-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WV73lvaY5ng6HLHKucwAhX9jGxxney2VyMslwyEmFfh69JS2ir96RB0GGulFfebq UH7nj3YAafX8lAESPpejpQ== 0000872625-95-000030.txt : 19951206 0000872625-95-000030.hdr.sgml : 19951206 ACCESSION NUMBER: 0000872625-95-000030 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19951205 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN STRATEGIC SERIES CENTRAL INDEX KEY: 0000872625 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-39088 FILM NUMBER: 95599142 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-06243 FILM NUMBER: 95599143 BUSINESS ADDRESS: STREET 1: 777 MARINERS ISLAND BLVD CITY: SAN MATEO STATE: CA ZIP: 94404 BUSINESS PHONE: 4155703000 MAIL ADDRESS: STREET 1: 777 MARINERS ISLAND BLVD CITY: SAN MATEO STATE: CA ZIP: 94404 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN CALIFORNIA 250 GROWTH FUND DATE OF NAME CHANGE: 19911216 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN CALIFORNIA 250 GROWTH INDEX FUND DATE OF NAME CHANGE: 19910917 485APOS 1 As filed with the Securities and Exchange Commission on December 5, 4995 File Nos. 33-39088 811-6243 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Pre-Effective Amendment No. Post-Effective Amendment No. 17 (X) and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 20 (X) FRANKLIN STRATEGIC SERIES (Exact Name of Registrant as Specified in Charter) 777 MARINERS ISLAND BOULEVARD, SAN MATEO, CA 94404 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (415) 312-2000 Harmon E. Burns, 777 Mariners Island Blvd., San Mateo, CA 94404 (Name and Address of Agent for Service of Process) Approximate Date of Proposed Public Offering: It is proposed that this filing will become effective (check appropriate box) [ ] immediately upon filing pursuant to paragraph (b) [ ] on (date) pursuant to paragraph (b) [ ] 60 days after filing pursuant to paragraph (a)(i) [ ] on (date) pursuant to paragraph (a)(i) [ ] 75 days after filing pursuant to paragraph (a)(ii) [x] on February 5, 1996 pursuant to paragraph (a)(ii) of rule 485 If appropriate, check the following box: [ ] This post-effective amendment designates a new effective date for a previously filed post-effective amendment. Declaration Pursuant to Rule 24f-2. The issuer has registered an indefinite number or amount of securities under the Securities Act of 1933 pursuant to Section 24f-2 under the Investment Company Act of 1940. The Rule 24f-2 Notice for the issuer's most recent fiscal year was filed on June 27, 1995. FRANKLIN STRATEGIC SERIES CROSS REFERENCE SHEET FORM N-1A Part A: Information Required in the Prospectus (Franklin Natural Resources Fund) N-1A Location in Item No. Item Registration Statement 1. Cover Page Cover Page 2. Synopsis Expense Table 3. Condensed Financial "Financial Highlights -How Has Information the Fund Performed"; "Performance" 4. General Description "About the Fund"; "Investment Objective and Policies of the Fund"; "General Information" 5. Management of the Fund "Management of the Fund"; "Portfolio Operations" 5A. Management's Discussion of Contained in Registrant's Fund Performance Annual Report to Shareholders 6. Capital Stock and Other "Distributions to Securities Shareholders"; "Taxation of the Fund and Its Shareholders"; "General Information" 7. Purchase of Securities Being "How to Buy Shares of the Offered Fund"; "Purchasing Shares of the Fund in Connection with Retirement Plans Involving Tax-Deferred Investments"; "Other Programs and Privileges Available to Fund Shareholders"; "Exchange Privilege"; "Telephone Transactions"; "Valuation of Fund Shares" 8. Redemption or Repurchase "Exchange Privilege"; "How to Sell Shares of the Fund"; "Telephone Transactions"; "How to Get Information Regarding an Investment in the Fund" 9. Pending Legal Proceedings Not Applicable FRANKLIN STRATEGIC SERIES CROSS REFERENCE SHEET FORM N-1A Part B: Information Required in the Statement of Additional Information (Franklin Natural Resources Fund) N-1A Location in Item No. Item Registration Statement 10. Cover Page Cover Page 11. Table of Contents Contents 12. General Information and Cover Page; About the Fund (see History also the Prospectus "About the Fund"; "General Information" 13. Investment Objectives and "The Fund's Investment Objective Policies and Restrictions" (See also the Prospectus "Investment Objective and Policies of the Fund") 14. Management of the Fund "Officers and Trustees" 15. Control Persons and "Officers and Trustees" Principal Holders of Securities 16. Investment Advisory and "Investment Advisory and Other Other Services Services" (See also the Prospectus "Management of the Fund") 17. Brokerage Allocation "The Fund's Policies Regarding Brokers Used on Portfolio Transactions" 18. Capital Stock and Other See "General Information" and Securities "About the Fund" in the Prospectus 19. Purchase, Redemption and "Additional Information Pricing of Securities Regarding Fund Shares" (See also the Prospectus "How to Buy Shares of the Fund", "How to Sell Shares of the Fund", "Valuation of Fund Shares") 20. Tax Status "Additional Information Regarding Taxation" 21. Underwriters "The Fund's Underwriter" 22. Calculation of Performance "General Information" Data 23. Financial Statements "Financial Statements" SUPPLEMENT DATED February 5, 1996 TO THE PROSPECTUS FOR FRANKLIN NATURAL RESOURCES FUND DATED JUNE 5, 1995 The following information amends and supplements the information set forth in the Prospectus dated June 5, 1995. THE TABLE AND ACCOMPANYING MATTERS DISCUSSED UNDER "FINANCIAL HIGHLIGHTS" ARE REVISED TO READ AS FOLLOWS: FINANCIAL HIGHLIGHTS - HOW HAS THE FUND PERFORMED? Set forth below is a table containing financial highlights for a share outstanding throughout the period beginning June 5, 1995, the Fund's commencement date, and ending October 31, 1995. The information is unaudited. JUNE 5, 1995 TO OCTOBER 31, 1995 PER SHARE OPERATING PERFORMANCE (UNAUDITED) Net asset value at beginning of period $10.00 Net investment income .04 Net realized and unrealized gains(losses) on securities (.150) Total from investment operations (.110) Less distributions: Distributions from net investment income - Distributions from realized capital gains - Total distributions - Net asset value at end of period $ 9.89 ------ TOTAL RETURN* (1.10)% ------- RATIOS AND SUPPLEMENTAL DATA Net assets at end of period(in 000's) $3,578 Ratio of expenses to average net assets*** .98%** Ratio of net investment income to average net 1.59%** assets Portfolio turnover rate 16.54% *Total return measures the change in value of an investment over the period indicated. It does not include the maximum front-end sales charge or the deferred contingent sales charge. It assumes reinvestment of dividends and capital gains at net asset value and is not annualized. **Annualized *** During the periods indicated, Franklin Advisers, Inc., the investment manager, agreed in advance to waive a portion of its management fees and made payments of other expenses incurred by the Fund. Had such action not been taken, the ratios of operating expenses to average net assets would have been as follows: FRANKLIN NATURAL RESOURCES FUND 1995 1.62** THE FOLLOWING PARAGRAPH REPLACES THE THIRD PARAGRAPH UNDER "MANAGEMENT OF THE FUND" REGARDING SUPERVISION AND IMPLEMENTATION OF THE FUND'S INVESTMENT ACTIVITIES: Pursuant to a management agreement, the Manager supervises and implements the Fund's investment activities and provides certain administrative services and facilities which are necessary to conduct the Fund's business. The Manager performs similar services for other funds and there may be times when the actions taken with respect to the Fund's portfolio will differ from those taken by the Manager on behalf of other funds. Neither the Manager (including its affiliates) nor its officers, directors or employees nor the officers and trustees of the Fund are prohibited from investing in securities held by the Fund or other funds which are managed or administered by the Manager to the extent such transactions comply with the Fund's Code of Ethics. Please see "Investment Advisory and Other Services" and "General Information" in the SAI for further information on securities transactions and a summary of the Fund's Code of Ethics. SUPPLEMENT DATED February 5, 1996 TO THE STATEMENT OF ADDITIONAL INFORMATION OF FRANKLIN NATURAL RESOURCES FUND DATED JUNE 5, 1995 The following information amends and supplements the information set forth in the Statement of Additional Information ("SAI") dated June 5, 1995. THE LAST PARAGRAPH OF THE SECTION "OFFICERS AND TRUSTEES" REGARDING PRINCIPAL SHAREHOLDERS OF THE FUND HAS BEEN UPDATED AND MOVED TO THE SUBSECTION "MISCELLANEOUS INFORMATION" UNDER "GENERAL INFORMATION". ADD THE FOLLOWING AS THE LAST PARAGRAPH IN THE SECTION "OFFICERS AND TRUSTEES": As of November 3, 1995, the officers and trustees, as a group, owned of record and beneficially approximately 81.912 shares, or less than 1% of the total outstanding shares of the Fund. Many of the Fund's trustees also own shares in various of the other funds in the Franklin Templeton Group of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. THE FOLLOWING PARAGRAPH REPLACES THE SECOND PARAGRAPH UNDER "INVESTMENT ADVISORY AND OTHER SERVICES": The Manager also provides management services to numerous other investment companies or funds pursuant to management agreements with each fund. The Manager may give advice and take action with respect to any of the other funds it manages, or for its own account, which may differ from action taken by the