIPAL
AMOUNT VALUE
---------------- -----------------
Repurchase Agreements 5.7%
Strategic Income Fund
Joint Repurchase Agreement, 5.350%, 11/02/98
(Cost $16,732,426) United States $10,683,089 $10,683,089
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $300,249,153) 98.1% 234,723,129
Other Assets, less Liabilities 1.9% 5,620,061
-----------------
Net Assets 100.0% $ 240,343,190
-----------------
Investment Grade Income Fund
-----------------------------------------------------------
COUNTRY SHARES/ WARRANTS VALUE
------------------------------------------------------------------------------------------ -------------------------------------
a Common Stock, Warrants & Rights .0%
Gulf States Steel, warrants United States
Loral Space & Communications, Ltd., warrants United States
Venezuela Oil Value Recovery, rights Venezuela
----------------
----------------
Total Common Stock, Warrants & Rights (Cost $3,731) -
----------------
Preferred Stocks .2%
a CSC Holdings, Inc., 11.125% pfd. United States
Fresenius Medical Care, 9.00% pfd. Germany
Sinclair Capital, 11.625% pfd. United States
----------------
Total Preferred Stocks (Cost $499,966) -
----------------
Convertible Preferred Stocks 3.7%
El Paso Energy, 4.75% cvt. pfd. United States
Host Marriott Financial Trust, 6.75%, cvt. pfd. United States
MediaOne Group, Inc., 6.25% cvt. pfd. United States
Protective Life Capital Trust II, 6.50% cvt. pfd. United States
Ralston Purina Co., 7.00% cvt. pfd. United States
Salomon, Inc., 6.25% cvt. pfd. United States
Texas Utilities Co., 9.25% cvt. pfd. United States
Triathlon Broadcasting, 9.00% cvt. pfd. United States
Union Pacific Capital Trust, 6.25% cvt. pfd. United States
----------------
----------------
Total Convertible Preferred Stocks (Cost $11,083,904) -
----------------
PRINCIPAL AMOUNT*
--------------------------------
Bonds 30.5%
Commercial Services 1.3%
Ameriserv Food Co., senior sub. notes, 10.125%, 7/15/07 United States $ -
Ameriserv Food Distribution, senior notes, 8.875%, 10/15/06 United States
Big Flower Press Holdings, senior disc. notes, 8.875%, 7/01/07 United States
Iron Mountain, Inc., senior sub. notes, 8.75%, 9/30/09 United States
Outdoor Systems, Inc., senior sub. notes, 8.875%, 6/15/07 United States
Xerox Corp., (putable** 5/05/99), 5.90% 5/05/37 United States 1,500,000 1,550,640
----------------
1,550,640
----------------
Consumer Durables .8%
AMF Group, Inc., senior disc. notes, zero coupon to 3/15/00, 12.25% United States
thereafter, 3/15/06
Revlon Consumer Products Corp., senior sub. notes, 8.625%, 2/01/08 United States
Sealy Corp., senior sub. notes, 9.875%, 12/15/07 United States
Sealy Corp., zero coupon to 12/15/02, 10.875% thereafter, 12/15/07 United States
----------------
-
----------------
Consumer Non-Durables .9%
Compania Alimentos Fargo, senior notes, 144A, 13.25%, 8/1/08 Argentina
Doane Products Co., senior notes, 10.625%, 3/01/06 United States
Coca-Cola Enterprises, (putable** 10/15/03), 6.70% 10/15/36 United States 2,000,000 2,103,524
----------------
----------------
2,103,524
----------------
Consumer Services 5.4%
Chancellor Media Corp., senior sub notes, 144A, 9.00%, 10/01/08 United States
Chancellor Media Corp., senior sub. notes, 8.75%, 6/15/07 United States
CSC Holdings, Inc., 9.875%, 4/01/23 United States
Diamond Cable Communications, Plc., senior disc. notes,
zero coupon to 2/15/02, 10.75% United Kingdom
thereafter, 2/15/07
Diamond Cable Communications, senior notes,
zero coupon to 12/15/00, 11.75% thereafter, United Kingdom
12/15/05
Diamond Holdings PLC., 9.125%, 2/01/08 United Kingdom
Fox Family Worldwide, Inc., senior disc. notes,
zero coupon to 11/01/02, 10.25% thereafter, United States
11/01/07
Fox/Liberty Networks, LLC., senior disc. notes,
zero coupon to 8/15/02, 9.75% United States
thereafter, 8/15/07
LA Petite Academy Inc., Series B, 10.00%, 5/15/08 United States
Lin Holdings Corp. senior disc. notes,
zero coupon to 3/1/03, 10.00% thereafter, 3/1/08 United States
Prime Hospitality Corp., senior sub. notes, Series B, 9.75%, 4/01/07 United States
Regal Cinemas, Inc., senior sub. notes, 144A, 9.50%, 6/01/08 United States
Sinclair Broadcast Group Inc., senior sub notes, 8.75%, 12/15/07 United States
Six Flags Entertainment., senior notes, 8.875%, 4/01/06 United States
Telewest, Plc., senior deb., zero coupon to
10/01/00, 11.00% thereafter, 10/01/07 United Kingdom
----------------
----------------
-
----------------
Energy Minerals 1.8%
Abraxas Petroleum Corp., senior notes, Series B, 11.50%, 11/01/04 United States
Chesapeake Energy Corp., senior notes, Series B, 9.625%, 5/1/05 United States
Clark R&M, Inc., senior sub. notes, 8.875%, 11/15/07 United States
Conproca, SA, S.F., secured senior notes, 144A, 12.00%, 6/16/10 Mexico
Nuevo Energy Co., senior sub notes, Series B, 8.875%, 6/1/08 United States
P & L Coal Holdings Corp., senior sub. notes, 144A, 9.625%, 5/15/08 United States
----------------
----------------
-
----------------
Finance 2.4%
Aetna Services Inc., (putable** 8/15/04), 6.97%, 8/15/36 United States 2,000,000 2,083,444
Homeside Finance, Inc., senior notes, 11.25%, 5/15/03 United States
Pera Financial Services, secured notes, 9.375%, 10/15/02 Turkey
Pera Financial Services, secured notes, 9.375%, 10/15/02 Turkey
Sears Roebuck Acceptance Corp.,
(putable** 11/15/00), 6.13%, 11/15/05 United States 775,000 805,978
(putable** 11/15/00), 6.15%, 11/15/05 United States 725,000 757,148
Southtrust Bank, (putable** 2/06/01), 5.58%, 2/06/06 United States 2,500,000 2,510,258
----------------
6,156,828
----------------
Health Services 1.2%
Fresenius Medical Care, 7.875%, 2/1/08 Germany
Magellan Health Services, Inc., senior sub. notes, 9.00%, 2/15/08 United States
Pharmerica, Inc., senior sub. notes, 8.375%, 4/01/08 United States
Tenet Healthcare Corp., senior sub. notes, 8.625%, 1/15/07 United States
Vencor Operating Inc., senior sub notes, 9.875%, 5/1/05 United States
----------------
-
----------------
Industrial Services .7%
Dailey International, Inc., senior notes, 9.50%, 2/15/08 United States
WMX Technologies, (putable** 5/15/00), 6.65% 5/15/05 United States 2,000,000 2,062,575
----------------
2,062,575
Non-Energy Minerals .3%
LTV Corp., senior notes, 8.20%, 9/15/07 United States
----------------
Process Industries 4.4%
Anchor Glass, first mortgage notes, 11.25%, 4/01/05 United States
Anchor Glass Container, senior notes, 9.875%, 3/15/08 United States
Ball Corp., senior notes, 144A, 7.75%, 8/01/06 United States
Ball Corp., senior sub.notes, 144A, 8.25%, 8/01/08 United States
Bausch & Lomb, (putable** 8/31/01), 6.56%, 8/12/26 United States 2,000,000 2,080,902
Four M Corp., senior notes, Series B, 12.00%, 6/01/06 United States
Graham Packaging Corp., senior sub. notes, 8.75%, 1/15/08 United States
Graham Packaging Corp., senior disc. notes zero
coupon to 1/15/03,10.75% thereafter, 1/15/09 United States
Huntsman Corp., senior sub. notes, 144A, 9.50%, 7/01/07 United States
Pillowtex Corp., senior sub. Notes, 9.00%, 12/18/07 United States
Pindo Deli Finance Mauritius, Ltd., senior notes, 10.25%, 10/01/02 Indonesia
Purina Mills Inc., senior sub notes, 144A, 9.00%, 3/15/10 United States
Repap New Brunswick, senior notes, 9.00%, 6/1/04 Canada
Sherwin-Williams Co., (putable** 10/15/99), 5.50%, 10/15/27 United States 2,000,000 2,025,690
Universal Compression Inc., senior disc. Notes,
zero coupon to 2/15/03, 9.875% thereafter, 2/15/08 United States
Windmere - Durable holdings, senior sub notes, 10.00%, 7/31/08 United States
----------------
4,106,592
----------------
Producer Manufacturing 2.7%
Aetna Industries, Inc., senior notes, 11.875%, 10/01/06 United States
Allied Waste Industries, Inc., senior disc. notes,
zero coupon to 6/01/02, 11.30% United States
thereafter, 6/01/07
Cambridge Industries, Inc., senior sub. notes, 10.25%, 7/15/07 United States
Collins & Aikman Products, senior sub. notes, 11.50%, 4/15/06 United States
Falcon Building Products, Inc., senior disc. sub. notes,
10.50%, 6/15/07 United States
Falcon Building Products, Inc., senior sub. notes,
Series B, 9.50%, 6/15/07 United States
a Harvard Industries, Inc., senior notes, 11.125%, 8/01/05 United States
International Comfort Products, senior notes,
Series B, 8.625%, 5/15/08 United States
Intertek Finance, Plc., senior sub. notes,
Series B, 10.25%, 11/01/06 United Kingdom
LES, Inc., senior sub. notes, 144A, 9.25%, 6/01/08 United States
LDM Technologies, Inc., senior sub. notes, 10.75%, 1/15/07 United States
Nortek, Inc., senior notes, 144A, 8.875%, 8/01/08 United States
Nortek, Inc., senior notes, 9.125%, 9/01/07 United States
Oshkosh Truck Corp., senior sub. notes 8.75%, 3/01/08 United States
Talon Automotive Group, senior sub. Notes,
Series B, 9.625%, 5/1/08 United States
Terex Corp., senior sub notes, 8.875%, 4/1/08 United States
----------------
-
----------------
Retail Trade .8%
Fleming Cos., Inc., senior sub. notes, 10.50%, 12/01/04 United States
Penney J.C. & Co., Inc., (putable** 8/15/03), 6.90% 8/15/26 United States 1,500,000 1,607,208
Shoppers Food Warehouse, senior notes, 9.75%, 6/15/04 United States
Specialty Retailers, Inc., senior notes, 8.50%, 7/15/05 United States
----------------
----------------
1,607,208
----------------
Transportation .5%
American Commercial Lines, 144A, 10.25%, 6/30/08 United States
Ultrapetrol (Bahamas) Ltd., mortgage rates, 10.50%, 4/1/08 Bahamas
----------------
----------------
-
----------------
Utilities 7.3%
AES Corp., senior sub. notes, 8.50%, 11/01/07 United States
AES China Generating Co., Ltd., senior notes, 10.125%, 12/15/06 Bermuda
Allegiance Telecom, Inc., senior notes,
zero coupon to 2/15/03, 11.75%, thereafter, 2/15/08 United States
Arch Communications Group, Inc., senior disc. notes,
zero coupon to 3/15/01, 10.875% United States
thereafter, 3/15/08
Bellsouth Corp., (putable** 11/15/00), 5.85%, 11/15/45 United States 2,000,000 2,069,274
Comcast Cellular, senior notes, 9.50%, 5/01/07 United States
ESI Tractebel Acq. Corp., 7.99%, 12/30/11 United States
Flag Ltd, senior notes, 8.250%, 1/30/08 Bermuda
IXC Communications Inc., senior sub. notes, 9.00%, 4/15/08 United States
IntelCom Group, Inc., senior disc. notes,
zero coupon to 5/01/01, 12.50% thereafter, 5/01/06 United States
Intermedia Communications, senior disc. notes, 11.25%, 7/15/07 United States
Iridium L.L.C., senior notes, Series D, 10.875%, 7/15/05 United States
Level 3 Communications, senior notes, 9.125%, 5/1/08 United States
Metrocall, Inc., senior sub. notes, 9.75%, 11/01/07 United States
Microcell Telecommunication, senior disc. notes,
Series B, zero coupon to 12/01/01, 14.00% Canada
thereafter, 6/01/06
Millicom International Cellular, SA, senior disc. notes,
zero coupon to 6/01/01, 13.50% Luxembourg
thereafter, 6/01/06
Netia Holdings B.V., senior notes,10.25%, 11/01/07 Poland
Netia Holdings BV, senior disc. notes, zero coupon
to 11/01/01,11.25% thereafter, 11/01/07 Poland
Nextel Communications, senior disc. notes,
zero coupon to 10/31/02, 9.75% thereafter, United States
10/31/07
Nextel Communications, senior disc. notes,
zero coupon to 2/15/99, 9.75% thereafter, 8/15/04 United States
Nextel Communications, senior disc. notes,
zero coupon to 2/15/03, 9.95% thereafter, 2/15/08 United States
Nextlink Communications, Inc., senior notes, 9.625%, 10/01/07 United States
Nextlink Communications, Inc., senior notes, 9.00%, 3/15/08 United States
Nextlink Communications, Inc., senior disc. notes,
zero coupon to 4/15/03, 9.45% thereafter 4/15/08 United States
Niagara Mohawk Power Corp., senior disc. notes,
Series H, zero coupon to7/01/03, 8.50% thereafter, 7/01/10 United States
Orion Network Systems, Inc., SA, senior disc. notes,
zero coupon to 1/15/02, 12.50% United States
thereafter, 1/15/07
Paging Network, Inc., senior sub. notes, 10.125%, 8/01/07 United States
RSL Communications P.L.C., 144A, United Kingdom
zero coupon to 3/01/03, 10.125% thereafter, 3/1/08
Sprint Spectrum, L.P., senior disc. notes,
zero coupon to 8/01/01, 12.50% thereafter, 8/15/06 United States
Sygnet Wireless, Inc., senior notes, 11.50%, 10/01/06 United States
Triton Communications L.L.C., senior disc. notes,
144A, zero coupon to 5/1/03, thereafter United States
11%, 5/1/08
----------------
----------------
2,069,274
----------------
----------------
Total Bonds (Cost $96,763,821) 19,656,641
----------------
Convertible Bonds 2.0%
Electronic Technology .3%
Dovatron International, Inc., cvt., sub. notes, 6.00%, 10/15/02 United States
----------------
Finance .3%
Macerich Co., cvt., sub. deb., 144A, 7.25%, 12/15/02 United States
----------------
Health Services .7%
Omnicare, Inc., cvt., 5.00%, 12/01/07 United States
----------------
Industrial Services .7%
Diamond Offshore Drilling, Inc., cvt., 3.75%, 2/15/07 United States
----------------
----------------
Total Convertible Bonds (Cost $6,214,493) -
----------------
Other Mortgages 1.9%
MLMI, 1998-C2 A2, 6.39%, 2/15/30 United States
Morgan Stanley Capital I, 6.55%, 12/15/07 United States
Delta Home Equity, 6.37%, 7/15/28 United States
----------------
Total Other Mortgages (Cost $5,579,900) -
----------------
Us Government Securities And Agencies/Mortgages 17.0%
Us Government Agencies/Mortgages 6.6%
FHLMC, 6.00%, 4/01/09 United States
FHLMC, 7.00%, 1/01/09 United States
FHLMC, 6.00%, 1/01/11 United States
FHLMC, 6.50%, 4/01/11 United States
FHLMC, 7.00%, 9/01/11 United States
FHLMC, 6.00%, 5/01/13 United States
FHLMC, 6.00%, 9/01/13 United States
FHLMC, 7.00%, 4/01/24 United States
FHLMC, 7.50%, 4/01/24 United States
FHLMC, 8.50%, 12/01/24 United States
FHLMC, 9.00%, 12/01/24 United States
FHLMC, 7.00%, 11/01/25 United States
FHLMC, 8.00%, 11/01/25 United States
FHLMC, 6.50%, 12/01/25 United States
FHLMC, 8.00%, 1/01/26 United States
FHLMC, 7.50%, 1/01/26 United States
FHLMC, 6.50%, 3/01/26 United States
FHLMC, 7.00%, 9/01/26 United States
FHLMC, 7.50%, 1/01/27 United States
FHLMC, 7.00%, 4/01/28 United States
FHLMC., 7.00%, 4/01/28 United States
FHLMC, 7.00%, 5/01/28 United States
FNMA, 7.50%, 10/01/07 United States
FNMA, 6.50%, 2/01/09 United States
FNMA, 6.50%, 4/01/11 United States
FNMA, 6.50%, 6/01/13 United States
FNMA, 6.50%, 1/01/24 United States
FNMA, 7.00%, 5/01/24 United States
FNMA, 8.00%, 1/01/25 United States
FNMA, 9.00%, 3/01/25 United States
FNMA, 9.00%, 5/01/25 United States
FNMA, 8.50%, 7/01/25 United States
FNMA, 8.00%, 12/01/25 United States
FNMA, 7.00%, 1/01/26 United States
FNMA, 7.00%, 3/01/26 United States
FNMA, 7.50%, 3/01/26 United States
FNMA, 8.00%, 5/01/26 United States
FNMA, 8.00%, 6/01/26 United States
FNMA, 7.50%, 8/01/26 United States
FNMA, 7.50%, 10/01/26 United States
FNMA, 8.00%, 1/01/27 United States
FNMA, 7.00%, 4/01/27 United States
FNMA, 6.50%, 3/01/28 United States
FNMA, 7.00%, 6/01/28 United States
FNMA, 6.00%, 9/01/28 United States
FNMA, 6.00%, 10/01/28 United States
b FNMA, 6.50%, 11/01/28 United States
GNMA SF, 7.00%, 7/15/08 United States
GNMA, SF, 7.50%, 9/15/23 United States
GNMA, SF, 6.50%, 3/15/24 United States
GNMA, SF, 8.00%, 6/15/24 United States
GNMA, SF, 9.00%, 1/15/25 United States
GNMA, SF, 8.00%, 2/15/25 United States
GNMA, SF, 9.50%, 6/15/25 United States
GNMA, SF, 7.50%, 1/15/26 United States
GNMA, SF, 7.50%, 1/15/26 United States
GNMA, SF, 7.50%, 2/15/26 United States
GNMA, SF, 7.00%, 3/15/26 United States
GNMA, SF, 9.00%, 3/15/26 United States
GNMA, SF, 8.00%, 6/15/26 United States
GNMA, SF, 8.50%, 7/15/26 United States
GNMA, SF, 7.50%, 9/15/27 United States
GNMA, SF, 8.50%, 8/15/24 United States
GNMA SF, 7.50%, 5/15/27 United States
GNMA, SF, 7.00%, 11/15/27 United States
GNMA SF, 8.00%, 4/15/28 United States
GNMA, SF, 7.00%, 5/15/28 United States
GNMA, SF, 7.00%, 6/15/28 United States
----------------
-
----------------
Us Government Securities 10.3%
U.S. Treasury Bonds, 7.125%, 2/15/23 United States
U.S. Treasury Note, 5.875%, 1/31/99 United States 2,000,000 2,006,876
U.S. Treasury Note, 5.875%, 3/31/99 United States 1,000,000 1,006,251
U.S. Treasury Note, 6.00%, 6/30/99 United States 2,000,000 2,020,626
U.S. Treasury Note, 5.875%, 7/31/99 United States 2,000,000 2,020,626
U.S. Treasury Note, 5.875%, 8/31/99 United States 3,000,000 3,034,689
U.S. Treasury Note, 5.75%, 9/30/99 United States 1,000,000 1,011,876
U.S. Treasury Note, 5.625%, 11/30/99 United States 2,000,000 2,025,626
U.S. Treasury Note, 5.625%, 12/31/99 United States 2,000,000 2,027,502
U.S. Treasury Note, 5.50%, 3/31/00 United States 2,000,000 2,031,252
U.S. Treasury Note, 6.00%, 8/15/00 United States 2,000,000 2,057,502
U.S. Treasury Note, 5.125%, 8/31/00 United States 3,000,000 3,044,064
U.S. Treasury Note, 5.375%, 2/15/01 United States 2,000,000 2,045,626
U.S. Treasury Note, 5.75%, 11/30/02 United States 3,000,000 3,150,003
U.S. Treasury Note, 5.625%, 12/31/02 United States
----------------
----------------
27,482,519
----------------
----------------
Total US Government Securities and 27,482,519
----------------
Agencies/Mortgages (Cost $49,485,610)
Other Government & Agency Securities 6.7%
Fannie Mae, 5.75%, 4/15/03 United States
Fannie Mae, 5.75%, 6/15/05 United States
Tennessee Valley Authority, United States 2,000,000 2,190,082
----------------
(putable** 7/15/01, callable 7/15/20), 6.235%, 7/15/45
----------------
----------------
Total Other Government & Agency Securities (Cost $19,067,344) 2,190,082
----------------
Foreign Government And Agency Securities 30.4%
Australian Government, Series 705, 7.50%, 7/15/05 Australia
Belgium Kingdom, 6.25%, 3/28/07 Belgium
Bundesobligation, Series 110, 5.375%, 2/22/99 Germany
Bundesobligation, Series 118, 5.25%, 2/21/01 Germany
Bundesrepublic Deutschland, Series 97, 6.00%, 1/04/07 Germany
Bundesschatzanweisungen, 6.875%, 2/24/99 Germany
Buoni Poliennali del Tesoro, 10.50%, 7/15/00 Italy
Buoni Poliennali del Tesoro, 7.75%, 11/01/06 Italy
Deutschland Republic, 6.00%, 1/05/06 Germany
Government of Canada, 10.50%, 7/01/00 Canada
Government of Canada, 10.50%, 3/01/01 Canada
Government of Canada, 10.00%, 5/01/02 Canada
Government of Canada, 6.50%, 6/01/04 Canada
Government of Canada, 10.00%, 6/01/08 Canada
Government of France, 5.50%, 4/25/07 France
Government of Jamaica, 9.625%, 7/02/02 Jamaica
Kingdom of Denmark, 9.00%, 11/15/00 Denmark
Kingdom of Denmark, 7.00%, 12/15/04 Denmark
Netherlands Government, Series 1 & 2, 6.00%, 1/15/06 Netherlands
New Zealand Government, 6.50%, 2/15/00 New Zealand
Peru - PDI., Series 20YR, 4.00%, 3/07/17 Peru
Republic of Korea, 8.875%, 4/15/08 South Korea
Republic of Argentina, 9.25%, 2/23/01 Argentina
Republic of Argentina, 11.00%, 10/09/06 Argentina