Manager on behalf of the Fund. Similarly, with respect to the Fund, the Manager is not obligated to recommend, purchase or sell, or to refrain from recommending, purchasing or selling any security that the Manager and access persons, as defined by the 1940 Act, may purchase or sell for its or their own account or for the accounts of any other fund. Furthermore, the Manager is not obligated to refrain from investing in securities held by the Fund or other funds which it manages or administers. Of course, any transactions for the accounts of the Manager and other access persons will be made in compliance with the Fund's Code of Ethics. THE FOLLOWING REPLACES THE SUBSECTIONS "TOTAL RETURN", "YIELD" AND "MISCELLANEOUS INFORMATION" UNDER "GENERAL INFORMATION": TOTAL RETURN The average annual total return is determined by finding the average annual compounded rates of return over one-, five- and ten-year periods, or fractional portion thereof, that would equate an initial hypothetical $1,000 investment to its ending redeemable value. The calculation assumes the maximum front-end sales charge is deducted from the initial $1,000 purchase order, and income dividends and capital gains are reinvested at net asset value. The quotation assumes the account was completely redeemed at the end of each one-, five- and ten-year period and the deduction of all applicable charges and fees. If a change is made on the sales charge structure, historical performance information will be restated to reflect the maximum front-end sales charge in effect currently. In considering the quotations of total return by the Fund, investors should remember that the maximum front-end sales charge reflected in each quotation is a one time fee (charged on all direct purchases) which will have its greatest impact during the early stages of an investor's investment in the Fund. The actual performance of an investment will be affected less by this charge the longer an investor retains the investment in the Fund. 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 the one-, five- or ten-year periods at the end of the one-, five- or ten-year periods (or fractional portion thereof) As discussed in the Prospectus, the Fund may quote total rates of return in addition to its average annual total return. Such quotations are computed in the same manner as the Fund's average annual compounded rate, except that such quotations will be based on the Fund's actual return for a specified period rather than on its average return over one-,five- and ten-year periods, or fractional portion thereof. The total rate of return for the Fund for the period June 5, 1995 to October 31, 1995 was -1.10%. YIELD Current yield reflects the income per share earned by the Fund's portfolio investments. Current yield is determined by dividing the net investment income per share earned during a 30-day base period by the maximum offering price per share on the last day of the period and annualizing the result. Expenses accrued for the period include any fees charged to all shareholders during the base period. The yield for the Fund for the 30-day period ended on October 31, 1995 was 1.46%. This figure was 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 MISCELLANEOUS INFORMATION The Fund is a member of the Franklin Templeton Group of Funds, one of the largest mutual fund organizations in the United States, and may be considered in a program for diversification of assets. Founded in 1947, Franklin, one of the oldest mutual fund organizations, has managed mutual funds for over 48 years and now services more than 2.5 million shareholder accounts. In 1992, Franklin, a leader in managing fixed-income mutual funds and an innovator in creating domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer in international investing. Together, the Franklin Templeton Group of Funds has over $130 billion in assets under management for more than 3.9 million U.S. based mutual fund shareholders and other accounts. The Franklin Group of Funds and the Templeton Group of Funds offers to the public 114 U.S. based mutual funds. The Fund may identify itself by its NASDAQ or CUSIP number. The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in service quality for five of the past seven years. As of November 3, 1995, the principal shareholders of the Fund, beneficial or of record, their addresses and the amount of their share ownership were as follows: Shareholder Share Amount Percentage Franklin Resources, Inc. 777 Mariner Island Blvd. San Mateo, CA 94404 100,000.000 27.63% Robert Tour-Ru Wen 8F NO 87 SEC 4 Chung-Hsiao E RD Taipei, Taiwan 67,251.462 18.58% Rauscher Pierce Refsnes FBO John M O'Quinn Separate Property Equity Acct. 440 Louisiana 2300 Lyric Center Houston, Texas 77002 47,036.689 13.00% 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. Access persons of the Franklin Templeton Group, as defined in SEC Rule 17(j) under the 1940 Act, who are employees of Resources or its subsidiaries, are permitted to engage in personal securities transactions subject to the following general restrictions and procedures: (1) The trade must receive advance clearance from a Compliance Officer and must be completed within 24 hours after this clearance; (2) Copies of all brokerage confirmations must be sent to the Compliance Officer and within 10 days after the end of each calendar quarter, a report of all securities transactions must be provided to the Compliance Officer; (3) In addition to items (1) and (2), access persons involved in preparing and making investment decisions must file annual reports of their securities holdings each January and also inform the Compliance Officer (or other designated personnel) if they own a security that is being considered for a fund or other client transaction or if they are recommending a security in which they have an ownership interest for purchase or sale by a fund or other client. ADD THE FOLLOWING AS THE LAST SECTION IN THE SAI. FINANCIAL STATEMENTS The unaudited financial statements of the Fund for the period June 5, 1995 to October 31, 1995, are incorporated herein by reference. FRANKLIN NATURAL RESOURCES FUND FRANKLIN STRATEGIC SERIES PROSPECTUS JUNE 5, 1995 777 MARINERS ISLAND BLVD., P.O. BOX 7777 SAN MATEO, CA 94403-7777 1-800/DIAL BEN Franklin Natural Resources Fund (the "Fund"), is an open-end, non-diversified series of Franklin Strategic Series (the "Trust"), a management investment company. The Fund's investment objective is to seek to provide high total return. The Fund seeks to achieve its objective by investing at least 65% of its total assets in securities of companies that own, produce, refine, process and market natural resources, as well as those that provide support services for natural resources companies (i.e., those that develop technologies or provide services or supplies directly related to the production of natural resources). These companies are concentrated in the natural resources sector which includes, but is not limited to, the following industries: Integrated oil; oil and gas exploration and production; gold and precious metals; steel and iron ore production; aluminum production; forest products; farming products; paper products; chemicals; building materials; energy services and technology; and environmental services. The Fund may also invest in securities of issuers outside the U.S. This Prospectus is intended to set forth in a clear and concise manner information about the Fund that a prospective investor should know before investing. After reading the Prospectus, it should be retained for future reference; it contains information about the purchase and sale of shares and other items which a prospective investor will find useful to have. SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. A Statement of Additional Information (the "SAI") concerning the Fund, dated June 5, 1995, as may be amended from time to time, provides a further discussion of certain areas in this Prospectus and other matters which may be of interest to some investors. It has been filed with the Securities and Exchange Commission ("SEC") and is incorporated herein by reference. A copy is available without charge from the Fund or the Fund's principal underwriter, Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or telephone number shown above. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY STATE IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM THE UNDERWRITER. CONTENTS PAGE Expense Table About the Fund Investment Objective and Policies of the Fund Management of the Fund Distributions to Shareholders Taxation of the Fund and Its Shareholders How to Buy Shares of the Fund Purchasing Shares of the Fund in Connection with Retirement Plans Involving Tax-Deferred Investments Other Programs and Privileges Available to Fund Shareholders Exchange Privilege How to Sell Shares of the Fund Telephone Transactions Valuation of Fund Shares How to Get Information Regarding an Investment in the Fund Performance General Information Account Registrations Important Notice Regarding Taxpayer IRS Certifications Portfolio Operations Appendix EXPENSE TABLE The purpose of this table is to assist an investor in understanding the various costs and expenses that a shareholder will bear directly or indirectly in connection with an investment in the Fund. The figures are based on annualized management fees and Rule 12b-1 fees set by contract and on annualized estimates of the other operating expenses of the Fund for the current fiscal year. SHAREHOLDER TRANSACTION EXPENSES Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) 4.50% Deferred Sales Charge NONE Exchange Fee (per transaction) $5.00** ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets) Management Fees 0.24%+ Rule 12b-1 Fees 0.35%++ Other Expenses: Reports to Shareholders 0.10% Registration Fees 0.10% Other 0.21% Total Other Expenses 0.41% Total Fund Operating Expenses 1.00%+ *Investments of $1 million or more are not subject to a front-end sales charge; however, a contingent deferred sales charge of 1% is generally imposed on certain redemptions within a "contingency period" of 12 months of the calendar month following such investments. See "How to Sell Shares of the Fund - Contingent Deferred Sales Charge." **$5.00 fee imposed only on Timing Accounts as described under "Exchange Privilege." All other exchanges are processed without a fee. +The investment manager voluntarily agreed to reduce its management fees and assume responsibility for payment of certain operating expenses in order to keep the Fund's aggregate maximum annual operating expenses to 1.00% of the Fund's average daily net assets for the current fiscal year. Absent this reduction by the investment manager, management fees and total operating expenses for the Fund would be 0.63% and 1.39%, respectively, of the average daily net assets of the Fund. After April 30, 1996, the investment manager may terminate this arrangement at any time. ++Consistent with National Association of Securities Dealers, Inc.'s rules, it is possible that the combination of front-end sales charges and Rule 12b-1 fees could cause long-term shareholders to pay more than the economic equivalent of the maximum front-end sales charges permitted under those same rules. Investors should be aware that the above table is not intended to reflect in precise detail the fees and expenses associated with an individual's own investment in the Fund. Rather the table has been provided only to assist investors in gaining a more complete understanding of fees, charges and expenses. For a more detailed discussion of these matters, investors should refer to the appropriate sections of this Prospectus. EXAMPLE As required by SEC regulations, the following example illustrates the expenses, including the maximum front-end sales charge and applicable contingent deferred sales charge, that apply to a $1,000 investment in the Fund over various time periods assuming (1) a 5% annual rate of return and (2) redemption at the end of each time period. ONE YEAR* THREE YEARS $65 $75 *For the purposes of this example, it is assumed that the 1% contingent deferred sales charge will not apply. THIS EXAMPLE IS BASED ON THE OPERATING EXPENSES SHOWN ABOVE, INCLUDING FEES SET BY CONTRACT, AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE SHOWN. The operating expenses are borne by the Fund and only indirectly by shareholders as a result of their investment in the Fund. (See "Management of the Fund" for a description of the Fund's expenses.) In addition, federal securities regulations require the example to assume an annual return of 5%, but the Fund's actual return may be more or less than 5%. ABOUT THE FUND Franklin Natural Resources Fund (the "Fund") is an open-end, non-diversified series of Franklin Strategic Series (the "Trust"), a management investment company, commonly called a "mutual fund." The Trust, a Delaware business trust, was organized on January 25, 1991 and has registered under the Investment Company Act of 1940 (the "1940 Act"). Shares of the Fund may be purchased (minimum investment of $100 initially and $25 thereafter) at the current public offering price, which is equal to the Fund's net asset value (see "Valuation of Fund Shares") plus a sales charge not exceeding 4.5% of the offering price. See "How to Buy Shares of the Fund." INVESTMENT OBJECTIVE AND POLICIES OF THE FUND The Fund's investment objective is to seek to provide high total return, by investing at least 65% of its total assets in securities issued by companies which own, produce, refine, process and market natural resources, as well as those that provide support services for natural resources companies (i.e., those that develop technologies or provide services or supplies directly related to the production of natural resources). These companies are concentrated in the natural resources sector which includes, but is not limited to, the following industries: Integrated oil; oil and gas exploration and production; gold and precious metals; steel and iron ore production; aluminum production; forest products; farming products; paper products; chemicals; building materials; energy services and technology; and environmental services. The Fund's total return consists of both capital appreciation and current dividend and interest income. The objective is a fundamental policy of the Fund and may not be changed without shareholder approval. The Fund at all times, except during temporary defensive periods, seeks to maintain at least 65% of its total assets invested in securities issued by companies in the natural resources sector. The Fund reserves the right to hold, as a temporary defensive measure or as a reserve for redemptions, short-term U.S. government securities, high quality money market securities, including repurchase agreements, or cash in such proportions as, in the opinion of the investment manager, prevailing market or economic conditions warrant. THE FUND'S INVESTMENTS The Fund invests in common stocks (including preferred or debt securities convertible into common stocks), preferred stocks and debt securities. The mixture of common stocks, debt securities and preferred stocks varies from time to time based upon the investment manager's assessment as to whether investments in each category will contribute to meeting the Fund's investment objective. The Fund may invest, without percentage limitation, in fixed-income securities having at the time of purchase one of the four highest ratings of Moody's Investors Service ("Moody's") (Aaa, Aa, A, Baa), Standard & Poor's Corporation ("S&P") (AAA, AA, A, BBB), two nationally recognized statistical rating organizations ("NRSRO's") or in fixed-income securities which are not rated by any NRSRO, provided that, in the opinion of the Fund's investment manager, such securities are comparable in quality to those within the four highest ratings. These are considered to be "investment grade" securities, although fixed-income securities rated Baa are regarded as having an adequate capacity to pay principal and interest but with greater vulnerability to adverse economic conditions and some speculative characteristics. The Fund's commercial paper investments at the time of purchase will be rated "A-1" or "A-2" by S&P or "Prime-1" or "Prime-2" by Moody's or, if not rated by an NRSRO, will be of comparable quality as determined by the Fund's investment managers. The Fund may also invest up to 15% of its total assets at the time of purchase in lower rated fixed-income securities (those rated BB or lower by S&P or Ba or lower by Moody's) and unrated securities of comparable quality (sometimes referred to as "junk bonds" in the popular media). The Fund will not acquire such securities rated lower than B by Moody's or S&P. Lower rated securities are considered by S&P and Moody's, on balance, to be predominantly speculative with respect to capacity to pay principal or interest, as the case may be, in accordance with the terms of the obligation and will generally involve more credit risk than securities in the higher rating categories. (See the SAI for a more complete discussion regarding these investments.) In the event the rating on an issue held in the Fund's portfolio is changed by the NRSRO, such event will be considered by the Fund in its evaluation of the overall investment merits of that security but will not necessarily result in an automatic sale of the security. A discussion of the ratings is contained in the Appendix to this Prospectus. WHERE THE FUND MAY INVEST The Fund may invest in the securities of issuers both within and outside the United States, including emerging market countries. The Fund may purchase foreign securities which are traded in the United States or in foreign markets or purchase sponsored or unsponsored American Depositary Receipts ("ADRs"), which are receipts typically issued by an American bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. Generally, ADRs, which are issued in registered form, are designed for use in the ("U.S") securities markets. The issuers of unsponsored ADRs are not obligated to disclose material information in the U.S. and, therefore, there may be less information available to the investing public than with sponsored ADRs. The Fund's investment manager will attempt to independently accumulate and evaluate information with respect to the issuers of the underlying securities of sponsored and unsponsored ADRs to attempt to limit the Fund's exposure to the market risk associated with such investments. For purposes of the Fund's investment policies, investments in ADRs will be deemed to be investments in the equity securities of the foreign issuers into which they may be converted. Under normal conditions, it is anticipated that the percentage of assets invested in U.S. securities will be higher than that invested in securities of any other single country. It is possible that at times the Fund may have 50% or more of its total assets invested in foreign securities. INVESTMENTS IN OTHER THAN NATURAL RESOURCES SECURITIES The Fund is permitted to invest up to 35% of its assets in securities of issuers that are outside the natural resources sector. Such investments will consist of common stocks, debt securities or preferred stocks and will be selected to meet the Fund's investment objective of providing high total return. These securities may be issued by either U.S. or non-U.S. companies, governments, or governmental instrumentalities. Some of these issuers may be in industries related to the natural resources sector and, therefore, may be subject to similar risks. Securities that are issued by foreign companies or are denominated in foreign currencies are subject to the risks outlined below. See "Risk Factors and Special Considerations." Securities issued or guaranteed by the U.S. government or its agencies or instrumentalities ("U.S. Government Securities"), including U.S. Treasury bills, notes and bonds as well as certain agency securities and mortgage-backed securities issued by the Government National Mortgage Association (GNMA), may carry guarantees which are backed by the "full faith and credit" of the U.S. government. Any such guarantee will extend to the payment of interest and principal due on the securities and will not provide any protection from fluctuations in either the securities' yield or value or to the yield or value of the Fund's shares. Other investments in agency securities are not necessarily backed by the "full faith and credit" of the U.S. government, such as certain securities issued by the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation, the Student Loan Marketing Association and the Farm Credit Bank. The Fund may invest in debt securities issued or guaranteed by foreign governments. Such securities are typically denominated in foreign currencies and are subject to the currency fluctuation and other risks of foreign securities investments outlined below. See "Risk Factors and Special Considerations." The foreign government securities in which the Fund intends to invest generally will consist of obligations issued by national, state or local governments or similar political subdivisions. Foreign government securities also include debt obligations of supranational entities, including international organizations designed or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Examples include the International Bank of Reconstruction and Development (the World Bank), the European Investment Bank, the Asian Development Bank and the Inter-American Development Bank. Foreign government securities also include debt securities of "quasi-governmental agencies" and debt securities denominated in multinational currency units. An example of a multinational currency unit is the European Currency Unit. A European Currency Unit represents specified amounts of the currencies of certain of the 12 member states of the European Economic Community. Debt securities of quasi-governmental agencies are issued by entities owned by either a national or local government or are obligations of a political unit that is not backed by the national government's full faith and credit and general taxing powers. Foreign government securities also include mortgage-related securities issued or guaranteed by national or local governmental instrumentalities, including quasi-governmental agencies. SOME OF THE FUND'S OTHER INVESTMENT POLICIES SHORT-TERM INVESTMENTS. The Fund may invest its cash, including cash resulting from purchases and sales of Fund shares, temporarily in short-term debt instruments, including high grade commercial paper, repurchase agreements and other money market equivalents and, pursuant to an exemption from the requirements of the 1940 Act, the shares of affiliated money market funds, which invest primarily in short-term debt securities. To the extent the Fund invests in affiliated money market funds, such as the Franklin Money Fund, the investment manager has agreed to waive its management fee on any portion of the Fund's assets invested in such affiliated fund. Temporary investments will only be made with cash held to maintain liquidity or pending investment. In addition, for temporary defensive purposes in the event of, or when the Adviser anticipates, a general decline in the market prices of stocks in which the Fund invests, the Fund may invest an unlimited amount of its assets in short-term debt instruments. REPURCHASE TRANSACTIONS. The Fund may engage in repurchase transactions, in which the Fund purchases a U.S. government security subject to resale to a bank or dealer at an agreed-upon price and date. The transaction requires the collateralization of the seller's obligation by the transfer of securities with an initial market value, including accrued interest, equal to at least 102% of the dollar amount invested by the Fund in each agreement, with the value of the underlying security marked-to-market daily to maintain coverage of at least 100%. A default by the seller might cause the Fund to experience a loss or delay in the liquidation of the collateral securing the repurchase agreement. The Fund might also incur disposition costs in liquidating the collateral. The Fund, however, intends to enter into repurchase agreements only with financial institutions such as broker-dealers and banks which are deemed creditworthy by the Fund's investment manager. A repurchase agreement is deemed to be a loan by the Fund under the 1940 Act. The U.S. government security subject to resale (the collateral) will be held on behalf of the Fund by a custodian approved by the Fund's Board and will be held pursuant to a written agreement. The Fund may also enter into reverse repurchase agreements. Such agreements involve the sale of securities held by the Fund pursuant to an agreement to repurchase the securities on an agreed upon price, date and interest payment. When effecting reverse repurchase transactions, cash or high grade liquid debt securities of a dollar amount equal in value to the Fund's obligation under the agreement, including accrued interest, will be maintained in a segregated account with the Fund's custodian bank, and the securities subject to the reverse repurchase agreement will be marked to market each day. Although reverse repurchase agreements are borrowings under Section 2(a)(23) of the 1940 Act, the Fund does not treat these arrangements as borrowings under investment restriction 2 (set forth in the SAI) so long as the segregated account is properly maintained. LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board of Trustees and subject to the following conditions, the Fund may lend its portfolio securities to qualified securities dealers or other institutional investors, provided that such loans do not exceed 33% of the value of the Fund's total assets at the time of the most recent loan. The borrower must deposit with the Fund's custodian collateral with an initial market value of at least 102% of the initial market value of the securities loaned, including any accrued interest, with the value of the collateral and loaned securities marked-to-market daily to maintain collateral coverage of at least 100%. Such collateral shall consist of cash, securities issued by the U.S. Government, its agencies or instrumentalities, or irrevocable letters of credit. The lending of securities is a common practice in the securities industry. The Fund engages in security loan arrangements with the primary objective of increasing the Fund's income either through investing the cash collateral in short-term interest bearing obligations or by receiving a loan premium from the borrower. Under the securities loan agreement, the Fund continues to be entitled to all dividends or interest on any loaned securities. As with any extension of credit, there are risks of delay in recovery and loss of rights in the collateral should the borrower of the security fail financially. BORROWING. As a fundamental policy, the Fund does not borrow money or mortgage or pledge any of the assets of the Fund, except that the Fund may enter into reverse repurchase agreements or borrow money from banks in an amount up to 33% of its total asset value (computed at the time the loan is made) for temporary or emergency purposes. While borrowings exceed 5% of the Fund's total assets, the Fund will not make any additional investments. ILLIQUID INVESTMENTS. It is the policy of the Fund that illiquid securities (securities that cannot be disposed of within seven days in the normal course of business at approximately the amount at which the Fund has valued the securities) may not constitute, at the time of purchase or at any time, more than 15% of the value of the total net assets of the Fund. Subject to this limitation, the Fund's Board of Trustees has authorized the Fund to invest in restricted securities where such investments are consistent with the Fund's investment objective and has authorized such securities to be considered to be liquid to the extent the investment manager determines on a daily basis that there is a liquid institutional or other market for such securities. Notwithstanding the investment manager's determinations in this regard, the Fund's Board of Trustees will remain responsible for such determinations and will consider appropriate action, consistent with the Fund's objective and policies, if a security should become illiquid subsequent to its purchase. To the extent the Fund invests in restricted securities that are deemed liquid, the general level of illiquidity in the Fund may be increased if qualified institutional buyers become uninterested in purchasing these securities or the market for these securities contracts. See "The Fund's Investment Objective and Restrictions - Short-Term Investments" in the SAI. Portfolio Turnover. The Fund expects that its portfolio turnover rate will generally not exceed 100%, but this rate should not be construed as a limiting factor. High portfolio turnover increases transaction costs which must be paid by the Fund. High turnover may also result in the realization of capital gain income, which is taxable when distributed to shareholders. GENERAL. As discussed more fully in the SAI, the Fund also may purchase debt obligations on a "when-issued" or "delayed delivery" basis and from time to time enter into standby commitment agreements. The Fund is subject to a number of additional investment restrictions, some of which may be changed only with the approval of shareholders, which limit its activities to some extent. For a list of these restrictions and more information concerning the investment policies discussed herein, please see the SAI. RISK FACTORS AND SPECIAL CONSIDERATIONS Each prospective investor should take into account his/her investment objectives as well as his/her other investments when considering the purchase of shares of the Fund. The Fund is designed for long-term investors and not as a trading vehicle, and is not intended to present a complete investment program. Although the Fund's assets will usually be invested in a substantial number of issuers, the Fund is non-diversified as defined by the 1940 Act. This generally means that more than 5% of the Fund's assets may be invested in the securities of a single issuer. Consequently, changes in the financial condition of a single issuer may have a greater effect on the Fund's share value than such changes would have on the performance of other mutual funds, particularly those which invest in a broad range of issuers, sectors and industries. RISKS INVOLVING THE NATURAL RESOURCES SECTOR There are several risk factors which need to be assessed before investing in the natural resources sector. Certain of the industries' commodities are subject to limited pricing flexibility as a result of similar supply and demand factors. Others are subject to broad price fluctuations, reflecting the volatility of certain raw materials' prices and the instability of supplies of other resources. These factors can effect the overall profitability of an individual company operating within the natural resources sector. While the investment managers of the Fund strive to diversify among the industries within the natural resources sector to minimize this volatility, there will be occasions where the value of an individual company's securities will prove more volatile than the broader market. In addition, many of these companies operate in areas of the world where they are subject to unstable political environments, currency fluctuations and inflationary pressures. RISKS INVOLVING INVESTMENT IN FOREIGN SECURITIES Investment in the Fund's shares requires consideration of certain risks which are not normally involved in investment solely in U.S. issuers. These risks include political, social or economic instability in the country of the issuer, the difficulty of predicting international trade patterns, the possibility of the imposition of exchange controls, expropriation, restrictions on removal of currency or other assets, nationalization of assets, foreign withholding and income taxation, and foreign trading practices (including higher trading commissions, custodial charges and delayed settlements). Such securities may be subject to greater fluctuations in price than securities issued by U.S. corporations or issued or guaranteed by the U.S. government, its instrumentalities or agencies. The markets on which such securities trade may have less volume and liquidity, and may be more volatile than securities markets in the U.S. In addition, there may be less publicly available information about a foreign company than about a U.S. domiciled company. Foreign companies generally are not subject to uniform accounting, auditing and financial reporting standards comparable to those applicable to U.S. domestic companies. There is generally less government regulation of securities exchanges, brokers and listed companies abroad than in the U.S. Confiscatory taxation or diplomatic developments could also affect investment in those countries. In many instances, foreign debt securities may provide higher yields than securities of domestic issuers which have similar maturities and quality. Under certain market conditions, these investments may be less liquid than the securities of U.S. corporations and are certainly less liquid than securities issued or guaranteed by the U.S. government, its instrumentalities or agencies. Finally, in the event of a default of any such foreign debt obligations, it may be more difficult for the Fund to obtain or to enforce a judgment against the issuers of such securities. If a security is denominated in foreign currency, the value of the security to the Fund will be affected by changes in currency exchange rates and in exchange control regulations, and costs will be incurred in connection with conversions between currencies. A change in the value of any foreign currency against the U.S. dollar will result in a corresponding change in the U.S. dollar value of the Fund's securities denominated in that currency. Such changes will also affect the Fund's income and distributions to shareholders. In addition, although the Fund will receive income on foreign securities in such currencies, the Fund will be required to compute and distribute its income in U.S. dollars. Therefore, if the exchange rate for any such currency declines materially after the Fund's income has been accrued and translated into U.S. dollars, the Fund could be required to liquidate portfolio securities to make required distributions. Similarly, if an exchange rate declines between the time the Fund incurs expenses in U.S. dollars and the time such expenses are paid, the amount of such currency required to be converted into U.S. dollars in order to pay such expenses in U.S. dollars will be greater. The Fund may choose to hedge exposure to currency fluctuations by entering into forward foreign currency exchange contracts, and buying and selling options, futures contracts and options on futures contracts relating to foreign currencies. The Fund may use forward currency exchange contracts in the normal course of business to lock in an exchange rate in connection with purchases and sales of securities denominated in foreign currencies. The Fund's investment manager may employ other currency management strategies to hedge portfolio securities or to shift investment exposure from one currency to another. Some of these strategies will require the Fund to set aside liquid assets in a segregated custodial account to cover its obligations. (See "Currency Hedging Transactions and Associated Risks" in the SAI.) The operating expense ratio of the Fund can be expected to be higher than that of an investment company investing exclusively in U.S. securities because of the additional expenses of the Fund attributable to its foreign investment activity, such as custodial costs, valuation costs and communication costs, although the Fund's expenses are expected to be similar to expenses of other investment companies investing in a mix of U.S. securities and securities of one or more foreign countries. Investing in emerging market countries subjects the Fund to heightened foreign securities investment risks as discussed in this section. HOW SHAREHOLDERS PARTICIPATE IN THE RESULTS OF THE FUND'S ACTIVITIES The assets of the Fund are invested in portfolio securities. If the securities owned by the Fund increase in value, the value of the shares of the Fund which the shareholder owns will increase. If the securities owned by the Fund decrease in value, the value of the shareholder's shares will also decline. In this way, shareholders participate in any change in the value of the securities owned by the Fund. In addition to the factors which affect the value of individual securities, as described in the preceding sections, a shareholder may anticipate that the value of Fund shares will fluctuate with movements in the broader equity and bond markets, as well. To the extent the Fund's investments consist of debt securities, changes in interest rates will affect the value of the Fund's portfolio and thus its share price. Increased rates of interest which frequently accompany higher inflation and/or a growing economy are likely to have a negative effect on the value of Fund shares. To the extent the Fund's investments consist of common stocks, a decline in the market, expressed for example by a drop in the Dow Jones Industrials or the Standard & Poor's 500 average or any other equity based index, may also be reflected in declines in the Fund's share price. History reflects both increases and decreases in the prevailing rate of interest and in the valuation of the market, and these may reoccur unpredictably in the future. CONVERSION TO MULTIPLE CLASSES OR MASTER/FEEDER STRUCTURE Many of the Franklin Templeton Funds (as that term is defined under "How to Buy Shares of the Fund") offer two classes of shares (Class I and Class II). The Board of Trustees reserves the right, without submitting the matter to a vote of security holders, to convert the Fund to a multi-class structure at a future date. This would permit the Fund to take advantage of alternative methods of selling Fund shares through the issuance of multiple classes of shares by