Republic of Argentina, 5.75%, 3/31/23 Argentina
Republic of Argentina, 9.75%, 9/19/27 Argentina
Republic of Argentina, Bonos Del Tesoro, 8.75%, 5/09/02 Argentina
Republic of Argentina, Global, 11.375%, 1/30/17 Argentina
Republic of Brazil, 8.875%, 11/05/01 Brazil
Republic of Brazil, 9.375%, 4/07/08 Brazil
Republic of Brazil, 6.188%, 4/15/12 Brazil
Republic of Brazil, 10.125%, 5/15/27 Brazil
Republic of Brazil, C Bond, 5.00%, 4/15/14 Brazil
Republic of Bulgaria, floating rate deb., Series A, 6.688%, 7/28/11 Bulgaria
Republic of Bulgaria, floating rate deb., 6.688%, 7/28/11 Bulgaria
Republic of Ecuador Disc, 6.625%, 2/28/25 Ecuador
Republic of Ecuador, unsub., 11.25%, 4/25/02 Ecuador
Republic of Ecuador, unsub., 144A, 11.25%, 4/25/02 Ecuador
Republic of Panama, 8.875%, 9/30/27 Panama Republic Of
Republic of Turkey, 144A, 9.875%, 2/23/05 Turkey
Republic of Turkey, 144A, 10.00%, 9/19/07 Turkey
Republic of Venezuela, 6.625%, 12/18/07 Venezuela
Republic of Venezuela, 9.25%, 9/15/27 Venezuela
Republic of Venezuela, Disc. W-A, 6.563%, 3/31/20 Venezuela
Republic of Venezuela, senior unsub. notes, 9.125%, 6/18/07 Venezuela
Republic of Venezuela, 144A, 9.125%, 6/18/07 Venezuela
Russian Federation, 10.00%, 6/26/07 Russia
SEI Holdings IX, Inc., senior notes, 144A, 11.00%, 11/30/00 Trinidad And Tobago
Spanish Government, 8.80%, 4/30/06 Spain
Swedish Government, 10.25%, 5/05/03 Sweden
Treuhandanstalt, 7.75%, 10/01/02 Germany
Turkey Republic of, 144A, 9.875%, 2/23/05 Turkey
Turkey Republic of, Reg S, 10.00%, 9/19/07 Turkey
United Kingdom Treasury, 9.50%, 4/18/05 United Kingdom
United Kingdom Treasury, 7.50%, 4/18/06 United Kingdom
United Mexican States, 9.75%, 2/06/01 Mexico
United Mexican States, 8.625%, 3/12/08 Mexico
United Mexican States, 11.375%, 9/15/16 Mexico
United Mexican States, 11.50%, 5/15/26 Mexico
World Bank IBRD-Global Bond, 4.50%, 3/20/03 Japan
----------------
Total Foreign Government and Agency Securities (Cost $94,817,958) -
----------------
----------------
Total Long Term Investments (Cost $283,516,727) 49,329,242
----------------
PRINCIPAL
AMOUNT VALUE
------------- ---------------- -
Repurchase Agreements 5.7%
Strategic Income Fund
Joint Repurchase Agreement, 5.350%, 11/02/98
(Cost $16,732,426) United States $6,049,337 $6,049,337
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $300,249,153) 98.1% 55,378,579
Other Assets, less Liabilities 1.9% 63,623
----------------
Net Assets 100.0% $55,442,202
----------------
Pro Forma Combined
------------------------------------------------------
COUNTRY SHARES/ WARRANTS VALUE
--------------------------------------------------------------------------------------------------------------------------
a Common Stock, Warrants & Rights .0%
Gulf States Steel, warrants United States 200 $ 200
Loral Space & Communications, Ltd., warrants United States 300 2,694
Venezuela Oil Value Recovery, rights Venezuela 3,035 -
-----------------
Total Common Stock, Warrants & Rights (Cost $3,731) 2,894
-----------------
Preferred Stocks .2%
a CSC Holdings, Inc., 11.125% pfd. United States 1,331 144,412
Fresenius Medical Care, 9.00% pfd. Germany 100 99,500
Sinclair Capital, 11.625% pfd. United States 3,000 309,750
-----------------
Total Preferred Stocks (Cost $499,966) 553,662
-----------------
Convertible Preferred Stocks 3.7%
El Paso Energy, 4.75% cvt. pfd. United States 32,000 1,552,000
Host Marriott Financial Trust, 6.75%, cvt. pfd. United States 40,000 1,615,000
MediaOne Group, Inc., 6.25% cvt. pfd. United States 33,800 1,820,975
Protective Life Capital Trust II, 6.50% cvt. pfd. United States 12,100 753,225
Ralston Purina Co., 7.00% cvt. pfd. United States 9,300 460,931
Salomon, Inc., 6.25% cvt. pfd. United States 6,700 330,813
Texas Utilities Co., 9.25% cvt. pfd. United States 40,000 2,255,000
Triathlon Broadcasting, 9.00% cvt. pfd. United States 20,000 193,750
Union Pacific Capital Trust, 6.25% cvt. pfd. United States 40,000 1,860,000
-----------------
Total Convertible Preferred Stocks (Cost $11,083,904) 10,841,694
-----------------
PRINCIPAL AMOUNT*
-----------------------------------
Bonds 30.5%
Commercial Services 1.3%
Ameriserv Food Co., senior sub. notes, 10.125%, 7/15/07 United States $ 1,000,000 815,000
Ameriserv Food Distribution, senior notes, 8.875%, 10/15/06 United States 500,000 426,250
Big Flower Press Holdings, senior disc. notes, 8.875%, 7/01/07 United States 300,000 290,250
Iron Mountain, Inc., senior sub. notes, 8.75%, 9/30/09 United States 350,000 348,250
Outdoor Systems, Inc., senior sub. notes, 8.875%, 6/15/07 United States 500,000 522,500
Xerox Corp., (putable** 5/05/99), 5.90% 5/05/37 United States 1,500,000 1,550,640
-----------------
3,952,890
-----------------
Consumer Durables .8%
AMF Group, Inc., senior disc. notes, zero coupon to 3/15/00, 12.25% United States 1,118,000 542,230
thereafter, 3/15/06
Revlon Consumer Products Corp., senior sub. notes, 8.625%, 2/01/08 United States 1,500,000 1,361,250
Sealy Corp., senior sub. notes, 9.875%, 12/15/07 United States 200,000 180,000
Sealy Corp., zero coupon to 12/15/02, 10.875% thereafter, 12/15/07 United States 300,000 168,000
-----------------
2,251,480
-----------------
Consumer Non-Durables .9%
Compania Alimentos Fargo, senior notes, 144A, 13.25%, 8/1/08 Argentina 500,000 300,000
Doane Products Co., senior notes, 10.625%, 3/01/06 United States 100,000 116,084
Coca-Cola Enterprises, (putable** 10/15/03), 6.70% 10/15/36 United States 2,000,000 2,103,524
-----------------
2,519,608
-----------------
Consumer Services 5.4%
Chancellor Media Corp., senior sub notes, 144A, 9.00%, 10/01/08 United States 1,000,000 1,010,000
Chancellor Media Corp., senior sub. notes, 8.75%, 6/15/07 United States 500,000 495,000
CSC Holdings, Inc., 9.875%, 4/01/23 United States 1,750,000 1,881,250
Diamond Cable Communications, Plc., senior disc. notes,
zero coupon to 2/15/02, 10.75% United Kingdom 150,000 95,063
thereafter, 2/15/07
Diamond Cable Communications, senior notes,
zero coupon to 12/15/00, 11.75% thereafter, United Kingdom 150,000 113,250
12/15/05
Diamond Holdings PLC., 9.125%, 2/01/08 United Kingdom 1,000,000 932,500
Fox Family Worldwide, Inc., senior disc. notes,
zero coupon to 11/01/02, 10.25% thereafter, United States 150,000 89,250
11/01/07
Fox/Liberty Networks, LLC., senior disc. notes,
zero coupon to 8/15/02, 9.75% United States 2,000,000 1,305,000
thereafter, 8/15/07
LA Petite Academy Inc., Series B, 10.00%, 5/15/08 United States 1,500,000 1,462,500
Lin Holdings Corp. senior disc. notes,
zero coupon to 3/1/03, 10.00% thereafter, 3/1/08 United States 1,500,000 971,250
Prime Hospitality Corp., senior sub. notes, Series B, 9.75%, 4/01/07 United States 2,000,000 1,900,000
Regal Cinemas, Inc., senior sub. notes, 144A, 9.50%, 6/01/08 United States 2,000,000 1,965,000
Sinclair Broadcast Group Inc., senior sub notes, 8.75%, 12/15/07 United States 1,700,000 1,632,000
Six Flags Entertainment., senior notes, 8.875%, 4/01/06 United States 600,000 602,250
Telewest, Plc., senior deb., zero coupon to
10/01/00, 11.00% thereafter, 10/01/07 United Kingdom 2,000,000 1,600,000
-----------------
16,054,313
-----------------
Energy Minerals 1.8%
Abraxas Petroleum Corp., senior notes, Series B, 11.50%, 11/01/04 United States 880,000 682,000
Chesapeake Energy Corp., senior notes, Series B, 9.625%, 5/1/05 United States 300,000 256,500
Clark R&M, Inc., senior sub. notes, 8.875%, 11/15/07 United States 1,000,000 855,000
Conproca, SA, S.F., secured senior notes, 144A, 12.00%, 6/16/10 Mexico 1,800,000 1,566,000
Nuevo Energy Co., senior sub notes, Series B, 8.875%, 6/1/08 United States 400,000 398,000
P & L Coal Holdings Corp., senior sub. notes, 144A, 9.625%, 5/15/08 United States 1,500,000 1,492,500
-----------------
5,250,000
-----------------
Finance 2.4%
Aetna Services Inc., (putable** 8/15/04), 6.97%, 8/15/36 United States 2,000,000 2,083,444
Homeside Finance, Inc., senior notes, 11.25%, 5/15/03 United States 100,000 117,500
Pera Financial Services, secured notes, 9.375%, 10/15/02 Turkey 1,000,000 695,000
Pera Financial Services, secured notes, 9.375%, 10/15/02 Turkey 160,000 111,200
Sears Roebuck Acceptance Corp., 0 -
(putable** 11/15/00), 6.13%, 11/15/05 United States 775,000 805,978
(putable** 11/15/00), 6.15%, 11/15/05 United States 725,000 757,148
Southtrust Bank, (putable** 2/06/01), 5.58%, 2/06/06 United States 2,500,000 2,510,258
-----------------
7,080,528
-----------------
Health Services 1.2%
Fresenius Medical Care, 7.875%, 2/1/08 Germany 1,000,000 935,000
Magellan Health Services, Inc., senior sub. notes, 9.00%, 2/15/08 United States 1,000,000 832,500
Pharmerica, Inc., senior sub. notes, 8.375%, 4/01/08 United States 350,000 302,750
Tenet Healthcare Corp., senior sub. notes, 8.625%, 1/15/07 United States 200,000 209,000
Vencor Operating Inc., senior sub notes, 9.875%, 5/1/05 United States 1,500,000 1,200,000
-----------------
3,479,250
-----------------
Industrial Services .7%
Dailey International, Inc., senior notes, 9.50%, 2/15/08 United States 300,000 136,500
WMX Technologies, (putable** 5/15/00), 6.65% 5/15/05 United States 2,000,000 2,062,575
-----------------
2,199,075
-----------------
Non-Energy Minerals .3%
LTV Corp., senior notes, 8.20%, 9/15/07 United States 1,000,000 950,000
-----------------