the same series. The term "series" in the mutual fund industry is used to refer to shares that represent interests in a separate portfolio of investment securities with differing investment objectives. "Classes" of shares represent sub-divisions of series with differing preferences, rights and privileges as the Trustees may determine and, in most circumstances, differing marketing attributes. The Trustees believe that offering alternative pricing structures for investors may lead to increased sales of shares. Upon implementation of a multiple class structure, at least two classes of shares will invest in a single portfolio of securities. The difference between the classes will involve primarily the amount of up-front sales charges and distribution fees. The Board of Trustees reserves the right to convert the Fund to a master/feeder structure at a future date. Currently, the Fund invests directly in a portfolio of securities of companies primarily engaged in the natural resources sector. Certain funds administered by the investment manager participate as feeder funds in master/feeder fund structures. Under a master/feeder structure, one or more feeder funds, such as the Fund, invests its assets in a master fund which, in turn, invests its assets directly in the securities. Various state governments have adopted the North American Securities Administrators Association Guidelines for registration of master/feeder funds. If required by those guidelines, as then in effect, the Fund will seek shareholder approval prior to converting the Fund to a master/feeder structure, subject to there not being adopted a superseding contrary provision or ruling under federal law. If it is determined by the requisite regulatory authorities that such approval is not required, shareholders will be deemed to have consented to such conversion by their purchase of Fund shares and no further shareholder approval will be sought or needed. Shareholders will, however, be informed in writing in advance of the conversion. The determination to convert the Fund to a master/feeder fund structure will not result in an increase in the fees or expenses paid by the Fund or its shareholders. The investment objective and other fundamental policies of the Fund, which can be changed only with shareholder approval, are structured so as to permit the Fund to invest directly in securities or indirectly in securities through a master/feeder fund structure. MANAGEMENT OF THE FUND The Board of Trustees has the primary responsibility for the overall management of the Fund and for electing the officers of the Fund who are responsible for administering its day-to-day operations. Franklin Advisers, Inc. ("Advisers" or "Manager"), serves as the Fund's investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources, Inc. ("Resources"), a publicly owned holding company, the principal shareholders of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own approximately 20% and 16%, respectively, of Resources' outstanding shares. Resources is engaged in various aspects of the financial services industry through its various subsidiaries (the "Franklin Templeton Group"). Advisers acts as investment manager or administrator to 34 U.S. registered investment companies (112 separate series) with aggregate assets of over $74 billion. Pursuant to the management agreement, the Manager supervises and implements the Fund's investment activities and provides certain administrative services and facilities which are necessary to conduct the Fund's business. The Fund is responsible for its own operating expenses including, but not limited to, the Manager's fee; taxes, if any; custodian, legal and auditing fees; fees and expenses of trustees who are not members of, affiliated with, or interested persons of the Manager; salaries of any personnel not affiliated with the Manager; insurance premiums; trade association dues; expenses of obtaining quotations for calculating the value of the Fund's net assets; printing and other expenses which are not expressly assumed by the Manager. Pursuant to the management agreement, the Fund is obligated to pay the Manager a fee computed and accrued daily and paid monthly at the annual rate of 0.625 of 1% of the value of average daily net assets up to and including $100 million; 0.50 of 1% of the value of average daily net assets over $100 million up to and including $250 million; 0.45 of 1% of the value of average daily net assets over $250 million up to and including $10 billion; 0.44 of 1% of the value of average daily net assets over $10 billion up to and including $12.5 billion; 0.42 of 1% of the value of average daily net assets over $12.5 billion up to and including $15 billion; and 0.40 of 1% of the value of average daily net assets over $15 billion. During the start-up period of the Fund, Advisers has elected to reduce the fees payable under the management agreement and to assume responsibility for making payments, if necessary, to offset certain operating expenses otherwise payable by the Fund so that total ordinary operating expenses do not exceed 1.00% of the Fund's average net assets. This arrangement is in effect until April 30, 1996, and then may be continued or terminated by the Manager at any time. In addition, the management agreement specifies that the management fee will be reduced to the extent necessary to comply with the most stringent limits on the expenses which may be borne by the Fund as prescribed by any state in which the Fund's shares are offered for sale. Currently, the most restrictive of such provisions limits a fund's allowable expenses as a percentage of its average net assets for each fiscal year to 21/2% of the first $30 million in assets, 2% of the next $70 million, and 11/2% of assets in excess of $100 million. Among the responsibilities of the Manager under the management agreement is the selection of brokers and dealers through whom transactions in the Fund's portfolio securities will be effected. The Manager tries to obtain the best execution on all such transactions. If it is felt that more than one broker is able to provide the best execution, the Manager will consider the furnishing of quotations and of other market services, research, statistical and other data for the Manager and its affiliates, as well as the sale of shares of the Fund, as factors in selecting a broker. Further information is included under "The Fund's Policies Regarding Brokers Used on Portfolio Transactions" in the SAI. Shareholder accounting and many of the clerical functions for the Fund are performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or "Shareholder Services Agent"), in its capacity as transfer agent and dividend-paying agent. Investor Services is a wholly-owned subsidiary of Resources. PLAN OF DISTRIBUTION The Fund has adopted a distribution plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the Fund may reimburse Distributors or others for all expenses incurred by Distributors or others in the promotion and distribution of the Fund's shares. Such expenses may include, but are not limited to, the printing of prospectuses and reports used for sales purposes, expenses of preparing and distributing sales literature and related expenses, advertisements, and other distribution-related expenses, including a prorated portion of Distributors' overhead expenses attributable to the distribution of Fund shares, as well as any distribution or service fees paid to securities dealers or their firms or others who have executed a servicing agreement with the Fund, Distributors or its affiliates. Under the Plan, the Fund may pay to Distributors and others up to 0.25% per annum of its average daily net assets, payable on a quarterly basis for such distribution expenses. Under the Plan, the Fund is also permitted to pay Distributors up to an additional 0.10% per annum of its average daily net assets for reimbursement of such distribution expenses. All expenses of distribution and marketing in excess of such amounts will be borne by Distributors and others, who have incurred them, without reimbursement from the Fund. The Plan also covers any payments to or by the Fund, Advisers, Distributors, or other parties on behalf of the Fund, Advisers or Distributors, to the extent such payments are deemed to be for the financing of any activity primarily intended to result in the sale of shares issued by the Fund within the context of Rule 12b-1. The payments under the Plan are included in the maximum operating expenses which may be borne by the Fund. For more information, please see the SAI. DISTRIBUTIONS TO SHAREHOLDERS There are two types of distributions which the Fund may make to its shareholders: 1. INCOME DIVIDENDS. The Fund receives income in the form of dividends, interest and other income derived from its investments. This income, less the expenses incurred in the Fund's operations, is its net investment income from which income dividends may be distributed. Thus, the amount of dividends paid per share may vary with each distribution. 2. CAPITAL GAIN DISTRIBUTIONS. The Fund may derive capital gains or losses in connection with sales or other dispositions of its portfolio securities. Distributions by the Fund derived from net short-term and net long-term capital gains (after taking into account any net capital loss carryovers) may generally be made once a year in December to reflect any net short-term and net long-term capital gains realized by the Fund as of October 31 of the current fiscal year and any undistributed net capital gains from the prior fiscal year. These distributions, when made, will generally be fully taxable to the Fund's shareholders. The Fund may make more than one distribution derived from net short-term and net long-term capital gains in any year or adjust the timing of these distributions for operational or other reasons. DISTRIBUTION DATE Although subject to change by the Board of Trustees, without prior notice to or approval by shareholders, the Fund's current policy is to declare income dividends payable semiannually in June and December for shareholders of record generally on the first business day preceding the 15th of the month, payable on or about the last business day of such months. The amount of income dividend payments by the Fund is dependent upon the amount of net income received by the Fund from its portfolio holdings, is not guaranteed and is subject to the discretion of the Board of Trustees. Fund shares are quoted ex-dividend on the first business day following the record date. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES. In order to be entitled to a dividend, an investor must have acquired Fund shares prior to the close of business on the record date. An investor considering purchasing Fund shares shortly before the record date of a distribution should be aware that because the value of the Fund's shares is based directly on the amount of its net assets, rather than on the principle of supply and demand, any distribution of income or capital gain will result in a decrease in the value of the Fund's shares equal to the amount of the distribution. While a dividend or capital gain distribution received shortly after purchasing shares represents, in effect, a return of a portion of the shareholder's investment, it may be taxable as dividend income or capital gain. DIVIDEND REINVESTMENT Unless otherwise requested, income dividends and capital gain distributions, if any, will be automatically reinvested in the shareholder's account in the form of additional shares, valued at the closing net asset value (without a sales charge) on the dividend reinvestment date ("ex-dividend date") Dividend and capital gain distributions are only eligible for reinvestment at net asset value in the Fund or Class I shares of another of the Franklin Templeton Funds. Shareholders have the right to change their election with respect to the receipt of distributions by notifying the Fund, but any such change will be effective only as to distributions for which the record date is seven or more business days after the Fund has been notified. See the SAI for more information. Many of the Fund's shareholders receive their distributions in the form of additional shares. This is a convenient way to accumulate additional shares and maintain or increase the shareholder's earnings base. Of course, any shares so acquired remain at market risk. DISTRIBUTIONS IN CASH A shareholder may elect to receive income dividends, or both income dividends and capital gain distributions, in cash. By completing the "Special Payment Instructions for Distributions" section of the Shareholder Application included with this Prospectus, a shareholder may direct the selected distributions to another fund in the Franklin Templeton Funds, to another person, or directly to a checking account. If the bank at which the account is maintained is a member of the Automated Clearing House, the payments may be made automatically by electronic funds transfer. If this last option is requested, the shareholder should allow at least 15 days for initial processing. Dividends which may be paid in the interim will be sent to the address of record. Additional information regarding automated fund transfers may be obtained from Franklin's Shareholder Services Department. See "Purchases at Net Asset Value" under "How to Buy Shares of the Fund." TAXATION OF THE FUND AND ITS SHAREHOLDERS The following discussion reflects some of the tax considerations that affect mutual funds and their shareholders. Additional information on tax matters relating to the Fund and its shareholders is included in the section entitled, "Additional Information Regarding Taxation" in the SAI. The Fund intends to elect and qualify to be treated as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). By distributing all of its net investment income and net realized short-term and long-term capital gain and by meeting certain other requirements relating to the sources of its income and diversification of its assets, the Fund will not be liable for federal income or excise taxes. For federal income tax purposes, any income dividends which the shareholder receives from the Fund, as well as any distributions derived from the excess of net short-term capital gain over net long-term capital loss, are treated as ordinary income whether the shareholder has elected to receive them in cash or in additional shares. Distributions derived from the excess of net long-term capital gain over net short-term capital loss are treated as long-term capital gain regardless of the length of time the shareholder has owned Fund shares and regardless of whether such distributions are received in cash or in additional shares. Pursuant to the Code, certain distributions which are declared in October, November or December but which, for operational reasons, may not be paid to the shareholder until the following January, will be treated for tax purposes as if received by the shareholder on December 31 of the calendar year in which they are declared. Redemptions and exchanges of Fund shares are taxable events on which a shareholder may realize a gain or loss. Any loss incurred on sale or exchange of the Fund's shares, held for six months or less, will be treated as a long-term capital loss to the extent of capital gain dividends received with respect to such shares. The Fund will inform shareholders of the source of their dividends and distributions at the time they are paid, and will promptly after the close of each calendar year advise them of the tax status for federal income tax purposes of such dividends and distributions. Shareholders who are not U.S. persons for purposes of federal income taxation should consult with their financial or tax advisors regarding the applicability of U.S. withholding or other taxes on distributions received by them from the Fund and the application of foreign tax laws to these distributions. Shareholders should also consult their tax advisors with respect to the applicability of any state and local intangible property or income taxes to their shares of the Fund and distributions and redemption proceeds received from the Fund. HOW TO BUY SHARES OF THE FUND Shares of the Fund are continuously offered through securities dealers which execute an agreement with Distributors, the principal underwriter of the Fund's shares. The use of the term "securities dealer" shall include other financial institutions which, pursuant to an agreement with Distributors (directly or through affiliates), handle customer orders and accounts with the Fund. Such reference, however, is for convenience only and does not indicate a legal conclusion of capacity. The minimum initial investment is $100 and subsequent investments must be $25 or more. These minimums may be waived when the shares are purchased through plans established by the Franklin Templeton Group. The Fund and Distributors reserve the right to refuse any order for the purchase of shares. PURCHASE PRICE OF FUND SHARES Shares of the Fund are offered at the public offering price, which is determined by adding the net asset value per share plus a front-end sales charge, next computed (1) after the shareholder's securities dealer receives the order which is promptly transmitted to the Fund or (2) after receipt of an order by mail from the shareholder directly in proper form (which generally means a completed Shareholder Application accompanied by a negotiable check). The sales charge is a variable percentage of the offering price depending upon the amount of the sale. The offering price will be calculated to two decimal places using standard rounding criteria. A description of the method of calculating net asset value per share is included under the caption "Valuation of Fund Shares." Set forth below is a table of total front-end sales charges or underwriting commissions and dealer concessions. AS A PERCENTAGE DEALER AS A PERCENTAGE CONCESSION OF NET AS A PERCENTAGE OF OFFERING AMOUNT OF OFFERING SIZE OF TRANSACTION PRICE INVESTED PRICE*,*** Less than $100,000 4.50% 4.71% 4.00% $100,000 but less than 3.75% 3.90% 3.25% $250,000 $250,000 but less than 2.75% 2.83% 2.50% $500,000 $500,000 but less than 2.25% 2.30% 2.00% $1,000,000 $1,000,000 or more none none (see below)** *Financial institutions or their affiliated brokers may receive an agency transaction fee in the percentages set forth above. **The following commissions will be paid by Distributors, out of its own resources, to securities dealers who initiate and are responsible for purchases of $1 million or more: 1.00% on sales of $1 million but less than $2 million, plus 0.80% on sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million but less than $50 million, plus 0.25% on sales of $50 million but less than $100 million, plus 0.15% on sales of $100 million or more. Dealer concession breakpoints are reset every 12 months for purposes of additional purchases. ***At the discretion of Distributors, all sales charges may at times be allowed to the securities dealer. If 90% or more of the sales commission is allowed, such securities dealer may be deemed