Process Industries 4.4%
Anchor Glass, first mortgage notes, 11.25%, 4/01/05 United States 300,000 308,250
Anchor Glass Container, senior notes, 9.875%, 3/15/08 United States 700,000 679,000
Ball Corp., senior notes, 144A, 7.75%, 8/01/06 United States 500,000 520,000
Ball Corp., senior sub.notes, 144A, 8.25%, 8/01/08 United States 350,000 363,125
Bausch & Lomb, (putable** 8/31/01), 6.56%, 8/12/26 United States 2,000,000 2,080,902
Four M Corp., senior notes, Series B, 12.00%, 6/01/06 United States 200,000 151,000
Graham Packaging Corp., senior sub. notes, 8.75%, 1/15/08 United States 200,000 187,500
Graham Packaging Corp., senior disc. notes zero
coupon to 1/15/03,10.75% thereafter, 1/15/09 United States 1,700,000 1,045,500
Huntsman Corp., senior sub. notes, 144A, 9.50%, 7/01/07 United States 1,000,000 945,000
Pillowtex Corp., senior sub. Notes, 9.00%, 12/18/07 United States 2,000,000 2,030,000
Pindo Deli Finance Mauritius, Ltd., senior notes, 10.25%, 10/01/02 Indonesia 700,000 372,750
Purina Mills Inc., senior sub notes, 144A, 9.00%, 3/15/10 United States 600,000 589,500
Repap New Brunswick, senior notes, 9.00%, 6/1/04 Canada 700,000 651,000
Sherwin-Williams Co., (putable** 10/15/99), 5.50%, 10/15/27 United States 2,000,000 2,025,690
Universal Compression Inc., senior disc. Notes,
zero coupon to 2/15/03, 9.875% thereafter, 2/15/08 United States 1,250,000 693,750
Windmere - Durable holdings, senior sub notes, 10.00%, 7/31/08 United States 500,000 427,500
-----------------
13,070,467
-----------------
Producer Manufacturing 2.7%
Aetna Industries, Inc., senior notes, 11.875%, 10/01/06 United States 200,000 203,000
Allied Waste Industries, Inc., senior disc. notes,
zero coupon to 6/01/02, 11.30% United States 500,000 375,000
thereafter, 6/01/07
Cambridge Industries, Inc., senior sub. notes, 10.25%, 7/15/07 United States 600,000 544,500
Collins & Aikman Products, senior sub. notes, 11.50%, 4/15/06 United States 100,000 99,500
Falcon Building Products, Inc., senior disc. sub. notes,
10.50%, 6/15/07 United States 250,000 125,000
Falcon Building Products, Inc., senior sub. notes,
Series B, 9.50%, 6/15/07 United States 1,000,000 827,500
a Harvard Industries, Inc., senior notes, 11.125%, 8/01/05 United States 300,000 48,000
International Comfort Products, senior notes,
Series B, 8.625%, 5/15/08 United States 1,500,000 1,440,000
Intertek Finance, Plc., senior sub. notes,
Series B, 10.25%, 11/01/06 United Kingdom 100,000 90,500
LES, Inc., senior sub. notes, 144A, 9.25%, 6/01/08 United States 1,350,000 1,350,000
LDM Technologies, Inc., senior sub. notes, 10.75%, 1/15/07 United States 200,000 178,000
Nortek, Inc., senior notes, 144A, 8.875%, 8/01/08 United States 500,000 485,000
Nortek, Inc., senior notes, 9.125%, 9/01/07 United States 300,000 294,000
Oshkosh Truck Corp., senior sub. notes 8.75%, 3/01/08 United States 400,000 370,000
Talon Automotive Group, senior sub. Notes,
Series B, 9.625%, 5/1/08 United States 800,000 708,000
Terex Corp., senior sub notes, 8.875%, 4/1/08 United States 1,000,000 910,000
-----------------
8,048,000
-----------------
Retail Trade .8%
Fleming Cos., Inc., senior sub. notes, 10.50%, 12/01/04 United States 500,000 467,500
Penney J.C. & Co., Inc., (putable** 8/15/03), 6.90% 8/15/26 United States 1,500,000 1,607,208
Shoppers Food Warehouse, senior notes, 9.75%, 6/15/04 United States 125,000 133,125
Specialty Retailers, Inc., senior notes, 8.50%, 7/15/05 United States 250,000 231,250
-----------------
2,439,083
-----------------
Transportation .5%
American Commercial Lines, 144A, 10.25%, 6/30/08 United States 1,000,000 980,000
Ultrapetrol (Bahamas) Ltd., mortgage rates, 10.50%, 4/1/08 Bahamas 1,000,000 630,000
-----------------
1,610,000
-----------------
Utilities 7.3%
AES Corp., senior sub. notes, 8.50%, 11/01/07 United States 750,000 708,750
AES China Generating Co., Ltd., senior notes, 10.125%, 12/15/06 Bermuda 100,000 57,750
Allegiance Telecom, Inc., senior notes,
zero coupon to 2/15/03, 11.75%, thereafter, 2/15/08 United States 2,000,000 810,000
Arch Communications Group, Inc., senior disc. notes,
zero coupon to 3/15/01, 10.875% United States 300,000 111,000
thereafter, 3/15/08
Bellsouth Corp., (putable** 11/15/00), 5.85%, 11/15/45 United States 2,000,000 2,069,274
Comcast Cellular, senior notes, 9.50%, 5/01/07 United States 400,000 414,000
ESI Tractebel Acq. Corp., 7.99%, 12/30/11 United States 250,000 233,452
Flag Ltd, senior notes, 8.250%, 1/30/08 Bermuda 200,000 186,000
IXC Communications Inc., senior sub. notes, 9.00%, 4/15/08 United States 650,000 641,875
IntelCom Group, Inc., senior disc. notes,
zero coupon to 5/01/01, 12.50% thereafter, 5/01/06 United States 2,250,000 1,552,500
Intermedia Communications, senior disc. notes, 11.25%, 7/15/07 United States 2,000,000 1,330,000
Iridium L.L.C., senior notes, Series D, 10.875%, 7/15/05 United States 2,000,000 1,520,000
Level 3 Communications, senior notes, 9.125%, 5/1/08 United States 2,000,000 1,890,000
Metrocall, Inc., senior sub. notes, 9.75%, 11/01/07 United States 1,000,000 915,000
Microcell Telecommunication, senior disc. notes,
Series B, zero coupon to 12/01/01, 14.00% Canada 600,000 387,000
thereafter, 6/01/06
Millicom International Cellular, SA, senior disc. notes,
zero coupon to 6/01/01, 13.50% Luxembourg 300,000 180,000
thereafter, 6/01/06
Netia Holdings B.V., senior notes,10.25%, 11/01/07 Poland 200,000 154,500
Netia Holdings BV, senior disc. notes, zero coupon
to 11/01/01,11.25% thereafter, 11/01/07 Poland 500,000 256,250
Nextel Communications, senior disc. notes,
zero coupon to 10/31/02, 9.75% thereafter, United States 500,000 280,000
10/31/07
Nextel Communications, senior disc. notes,
zero coupon to 2/15/99, 9.75% thereafter, 8/15/04 United States 500,000 470,000
Nextel Communications, senior disc. notes,
zero coupon to 2/15/03, 9.95% thereafter, 2/15/08 United States 1,300,000 708,500
Nextlink Communications, Inc., senior notes, 9.625%, 10/01/07 United States 250,000 232,500
Nextlink Communications, Inc., senior notes, 9.00%, 3/15/08 United States 750,000 686,250
Nextlink Communications, Inc., senior disc. notes,
zero coupon to 4/15/03, 9.45% thereafter 4/15/08 United States 650,000 354,250
Niagara Mohawk Power Corp., senior disc. notes,
Series H, zero coupon to7/01/03, 8.50% thereafter, 7/01/10 United States 1,500,000 1,106,250
Orion Network Systems, Inc., SA, senior disc. notes,
zero coupon to 1/15/02, 12.50% United States 300,000 178,500
thereafter, 1/15/07
Paging Network, Inc., senior sub. notes, 10.125%, 8/01/07 United States 400,000 392,000
RSL Communications P.L.C., 144A, United Kingdom 1,000,000 500,000
zero coupon to 3/01/03, 10.125% thereafter, 3/1/08
Sprint Spectrum, L.P., senior disc. notes,
zero coupon to 8/01/01, 12.50% thereafter, 8/15/06 United States 300,000 263,250
Sygnet Wireless, Inc., senior notes, 11.50%, 10/01/06 United States 2,000,000 2,250,000
Triton Communications L.L.C., senior disc. notes,
144A, zero coupon to 5/1/03, thereafter United States 1,750,000 700,000
11%, 5/1/08
-----------------
21,538,851
-----------------
-----------------
Total Bonds (Cost $96,763,821) 90,443,545
-----------------
Convertible Bonds 2.0%
Electronic Technology .3%
Dovatron International, Inc., cvt., sub. notes, 6.00%, 10/15/02 United States 1,000,000 955,000
-----------------
Finance .3%
Macerich Co., cvt., sub. deb., 144A, 7.25%, 12/15/02 United States 1,000,000 955,000
-----------------
Health Services .7%
Omnicare, Inc., cvt., 5.00%, 12/01/07 United States 2,000,000 2,150,000
-----------------
Industrial Services .7%
Diamond Offshore Drilling, Inc., cvt., 3.75%, 2/15/07 United States 2,000,000 2,007,500
-----------------
-----------------
Total Convertible Bonds (Cost $6,214,493) 6,067,500
-----------------
Other Mortgages 1.9%
MLMI, 1998-C2 A2, 6.39%, 2/15/30 United States 1,500,000 1,525,208
Morgan Stanley Capital I, 6.55%, 12/15/07 United States 2,000,000 2,052,500
Delta Home Equity, 6.37%, 7/15/28 United States 2,000,000 1,965,000
-----------------
Total Other Mortgages (Cost $5,579,900) 5,542,708
-----------------
Us Government Securities And Agencies/Mortgages 17.0%
Us Government Agencies/Mortgages 6.6%
FHLMC, 6.00%, 4/01/09 United States 19,194 19,323
FHLMC, 7.00%, 1/01/09 United States 16,642 16,887
FHLMC, 6.00%, 1/01/11 United States 17,677 17,741
FHLMC, 6.50%, 4/01/11 United States 29,536 29,818
FHLMC, 7.00%, 9/01/11 United States 36,004 36,479
FHLMC, 6.00%, 5/01/13 United States 731,200 735,142
FHLMC, 6.00%, 9/01/13 United States 493,240 495,900
FHLMC, 7.00%, 4/01/24 United States 42,545 43,312
FHLMC, 7.50%, 4/01/24 United States 34,241 35,044
FHLMC, 8.50%, 12/01/24 United States 19,771 20,605
FHLMC, 9.00%, 12/01/24 United States 9,909 10,430
FHLMC, 7.00%, 11/01/25 United States 24,939 25,383
FHLMC, 8.00%, 11/01/25 United States 18,751 19,262
FHLMC, 6.50%, 12/01/25 United States 33,067 33,373
FHLMC, 8.00%, 1/01/26 United States 15,270 15,686
FHLMC, 7.50%, 1/01/26 United States 25,991 26,597
FHLMC, 6.50%, 3/01/26 United States 44,679 45,076
FHLMC, 7.00%, 9/01/26 United States 22,222 22,618
FHLMC, 7.50%, 1/01/27 United States 45,013 46,059
FHLMC, 7.00%, 4/01/28 United States 210,743 215,237
FHLMC., 7.00%, 4/01/28 United States 144,420 147,501
FHLMC, 7.00%, 5/01/28 United States 628,789 642,151
FNMA, 7.50%, 10/01/07 United States 24,147 24,825
FNMA, 6.50%, 2/01/09 United States 23,932 24,353
FNMA, 6.50%, 4/01/11 United States 19,514 19,832
FNMA, 6.50%, 6/01/13 United States 971,531 986,787
FNMA, 6.50%, 1/01/24 United States 30,835 31,125
FNMA, 7.00%, 5/01/24 United States 18,995 19,378
FNMA, 8.00%, 1/01/25 United States 19,343 20,002
FNMA, 9.00%, 3/01/25 United States 8,072 8,512
FNMA, 9.00%, 5/01/25 United States 4,242 4,473
FNMA, 8.50%, 7/01/25 United States 14,034 14,616
FNMA, 8.00%, 12/01/25 United States 653,728 675,876
FNMA, 7.00%, 1/01/26 United States 44,585 45,482
FNMA, 7.00%, 3/01/26 United States 45,356 46,260
FNMA, 7.50%, 3/01/26 United States 27,087 27,729
FNMA, 8.00%, 5/01/26 United States 17,542 18,135
FNMA, 8.00%, 6/01/26 United States 11,840 12,240
FNMA, 7.50%, 8/01/26 United States 26,599 27,230
FNMA, 7.50%, 10/01/26 United States 13,672 13,996
FNMA, 8.00%, 1/01/27 United States 35,865 37,121
FNMA, 7.00%, 4/01/27 United States 879,433 899,645
FNMA, 6.50%, 3/01/28 United States 2,913,759 2,939,482
FNMA, 7.00%, 6/01/28 United States 1,461,529 1,495,213
FNMA, 6.00%, 9/01/28 United States 988,214 977,483
FNMA, 6.00%, 10/01/28 United States 1,009,469 998,507
b FNMA, 6.50%, 11/01/28 United States 1,000,000 1,007,813
GNMA SF, 7.00%, 7/15/08 United States 1,010,000 1,038,674
GNMA, SF, 7.50%, 9/15/23 United States 16,007 16,522
GNMA, SF, 6.50%, 3/15/24 United States 45,709 46,270
GNMA, SF, 8.00%, 6/15/24 United States 37,255 38,649
GNMA, SF, 9.00%, 1/15/25 United States 4,866 5,190
GNMA, SF, 8.00%, 2/15/25 United States 14,788 15,338
GNMA, SF, 9.50%, 6/15/25 United States 9,937 10,736
GNMA, SF, 7.50%, 1/15/26 United States 18,570 19,154
GNMA, SF, 7.50%, 1/15/26 United States 20,570 21,217
GNMA, SF, 7.50%, 2/15/26 United States 21,355 22,026
GNMA, SF, 7.00%, 3/15/26 United States 20,377 20,865
GNMA, SF, 9.00%, 3/15/26 United States 34,259 36,530
GNMA, SF, 8.00%, 6/15/26 United States 41,256 42,782
GNMA, SF, 8.50%, 7/15/26 United States 18,487 19,559
GNMA, SF, 7.50%, 9/15/27 United States 926,806 956,251
GNMA, SF, 8.50%, 8/15/24 United States 9,528 10,099
GNMA SF, 7.50%, 5/15/27 United States 1,009,999 1,042,088
GNMA, SF, 7.00%, 11/15/27 United States 1,009,999 1,034,732
GNMA SF, 8.00%, 4/15/28 United States 992,464 1,029,372
GNMA, SF, 7.00%, 5/15/28 United States 49,340 50,531
GNMA, SF, 7.00%, 6/15/28 United States 1,002,120 1,026,311
-----------------
19,578,635
-----------------
Us Government Securities 10.3%
U.S. Treasury Bonds, 7.125%, 2/15/23 United States 400,000 494,125
U.S. Treasury Note, 5.875%, 1/31/99 United States 2,000,000 2,006,876
U.S. Treasury Note, 5.875%, 3/31/99 United States 1,000,000 1,006,251
U.S. Treasury Note, 6.00%, 6/30/99 United States 2,000,000 2,020,626
U.S. Treasury Note, 5.875%, 7/31/99 United States 2,000,000 2,020,626
U.S. Treasury Note, 5.875%, 8/31/99 United States 3,000,000 3,034,689
U.S. Treasury Note, 5.75%, 9/30/99 United States 1,000,000 1,011,876
U.S. Treasury Note, 5.625%, 11/30/99 United States 2,000,000 2,025,626
U.S. Treasury Note, 5.625%, 12/31/99 United States 2,000,000 2,027,502
U.S. Treasury Note, 5.50%, 3/31/00 United States 2,000,000 2,031,252
U.S. Treasury Note, 6.00%, 8/15/00 United States 2,000,000 2,057,502
U.S. Treasury Note, 5.125%, 8/31/00 United States 3,000,000 3,044,064
U.S. Treasury Note, 5.375%, 2/15/01 United States 2,000,000 2,045,626
U.S. Treasury Note, 5.75%, 11/30/02 United States 3,000,000 3,150,003
U.S. Treasury Note, 5.625%, 12/31/02 United States 2,500,000 2,617,970
-----------------
30,594,614
-----------------
-----------------
Total US Government Securities and 50,173,249
-----------------
Agencies/Mortgages (Cost $49,485,610)
Other Government & Agency Securities 6.7%
Fannie Mae, 5.75%, 4/15/03 United States 11,000,000 11,421,575
Fannie Mae, 5.75%, 6/15/05 United States 6,000,000 6,208,050
Tennessee Valley Authority, United States 2,000,000 2,190,082
(putable** 7/15/01, callable 7/15/20), 6.235%, 7/15/45
-----------------
Total Other Government & Agency Securities (Cost $19,067,344) 19,819,707
-----------------
Foreign Government And Agency Securities 30.4%
Australian Government, Series 705, 7.50%, 7/15/05 Australia 3,600,000 2,585,503
Belgium Kingdom, 6.25%, 3/28/07 Belgium 106,245,000 3,545,958
Bundesobligation, Series 110, 5.375%, 2/22/99 Germany 1,205,000 731,644
Bundesobligation, Series 118, 5.25%, 2/21/01 Germany 2,565,000 1,611,295
Bundesrepublic Deutschland, Series 97, 6.00%, 1/04/07 Germany 3,110,000 2,107,822
Bundesschatzanweisungen, 6.875%, 2/24/99 Germany 1,035,000 631,111
Buoni Poliennali del Tesoro, 10.50%, 7/15/00 Italy 2,055,000,000 1,392,119
Buoni Poliennali del Tesoro, 7.75%, 11/01/06 Italy 2,815,000,000 2,097,869
Deutschland Republic, 6.00%, 1/05/06 Germany 1,175,000 793,171
Government of Canada, 10.50%, 7/01/00 Canada 935,000 659,671
Government of Canada, 10.50%, 3/01/01 Canada 1,645,000 1,196,001
Government of Canada, 10.00%, 5/01/02 Canada 1,515,000 1,139,776
Government of Canada, 6.50%, 6/01/04 Canada 1,000,000 696,891
Government of Canada, 10.00%, 6/01/08 Canada 700,000 618,109
Government of France, 5.50%, 4/25/07 France 6,000,000 1,181,321
Government of Jamaica, 9.625%, 7/02/02 Jamaica 1,750,000 1,426,250
Kingdom of Denmark, 9.00%, 11/15/00 Denmark 1,785,000 310,215
Kingdom of Denmark, 7.00%, 12/15/04 Denmark 6,000,000 1,082,003
Netherlands Government, Series 1 & 2, 6.00%, 1/15/06 Netherlands 2,385,000 1,424,973
New Zealand Government, 6.50%, 2/15/00 New Zealand 1,295,000 696,944
Peru - PDI., Series 20YR, 4.00%, 3/07/17 Peru 5,100,000 2,932,500
Republic of Korea, 8.875%, 4/15/08 South Korea 3,100,000 2,865,578
Republic of Argentina, 9.25%, 2/23/01 Argentina 275,000 270,188
Republic of Argentina, 11.00%, 10/09/06 Argentina 2,950,000 2,935,250
Republic of Argentina, 5.75%, 3/31/23 Argentina 2,000,000 1,390,000
Republic of Argentina, 9.75%, 9/19/27 Argentina 730,000 633,731
Republic of Argentina, Bonos Del Tesoro, 8.75%, 5/09/02 Argentina 3,800,000 3,379,150
Republic of Argentina, Global, 11.375%, 1/30/17 Argentina 160,000 155,200
Republic of Brazil, 8.875%, 11/05/01 Brazil 2,295,000 2,094,188
Republic of Brazil, 9.375%, 4/07/08 Brazil 3,000,000 2,055,000
Republic of Brazil, 6.188%, 4/15/12 Brazil 300,000 159,189
Republic of Brazil, 10.125%, 5/15/27 Brazil 2,200,000 1,524,600
Republic of Brazil, C Bond, 5.00%, 4/15/14 Brazil 2,355,240 1,474,335
Republic of Bulgaria, floating rate deb., Series A, 6.688%, 7/28/11 Bulgaria 4,820,000 3,235,425
Republic of Bulgaria, floating rate deb., 6.688%, 7/28/11 Bulgaria 110,000 73,838
Republic of Ecuador Disc, 6.625%, 2/28/25 Ecuador 1,250,000 642,188
Republic of Ecuador, unsub., 11.25%, 4/25/02 Ecuador 1,500,000 1,215,000
Republic of Ecuador, unsub., 144A, 11.25%, 4/25/02 Ecuador 750,000 607,500
Republic of Panama, 8.875%, 9/30/27 Panama Republic Of 1,500,000 1,383,750
Republic of Turkey, 144A, 9.875%, 2/23/05 Turkey 850,000 707,625
Republic of Turkey, 144A, 10.00%, 9/19/07 Turkey 875,000 755,781
Republic of Venezuela, 6.625%, 12/18/07 Venezuela 904,762 554,732
Republic of Venezuela, 9.25%, 9/15/27 Venezuela 5,383,000 3,310,545
Republic of Venezuela, Disc. W-A, 6.563%, 3/31/20 Venezuela 250,000 153,750
Republic of Venezuela, senior unsub. notes, 9.125%, 6/18/07 Venezuela 1,200,000 807,000
Republic of Venezuela, 144A, 9.125%, 6/18/07 Venezuela 100,000 67,250
Russian Federation, 10.00%, 6/26/07 Russia 8,000,000 1,970,000
SEI Holdings IX, Inc., senior notes, 144A, 11.00%, 11/30/00 Trinidad And Tobago 125,000 118,750
Spanish Government, 8.80%, 4/30/06 Spain 200,000,000 1,817,248
Swedish Government, 10.25%, 5/05/03 Sweden 7,000,000 1,115,395
Treuhandanstalt, 7.75%, 10/01/02 Germany 1,530,000 1,062,002
Turkey Republic of, 144A, 9.875%, 2/23/05 Turkey 1,680,000 1,398,600
Turkey Republic of, Reg S, 10.00%, 9/19/07 Turkey 1,315,000 1,135,831
United Kingdom Treasury, 9.50%, 4/18/05 United Kingdom 880,000 1,820,893
United Kingdom Treasury, 7.50%, 4/18/06 United Kingdom 1,681,000 3,248,608
United Mexican States, 9.75%, 2/06/01 Mexico 1,950,000 2,013,375
United Mexican States, 8.625%, 3/12/08 Mexico 7,470,000 6,708,060
United Mexican States, 11.375%, 9/15/16 Mexico 2,810,000 2,799,463
United Mexican States, 11.50%, 5/15/26 Mexico 2,850,000 2,949,750
World Bank IBRD-Global Bond, 4.50%, 3/20/03 Japan 45,000,000 454,409
-----------------
Total Foreign Government and Agency Securities (Cost $94,817,958) 89,924,323
-----------------
-----------------
Total Long Term Investments (Cost $283,516,727) 273,369,282
-----------------
PRINCIPAL
AMOUNT VALUE
--------------- -----------------
Repurchase Agreements 5.7%
Strategic Income Fund
Joint Repurchase Agreement, 5.350%, 11/02/98
(Cost $16,732,426) United States $16,732,426 $16,732,426
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $300,249,153) 98.1% 290,101,708
Other Assets, less Liabilities 1.9% 5,683,684
-----------------
Net Assets 100.0% $295,785,392
-----------------
Currency Abbreviations
AUD - Australian Dollar
BEF - Belguim Franc
CAD - Canadian Dollar
DEM - German Mark
DKK - Danish Krone
ESP - Spanish Peseta
FRF - French Franc
GBP - British Pound
ITL - Italian Lira
JPY - Japanese Yen
NEG - Netherland Guilder
NZD - New Zealand Dollar
SEK - Swedish Krona
* Securities traded in U.S. dollars unless otherwise indicated.
** Holder may redeem at par on put date.
a Non-income producing.
b Sufficient collateral has been segregated for securities traded on a when issued or delayed delivery.
See accompanying notes to pro forma combining financial statements.
</TABLE>
FRANKLIN STRATEGIC INCOME FUND
FRANKLIN INVESTMENT GRADE INCOME FUND
FINANCIAL STATEMENTS
PRO FORMA COMBINING STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)
OCTOBER 31, 1998
<TABLE>
<CAPTION>
Franklin
Strategic
Franklin Franklin Income Fund
Strategic Investment Grade Pro Forma
Income Fund Income Fund Combined
--------------- ------------------- ------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost $ 235,176,429 $ 48,340,297 $ 283,516,726
--------------- ------------------- ------------------
Value 224,040,040 49,329,242 273,369,282
Repurchase agreements, at value and cost 10,683,089 6,049,337 16,732,426
Cash 566,582 (60,618) 505,964
Receivables:
Investment securities sold 1,298,496 - 1,298,496
Capital shares sold 767,016 7,184 774,200
Dividends and interest 4,756,761 753,642 5,510,403
Affiliates 44,550 - 44,550
Unrealized gain on forward exchange contracts 51,086 - 51,086
Other assets - 3,725 3,725
--------------- ------------------- ------------------
Total assets 242,207,620 56,082,512 298,290,132
--------------- ------------------- ------------------
Liabilities:
Payables:
Investment securities purchased 1,327,977 - 1,327,977
Capital shares redeemed 144,246 546,263 690,509
Affiliates 183,576 59,637 243,213
Shareholders 71,102 17,321 88,423
Unrealized loss on forward exchange contracts 98,567 - 98,567
Other liabilities 38,962 17,089 56,051
--------------- ------------------- ------------------
Total liabilities 1,864,430 640,310 2,504,740
--------------- ------------------- ------------------
Net assets, at value $ 240,343,190 $ 55,442,202 $ 295,785,392
--------------- ------------------- ------------------
CLASS I**:
Net assets, at value $ 218,226,419 $ 54,918,409 $ 273,144,828
--------------- ------------------- ------------------
--------------- ------------------- ------------------
Shares outstanding *** 20,850,948 5,950,630 26,096,259
--------------- ------------------- ------------------
Net asset value per share * $ 10.47 $ 9.23 $ 10.47
--------------- ------------------- ------------------
CLASS II**:
Net assets, at value $ 22,116,771 $ - $ 22,116,771
--------------- ------------------- ------------------
--------------- ------------------- ------------------
Shares outstanding 2,112,826 - 2,112,826
--------------- ------------------- ------------------
Net asset value per share * $ 10.47 $ - $ 10.47
--------------- ------------------- ------------------
ADVISOR CLASS:
Net assets, at value $ - $ 523,793 $ 523,793
--------------- ------------------- ------------------
--------------- ------------------- ------------------
Shares outstanding *** - 56,809 50,028
--------------- ------------------- ------------------
Net asset value and maximum offering price per share $ - $ 9.22 $ 10.47
------------------
*Redemption price is equal to net asset value less any applicable contingent deferred sales charge.
** Effective January 1, 1999, Class I and Class II Shares were renamed Class A and Class C, respectively and
the Strategic Income Fund began offering a new class of shares, Class B.
*** See note 2 in the accompanying notes to pro forma combining financial statements.
See accompanying notes to pro forma combining financial statements.
</TABLE>
FRANKLIN STRATEGIC INCOME FUND
FRANKLIN INVESTMENT GRADE INCOME FUND
FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PRO FORMA COMBINING STATEMENTS OF OPERATIONS Franklin
FOR THE SIX MONTHS ENDED OCTOBER 31, 1998 (UNAUDITED) Strategic
Franklin Franklin ncome Fund
Strategic Investment Grade Pro Forma Pro Forma
Income Fund Income Fund Adjustments Combined
------------------------------------------------------------------
<S> <C> <C> <C>
Investment income:
Dividends $ 259,749 $ - $ 259,749
Interest 8,608,348 1,562,613 10,170,961
-------------- ---------------- --------------- -------------
-------------- ---------------- --------------- -------------
Total investment income 8,868,097 1,562,613 - 10,430,710
-------------- ---------------- --------------- -------------
Expenses:
Management fees 587,713 135,061 2,073 a 724,847
Distribution fees
Class I 250,607 67,293 317,900
Class II 37,506 - 37,506
Transfer agent fees 73,454 28,731 102,185
Custodian fees 15,184 530 15,714
Reports to shareholders 26,100 15,896 41,996
Registration and filing fees 79,749 1,834 81,583
Professional fees 2,572 7,417 9,989
Trustees' fees and expenses 1,209 1,618 2,827
Accounting Fees - 24,081 (24,081)c -
Other 24,002 4,155 28,157
-------------- ---------------- --------------- -------------
-------------- ---------------- --------------- -------------
Total expenses 1,098,096 286,616 (22,008) 1,362,704
Expenses waived/paid by affiliate (545,713) - (151,635)b (697,348)
-------------- ---------------- --------------- -------------
Net expenses 552,383 286,616 (173,643) 665,356
-------------- ---------------- --------------- -------------
Net investment income (loss) 8,315,714 1,275,997 173,643 9,765,354
-------------- ---------------- --------------- -------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments (1,240,583) 2,155 (1,238,428)
Foreign currency transactions (102,982) - (102,982)
-------------- ---------------- --------------- -------------
Net realized gain (loss) (1,343,565) 2,155 - (1,341,410)
Net unrealized appreciation (depreciation) on:
Investments (13,430,188) 785,613 (12,644,575)
Translation of assets and liabilities
denominated in foreign currencies 90,438 - 90,438
-------------- ---------------- --------------- -------------
Net unrealized appreciation (depreciation) (13,339,750) 785,613 - (12,554,137)
-------------- ---------------- --------------- -------------
Net realized and unrealized gain (loss) (14,683,315) 787,768 - (13,895,547)
-------------- ---------------- --------------- -------------
Net increase (decrease) in net assets resulting from operations $ (6,367,601) $ 2,063,765 $ 173,643 $ (4,130,193)
-------------- ---------------- --------------- -------------
a - Pro Forma adjustment for difference in Management fee schedule.
b - Pro Forma adjustment to comply with Strategic Income Fund 0.50% expense limitation.
c - Pro Forma adjustment for difference in Management agreement.
See accompanying notes to pro forma combining financial statements.
</TABLE>
FRANKLIN STRATEGIC INCOME FUND
FRANKLIN INVESTMENT GRADE FUND
NOTES TO PRO FORMA COMBINING STATEMENTS (UNAUDITED)
1. BASIS OF COMBINATION
Subject to approval of the proposed Agreement and Plan of Reorganization
(the "Agreement and Plan") by the shareholders of the Franklin Investment
Grade Income Fund ("Investment Grade Fund"), the Franklin Strategic Income
Fund ("Strategic Income Fund") will acquire all the net assets of the
Investment Grade Fund in exchange for the Class A and Advisor Class shares
of Strategic Income Fund. 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 Strategic Income Fund and Investment Grade Fund at
October 31, 1998 as though the merger occurred as of that date. The pro
forma combining Statement of Operations reflects the results of operations
of the Strategic Income Fund and the Investment Grade Fund for the period
May 1, 1998 to October 31, 1998 as though the merger occurred on May 1,
1998. The pro forma financial statements do not reflect the expenses of
either fund in carrying out its obligations under the Agreement and Plan
of Reorganization or any adjustment with respect to additional
distributions that may be made prior to reorganization. The pro forma
financial statements are presented for the information of the reader, and
should be read in conjunction with the historical financial statements of
the funds.
2. SHARES OF BENEFICIAL INTEREST:
The number of Class I and Advisor Class shares issued was calculated by
dividing the Class I and Advisor Class net assets of the Investment Grade
Fund at October 31, 1998 by the Class I net asset value per share of the
Strategic Income Fund at October 31, 1998.
FORM N-14
PART C. OTHER INFORMATION
Item 15. INDEMNIFICATION
Please see the Agreement and Declaration of Trust, By-Laws, Management,
and Distribution Agreements, previously filed as exhibits and incorporated
herein by reference. Notwithstanding the provisions contained in the
Registrant's By-Laws, in the absence of authorization by the appropriate
court on the merits pursuant to said By-Laws, any indemnification under said
By-Laws shall be made by Registrant only if authorized in the manner provided
by such By-Laws.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustee, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification is against public policy as expressed
in the Act and will be governed by the final adjudication of such issue.
Item 16. EXHIBITS (Incorporated by reference to the filings as noted).
The following exhibits are incorporated herein by reference, except
Exhibits 12, 14(i), 14(ii), 16(iii), and 16(iv) which are attached.
(1) Copies of the charter as now in effect;
(i) Agreement and Declaration of Trust Franklin California 250
Growth Index Fund dated January 22, 1991
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Certificate of Trust of Franklin California 250 Growth
Index Fund dated January 22, 1991
Filing: Post Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iii) Certificate of Amendment to Certificate of Trust of
Franklin California 250 Growth Index Fund dated November
19, 1991
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iv) Certificate of Amendment to the Certificate of Trust of
Franklin Strategic Series dated May 14, 1992
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(v) Certificate of Amendment of Agreement and Declaration of
Trust of Franklin Strategic Series dated April 18, 1995
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(2) Copies of the existing By-Laws or instruments corresponding
thereto;
(iv) Amended and Restated By-Laws of Franklin California 250
Growth Index Fund as of April 25, 1991
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Amendment to By-Laws dated October 27, 1994
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(3) Copies of any voting trust agreement with respect to more than
five percent of any class of equity securities of the Registrant;
Not Applicable
(4) The Agreement and Plan of Reorganization is included in this
Registration Statement as Exhibit A to the Prospectus/Proxy
Statement.
(5) Specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the
rights of the holders of such securities, and copies of each
security being registered;
Not Applicable
(6) Copies of all investment advisory contracts relating to the
management of the assets of the Registrant;
(i) Management Agreement between Registrant on behalf of
Franklin Global Health Care Fund, Franklin Small Cap Growth
Fund, Franklin Global Utilities Fund and Franklin Natural
Resources Fund, and Franklin Advisers, Inc., dated February
24, 1992
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Management Agreement between the Registrant, on behalf of
Franklin Strategic Income Fund, and Franklin Advisers,
Inc., dated May 24, 1994
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iii) Subadvisory Agreement between Franklin Advisers, Inc., on
behalf of the Franklin Strategic Income Fund, and Templeton
Investment Counsel, Inc., dated May 24, 1994
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(iv) Amended and Restated Management Agreement between the
Registrant, on behalf of Franklin California Growth Fund,
and Franklin Advisers, Inc., dated July 12, 1993
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(v) Management Agreement between the Registrant, on behalf of
Franklin Blue Chip Fund, and Franklin Advisers, Inc. dated
February 13, 1996
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 14, 1996
(vi) Management Agreement between the Registrant, on behalf of
Franklin Institutional MidCap Growth Fund (now know as
Franklin MidCap Growth Fund), and Franklin Advisers, Inc.
dated January 1, 1996
Filing: Post-Effective Amendment No. 19 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 27, 1996
(vii) Amendment dated August 1, 1995 to the Management Agreement
between the Registrant, on behalf of Franklin California
Growth Fund, and Franklin Advisers, Inc., dated July 12,
1993
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No: 33-39088
Filing Date: August 6, 1996
(viii)Amendment dated August 1, 1995 to the Management
Agreement between the Registrant, on behalf of Franklin
Global Health Care Fund, Franklin Small Cap Growth Fund,
Franklin Global Utilities Fund, and Franklin Natural
Resources Fund, and Franklin Advisers, Inc., dated February
24, 1992
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(ix) Amendment dated August 1, 1995 to the Management Agreement
between the Registrant, on behalf of Franklin Strategic
Income Fund, and Franklin Advisers, Inc., dated May 24, 1994
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(x) Management Agreement between the Registrant, on behalf of
Franklin Biotechnology Discovery Fund, and Franklin
Advisers, Inc., dated July 15, 1997
Filing: Post-Effective Amendment No. 25 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 22, 1997
(xi) Administration Agreement between the Registrant, on behalf
of Franklin Biotechnology Discovery Fund, and Franklin
Templeton Services, Inc., dated July 15, 1997
Filing: Post-Effective Amendment No 25 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 22, 1997
(xii) Investment Advisory Agreement between the Registrant, on
behalf of Franklin U.S. Long Short Fund, and Franklin
Advisers, Inc., dated February 18, 1999
Filing: Post-Effective Amendment No. 31 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 11, 1999
(xiii)Form of Investment Advisory Agreement between the
Registrant, on behalf of Franklin Large Cap Growth Fund,
and Franklin Advisers, Inc.
Filing: Post-Effective Amendment No. 32 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 24, 1999
(xiv) Form of Investment Advisory Agreement between the
Registrant, on behalf of Franklin Aggressive Growth Fund,
and Franklin Advisers, Inc.
Filing: Post-Effective Amendment No. 33 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: April 9, 1999
(7) Copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies
of all agreements between principal underwriters and dealers;
(i) Amended and Restated Distribution Agreement between
Registrant, on behalf of all Series except Franklin
Strategic Income Fund, and Franklin/Templeton Distributors,
Inc., dated April 23, 1995
Filing: Post-Effective Amendment No. 14 to
Registration Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Amended and Restated Distribution Agreement between the
Registrant, on behalf of Franklin Strategic Income Fund,
and Franklin Templeton Distributors, Inc., dated March 29,
1995
Filing: Post-Effective Amendment No. 14 to
Registration Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iii) Form of Dealer Agreement between Franklin/Templeton
Distributors, Inc., and Securities Dealers dated March 1,
1998
Filing: Post-Effective Amendment No. 30 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: December 23, 1998
(8) Copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
directors or officers of the Registrant in their capacity as
such; any such plan that is not set forth in a formal document,
furnish a reasonably detailed description thereof;
Not Applicable
(9) Copies of all custodian agreements and depository contracts under
Section 17(f) of the 1940 Act, with respect to securities and
similar investments of the Registrant, including the schedule of
remuneration;
(i) Master Custody Agreement between the Registrant and Bank of
New York dated February 16, 1996
Filing: Post-Effective Amendment No. 19 to
Registration Statement on Form N-1A
File No. 33-39088
Filing Date: March 14, 1996
(ii) Terminal Link Agreement between the Registrant and Bank of
New York dated February 16, 1996
Filing: Post-Effective Amendment No. 19 to
Registration Statement on Form N-1A
File No. 33-39088
Filing Date: March 14, 1996
(iii) Amendment dated May 7, 1997 to Master Custody Agreement
between Registrant and Bank of New York dated February 16,
1996
Filing: Post-Effective Amendment No. 27 to
Registration Statement on Form N-1A
File No. 33-39088
Filing Date: March 13, 1998
(iv) Amendment dated February 27, 1998 to Master Custody
Agreement between Registrant and Bank of New York dated
February 16,1996
Filing: Post-Effective Amendment No.30 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: December 23, 1998
(v) Foreign Custody Agreement between the Registrant and The
Bank of New York dated February 27, 1998
Filing: Post-Effective Amendment No. 30 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: December 23, 1998
(10) Copies of any plan entered into by Registrant pursuant to Rule
12b-1 under the 1940 Act, which describes all material aspects of
the financing of distribution of Registrant's shares, and any
agreements with any person relating to implementation of such
plan.
(i) Amended and Restated Distribution Plan between the
Registrant, on behalf of Franklin California Growth Fund,
Franklin Small Cap Growth Fund, Franklin Global Health Care
Fund and Franklin Global Utilities Fund, and
Franklin/Templeton Distributors, Inc., dated July 1, 1993
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Distribution Plan between the Registrant, on behalf of
Franklin Global Utilities Fund - Class II, and
Franklin/Templeton Distributors, Inc., dated March 30, 1995
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of the Franklin Strategic Income
Fund, and Franklin/Templeton Distributors, Inc., dated May
24, 1994
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iv) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of the Franklin Natural Resources
Fund, and Franklin/Templeton Distributors, Inc., dated June
1, 1995
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(v) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of the Franklin MidCap Growth Fund,
and Franklin/Templeton Distributors, Inc., dated June 1,
1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 7, 1996
(vi) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of the Franklin Blue Chip Fund, and
Franklin/Templeton Distributors, Inc., dated May 28, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 7, 1996
(vii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Small Cap Growth Fund -
Class II, and Franklin/Templeton Distributors, Inc., dated
September 29, 1995
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 7, 1996
(viii)Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Biotechnology Discovery
Fund and Franklin/Templeton Distributors, Inc., dated
September 15, 1997
Filing: Post-Effective Amendment No. 27 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 13, 1998
(ix) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin California Growth Fund -
Class II and Franklin Global Health Care Fund - Class II,
and Franklin/Templeton Distributors, Inc., dated September
3, 1996
Filing: Post-Effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 29, 1997
(x) Distribution Plan pursuant to Rule 12b-1 between Registrant
on behalf of Franklin Strategic Income Fund - Class II, and
Franklin/Templeton Distributors, Inc. dated February 26,
1998
Filing: Post-Effective Amendment No. 28 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: April 21, 1998
(xi) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of California Growth Fund - Class B
and Franklin/Templeton Distributors, Inc. dated October 16,
1998
Filing: Post-Effective Amendment No. 33 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 24, 1999
(xii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of Franklin Global Health Care Fund -
Class B and Franklin/Templeton Distributors, Inc. dated
October 16, 1998
Filing: Post-Effective Amendment No. 33 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 24, 1999
(xiii)Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of Franklin Global Utilities Fund -
Class B and Franklin/Templeton Distributors, Inc. dated
October 16, 1998
Filing: Post-Effective Amendment No. 33 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 24, 1999
(xiv) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of Franklin Strategic Income Fund -
Class B and Franklin/Templeton Distributors, Inc. dated
October 16, 1998
Filing: Post-Effective Amendment No. 33 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 24, 1999
(11) Legal opinion of Stradley, Ronon, Stevens & Young LLP, counsel to
the Registrant, as to the legality of the securities being
registered, is incorporated herein by reference to Post-Effective
Amendment No. 31 to Registrant's Registration Statement on Form
N-1A (File Nos. 33-39088, 811-6243) as filed electronically with
the Commission on March 11, 1999.
(12) An opinion, and consent to its use, of counsel, supporting the
tax matters and consequences to shareholders discussed in the
prospectus.
(i) Form of Opinion and Consent of Counsel Supporting Tax Matters
and Consequences to Shareholders
(13) Copies of all other material contracts not made in the ordinary
course of business which are to be performed in whole or in part
at or after the date of filing the Registration Statement:
(i) Subcontract for Fund Administrative Services dated October
1, 1996 and Amendment thereto dated April 30, 1998 between
Franklin Advisers, Inc. and Franklin Templeton Services,
Inc.
Filing: Post-Effective Amendment No. 30 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: December 23, 1998
(ii) Administration Agreement between the Registrant, on behalf
of Franklin Biotechnology Discovery Fund, and Franklin
Templeton Services, Inc., dated July 15, 1997
Filing: Post-Effective Amendment No. 25 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 22, 1997
(iii) Fund Administration Agreement between the Registrant, on
behalf of Franklin U.S. Long-Short Fund, and Franklin
Templeton Services, Inc. dated February 18, 1999
Filing: Post-Effective Amendment No. 31 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 11, 1999
(iv) Form of Fund Administration Agreement between the
Registrant, on behalf of Franklin Large Cap Growth Fund,
and Franklin Templeton Services, Inc.
Filing: Post-Effective Amendment No. 32 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 24, 1999
(v) Form of Fund Administration Agreement between the
Registrant, on behalf of Franklin Aggressive Growth Fund,
and Franklin Templeton Services, Inc.
Filing: Post-Effective Amendment No. 33 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: April 9, 1999
(14) Copies of any other opinions, appraisals or rulings, and consents
to their use relied on in preparing the registration statement
and required by Section 7 of the 1933 Act.
(i) Consent of PricewaterhouseCoopers, LLP, independent
auditors of Franklin Strategic Series
(ii) Consent of Tait, Weller & Baker, independent auditors of
Franklin Managed Trust
(15) All financial statements omitted from Item 14(a)(1):
Not Applicable
(16) (i) Power of Attorney for Franklin Strategic Series dated April
16, 1998
Filing: Post-Effective Amendment No. 28 to
Registration Statement on Form N-1A
File No. 33-39088
Filing Date: April 21, 1998
(ii) Certificate of Secretary for Franklin Strategic Series
dated April 16, 1998
Filing: Post-Effective Amendment No. 28 to
Registration Statement on Form N-1A
File No. 33-39088
Filing Date: April 21, 1998
(iii) Power of Attorney for Franklin Strategic Series dated
February 18, 1999
(iv) Certificate of Secretary for Franklin Strategic Series
dated February 18, 1999
(17) Any additional exhibits which the Registrant may wish to file:
None
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 a 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, 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 a 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 1933 Act, each Post-Effective Amendment
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
for them.
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement
has been signed on behalf of the Registrant, in the City of San Mateo, and
the State of California, on the 28th day of April, 1999.
Franklin Strategic Series
(Registrant)
By: RUPERT H. JOHNSON, JR.
Rupert H. Johnson, Jr.
President
As required by the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
RUPERT H. JOHNSON, JR.* Principal Executive Officer
Rupert H. Johnson, Jr. and Trustee
Dated: April 28, 1999
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: April 28, 1999
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: April 28, 1999
FRANK H. ABBOTT, III* Trustee
Frank H. Abbott, III Dated: April 28, 1999
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: April 28, 1999
HARMON E. BURNS* Trustee
Harmon E. Burns Dated: April 28, 1999
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: April 28, 1999
EDITH E. HOLIDAY* Trustee
Edith E. Holiday Dated: April 28, 1999
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: April 28, 1999
FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: April 28, 1999
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: April 28, 1999
*By /s/ Karen L. Skidmore
Attorney-in-Fact
(Pursuant to Power of Attorney previously filed)
EXHIBIT INDEX
EXHIBIT NO. DOCUMENT
EX-12(i) Form of Opinion and Consent of Counsel Supporting
Tax Matters and Consequences to Shareholders
EX-14(i) Consent of Auditors, PricewaterhouseCoopers, LLP
EX-14(ii) Consent of Auditors, Tait, Weller & Baker
EX-16(iii) Power of Attorney for Franklin Strategic Series
EX-16(iv) Certificate of Secretary for Franklin Strategic Series
, 1999
Board of Trustees
Franklin Managed Trust
777 Mariners Island Blvd.
San Mateo, CA 94404
Board of Trustees
Franklin Strategic Series
777 Mariners Island Blvd.
San Mateo, CA 94404
Re: AGREEMENT AND PLAN OF REORGANIZATION, DATED AS OF THE ND
DAY OF _____________, 1999 (THE "AGREEMENT"), BY AND BETWEEN
FRANKLIN MANAGED TRUST, A MASSACHUSETTS BUSINESS TRUST, ON BEHALF
OF ITS SERIES FRANKLIN INVESTMENT GRADE FUND ("ACQUIRED FUND")
AND FRANKLIN STRATEGIC SERIES, A DELAWARE BUSINESS TRUST ON
BEHALF OF ITS SERIES FRANKLIN STRATEGIC INCOME FUND ("ACQUIRING
FUND")
Ladies and Gentlemen:
You have requested our opinion as to certain federal income tax
consequences of the reorganization of Acquired Fund which will consist of (i)
the acquisition by the Acquiring Fund of substantially all of the property,
assets and goodwill of the Acquired Fund in exchange solely for shares of
common stock, $0.01 par value, of the Acquiring Fund - Class A ("Acquiring
Fund Class A Shares") and shares of common stock, $0.01 par value, of the
Acquiring Fund - Advisor Class ("Acquiring Advisor Class Shares")
(collectively "Acquiring Fund Shares"), (ii) the distribution of (a)
Acquiring Fund Class A Shares to the shareholders of Class A shares of common
stock of the Acquired Fund; and (b) Acquiring Fund Advisor Class Shares to
the shareholders of Advisor Class shares of common stock of the Acquired
Fund, according to their respective interests, and (iii) the subsequent
dissolution of the Acquired Fund as soon as practicable after the closing
(the "Reorganization"), all upon and subject to the terms and conditions of
the Agreement.
In rendering our opinion, we have reviewed and relied upon (a)
the Agreement and Plan of Reorganization, dated as of the nd day
of , 1999, by and between the Acquiring Fund and the
Acquired Fund ("Agreement"), (b) the proxy materials provided to stockholders
of the Acquired Fund in connection with the Special Meeting of Stockholders
of the Acquired Fund held on , 1999, (c) certain
representations concerning the Reorganization made to us by the Acquiring
Fund and the Acquired Fund in a letter
dated ____________, 1999 (the
"Representation Letter"), (d) all other documents, financial and other
reports and corporate minutes which we deemed relevant or appropriate, and
(e) such statutes, regulations, rulings and decisions as we deemed material
to the rendition of this opinion. All terms used herein, unless otherwise
defined, are used as defined in the Agreement.
For purposes of this opinion, we have assumed that the Acquired
Fund on the effective date of the Reorganization satisfies, and following the
Reorganization, the Acquiring Fund will continue to satisfy, the requirements
of subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), for qualification as a regulated investment company.
Under regulations to be prescribed by the Secretary of Treasury
under Section 1276(d) of the Code, certain transfers of market discount bonds
will be excepted from the requirement that accrued market discount be
recognized on disposition of a market discount bond under Section 1276(a) of
the Code. Such regulations are to provide, in part, that accrued market
discount will not be included in income if no gain is recognized under
Section 361(a) of the Code where a bond is transferred in an exchange
qualifying as a tax-free reorganization. As of the date hereof, the
Secretary has not issued any regulations under Section 1276 of the Code.
Based on the foregoing and provided the Reorganization is carried
out in accordance with the applicable laws of the Commonwealth of
Massachusetts and the State of Delaware, the Agreement and the Representation
Letter, it is our opinion that:
1. The Reorganization will constitute a tax-free
reorganization within the meaning of Section 368(a)(1)(C) of the Code, and
Acquired Fund and Acquiring Fund will each be a party to the reorganization
within the meaning of Section 368(b) of the Code.
2. No gain or loss will be recognized by Acquired Fund upon
the transfer of all of its assets to Acquiring Fund in exchange solely for
Acquiring Fund Shares pursuant to Section 361(a) and Section 357(a) of the
Code. We express no opinion as to whether any accrued market discount will
be required to be recognized as ordinary income pursuant to Section 1276 of
the Code.
3. No gain or loss will be recognized by Acquiring Fund upon
the receipt by it of all of the assets of Acquired Fund in exchange solely
for Acquiring Fund Shares pursuant to Section 1032(a) of the Code.
4. The basis of the assets of Acquired Fund received by
Acquiring Fund will be the same as the basis of such assets to Acquired Fund
immediately prior to the exchange pursuant to Section 362(b) of the Code.
5. The holding period of the assets of Acquired Fund received
by Acquiring Fund will include the period during which such assets were held
by Acquired Fund pursuant to Section 1223(2) of the Code.
6. No gain or loss will be recognized by the stockholders of
Acquired Fund upon the exchange of their Acquired Fund Shares for Acquiring
Fund Shares (including fractional shares to which they may be entitled),
pursuant to Section 354(a) of the Code.
7. The basis of the Acquiring Fund Shares received by the
stockholders of Acquired Fund (including fractional shares to which they may
be entitled) will be the same as the basis of the Acquired Fund Shares
exchanged therefor pursuant to Section 358(a)(1) of the Code.
8. The holding period of the Acquiring Fund Shares received by
the stockholders of Acquired Fund (including fractional shares to which they
may be entitled) will include the holding period of the Acquired Fund Shares
surrendered in exchange therefor, provided that the Acquired Fund Shares were
held as a capital asset on the effective date of the Reorganization, pursuant
to Section 1223(1) of the Code.
9. Acquiring Fund will succeed to and take into account as of
the date of the proposed transfer (as defined in Section 1.381(b)-1(b) of the
Income Tax Regulations) the items of Acquired Fund described in Section
381(c) of the Code, subject to the conditions and limitations specified in
Sections 381(b) and (c), 382, 383 and 384 of the Code.
Our opinion is based upon the Code, the applicable Treasury
Regulations promulgated thereunder, the present position of the Internal
Revenue Service as set forth in published revenue rulings and revenue
procedures, present administrative positions of the Internal Revenue Service,
and existing judicial decisions, all of which are subject to change either
prospectively or retroactively. We do not undertake to make any continuing
analysis of the facts or relevant law following the date of this letter.
Our opinion is conditioned upon the performance by Acquiring Fund
and Acquired Fund of their undertakings in the Agreement and the
Representation Letter.
This opinion is being rendered to Acquiring Fund and Acquired
Fund and may be relied upon only by such funds and the stockholders of each.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
By:
William P. Zimmerman, a Partner
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement of
Franklin Strategic Series on Form N-14 of our report dated June 4, 1998 on
our audit of the financial statements and financial highlights of Franklin
Strategic Series, which report is included in the Annual Report to
Shareholders for the year ended April 30 1998 filed with the Securities and
Exchange Commission pursuant to section 30(d) of the Investment Company Act
of 1940, which is included in the Registration Statement.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Francisco, California
April 28, 1999
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement of Franklin Strategic Series on Form N-14 File No. 811-6243 of our
report dated November 5, 1998 on the financial statements and financial
highlights of Franklin Managed Trust which report is included in the Annual
Report to Shareholders for the year ended September 30, 1998, which is
incorporated by reference in the Registration Statement. We also consent to
the references to our Firm in such Registration Statement.
/s/TAIT, WELLER & BAKER
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
April 27, 1999
POWER OF ATTORNEY
The undersigned officers and trustees of FRANKLIN STRATEGIC SERIES
hereby appoint MARK H. PLAFKER, HARMON E. BURNS, DEBORAH R. GATZEK, LARRY L.
GREENE and KAREN L. SKIDMORE (with full power to each of them to act alone)
his attorney-in-fact and agent, in all capacities, to execute, file or
withdraw any of the documents referred to below 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 18th day of February, 1999.
/s/Rupert H. Johnson, Jr.* /s/Frank H. Abbott*
Rupert H. Johnson, Jr., Frank H. Abbott,
Principal Executive Officer Trustee
and Trustee
/s/Harris J. Ashton* /s/Harmon E. Burns*
Harris J. Ashton, Harmon E. Burns,
Trustee Trustee
/s/S. Joseph Fortunato* /s/Edith E. Holiday*
S. Joseph Fortunato, Edith E. Holiday,
Trustee Trustee
/s/Charles B. Johnson* /s/Frank W.T. LaHaye*
Charles B. Johnson, Frank W.T. LaHaye,
Trustee Trustee
/s/Gordon S. Macklin* /s/Martin L. Flanagan*
Gordon S. Macklin, Martin L. Flanagan,
Trustee Principal Financial Officer
/s/Diomedes Loo-Tam*
Diomedes Loo-Tam,
Principal Accounting Officer
CERTIFICATE OF SECRETARY
I, Deborah R. Gatzek, certify that I am Secretary of FRANKLIN STRATEGIC
SERIES (the "Trust").
As Secretary of the Trust, I further certify that the following resolution
was adopted by a majority of the Trustees of the Trust present at a meeting
held at 777 Mariners Island Boulevard, San Mateo, California 94404, on
February 18, 1999.
RESOLVED, that a Power of Attorney, substantially in the form of
the Power of Attorney presented to this Board, appointing Harmon
E. Burns, Deborah R. Gatzek, Mark H. Plafker, Karen L. Skidmore,
and Larry L. Greene as attorneys-in-fact for the purpose of
filing such registration statement on Form N-14 in connection
with the Reorganization, be executed by each Trustee and
designated officer.
I declare under penalty of perjury that the matters set forth in this
certificate are true and correct of my own knowledge.
Dated: March 16, 1999 /s/ Deborah R. Gatzek
Deborah R. Gatzek
Secretary