to be an underwriter as that term is defined in the Securities Act of 1933, as amended. No front-end sales charge applies on investments of $1 million or more, but a contingent deferred sales charge of 1% is imposed on certain redemptions of all or a portion of investments of $1 million within the contingency period. See "How to Sell Shares of the Fund - Contingent Deferred Sales Charge." The size of a transaction which determines the applicable sales charge on the purchase of Fund shares is determined by adding the amount of the shareholder's current purchase plus the cost or current value (whichever is higher) of a shareholder's existing investment in one or more of the funds in the Franklin Group of Funds(R) and the Templeton Group of Funds. Included for these aggregation purposes are (a) the mutual funds in the Franklin Group of Funds except Franklin Valuemark Funds and Franklin Government Securities Trust (the "Franklin Funds"), (b) other investment products underwritten by Distributors or its affiliates (although certain investments may not have the same schedule of sales charges and/or may not be subject to reduction) and (c) the U.S. registered mutual funds in the Templeton Group of Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series Fund (the "Templeton Funds"). (Franklin Funds and Templeton Funds are collectively referred to as the "Franklin Templeton Funds.") Sales charge reductions based upon aggregate holdings of (a), (b) and (c) above ("Franklin Templeton Investments") may be effective only after notification to Distributors that the investment qualifies for a discount. Other Payments to Securities Dealers. Distributors, or one of its affiliates, may make payments, out of its own resources, of up to 1% of the amount purchased to securities dealers who initiate and are responsible for purchases made at net asset value by certain designated retirement plans (excluding IRA and IRA rollovers), certain non-designated plans, certain trust companies and trust departments of banks and certain retirement plans of organizations with collective retirement plan assets of $10 million or more. See definitions under "Description of Special Net Asset Value Purchases" and as set forth in the SAI. Distributors or one of its affiliates, out of its own resources, may also provide additional compensation to securities dealers in connection with sales of shares of the Franklin Templeton Funds. Compensation may include financial assistance to securities dealers in connection with conferences, sales or training programs for their employees, seminars for the public, advertising, sales campaigns and/or shareholder services and programs regarding one or more of the Franklin Templeton Funds, and other dealer-sponsored programs or events. In some instances, this compensation may be made available only to certain securities dealers whose representatives have sold or are expected to sell significant amounts of shares of the Franklin Templeton Funds. Compensation may include payment for travel expenses, including lodging, incurred in connection with trips taken by invited registered representatives and members of their families to locations within or outside of the United States for meetings or seminars of a business nature. Securities dealers may not use sales of the Fund's shares to qualify for this compensation to the extent such may be prohibited by the laws of any state or any self-regulatory agency, such as the National Association of Securities Dealers, Inc. None of the aforementioned additional compensation is paid for by the Fund or its shareholders. Additional terms concerning the offering of the Fund's shares are included in the SAI. Certain officers and trustees of the Fund are also affiliated with Distributors. A detailed description is included in the SAI. QUANTITY DISCOUNTS IN SALES CHARGES Shares may be purchased under a variety of plans which provide for a reduced sales charge. To be certain to obtain the reduction of the sales charge, the investor or the securities dealer should notify Distributors at the time of each purchase of shares which qualifies for the reduction. In determining whether a purchase qualifies for a discount, an investment in any of the Franklin Templeton Investments may be combined with those of the investor's spouse and children under the age of 21. In addition, the aggregate investments of a trustee or other fiduciary account (for an account under exclusive investment authority) may be considered in determining whether a reduced sales charge is available, even though there may be a number of beneficiaries of the account. The value of any Franklin Templeton Funds Class II shares owned by the investor may also be included for this purpose. In addition, an investment in the Fund may qualify for a reduction in the sales charge under the following programs: 1. RIGHTS OF ACCUMULATION. The cost or current value (whichever is higher) of existing investments in the Franklin Templeton Investments may be combined with the amount of the current purchase in determining the sales charge to be paid. 2. LETTER OF INTENT. An investor may immediately qualify for a reduced sales charge on a purchase of shares of the Fund by completing the Letter of Intent section of the Shareholder Application (the "Letter of Intent" or "Letter"). By completing the Letter, the investor expresses an intention to invest during the next 13 months a specified amount which, if made at one time, would qualify for a reduced sales charge and grants to Distributors a security interest in the reserved shares and irrevocably appoints Distributors as attorney-in-fact with full power of substitution to surrender for redemption any or all shares for the purpose of paying any additional sales charge due. Purchases under the Letter will conform with the requirements of Rule 22d-1 under the 1940 Act. The investor or the investor's securities dealer must inform Investor Services or Distributors that this Letter is in effect each time a purchase is made. AN INVESTOR (EXCEPT FOR CERTAIN EMPLOYEE BENEFIT PLANS WHICH ARE LISTED UNDER "DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES") ACKNOWLEDGES AND AGREES TO THE FOLLOWING PROVISIONS BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION: Five percent (5%) of the amount of the total intended purchase will be reserved in shares of the Fund, registered in the investor's name, to assure that the full applicable sales charge will be paid if the intended purchase is not completed. The reserved shares will be included in the total shares owned as reflected on periodic statements; income and capital gain distributions on the reserved shares will be paid as directed by the investor. The reserved shares will not be available for disposal by the investor until the Letter of Intent has been completed or the higher sales charge paid. For more information, see "Additional Information Regarding Purchases" in the SAI. GROUP PURCHASES An individual who is a member of a qualified group may also purchase shares of the Fund at the reduced sales charge applicable to the group as a whole. The sales charge is based upon the aggregate dollar value of shares previously purchased and still owned by the group, plus the amount of the current purchase. For example, if members of the group had previously invested and still held $80,000 of Fund shares and now were investing $25,000, the sales charge would be 3.75%. Information concerning the current sales charge applicable to a group may be obtained by contacting Distributors. A "qualified group" is one which (i) has been in existence for more than six months, (ii) has a purpose other than acquiring Fund shares at a discount and (iii) satisfies uniform criteria which enable Distributors to realize economies of scale in its costs of distributing shares. A qualified group must have more than 10 members, be available to arrange for group meetings between representatives of the Fund or Distributors and the members, agree to include sales and other materials related to the Fund in its publications and mailings to members at reduced or no cost to Distributors, and seek to arrange for payroll deduction or other bulk transmission of investments to the Fund. If an investor selects a payroll deduction plan, subsequent investments will be automatic and will continue until such time as the investor notifies the Fund and the investor's employer to discontinue further investments. Due to the varying procedures used to prepare, process and forward the payroll deduction information to the Fund, there may be a delay between the time of the payroll deduction and the time the money reaches the Fund. The investment in the Fund will be made at the offering price per share determined on the day that both the check and payroll deduction data are received in required form by the Fund. PURCHASES AT NET ASSET VALUE Shares of the Fund may be purchased without the imposition of either a front-end sales charge ("net asset value") or a contingent deferred sales charge by (1) officers, trustees, directors, and full-time employees of the Fund, any of the Franklin Templeton Funds, or of the Franklin Templeton Group, and by their spouses and family members, including subsequent payments made by such parties after cessation of employment; (2) companies exchanging shares with or selling assets pursuant to a merger, acquisition or exchange offer; (3) insurance company separate accounts for pension plan contracts; (4) accounts managed by the Franklin Templeton Group; (5) shareholders of Templeton Institutional Funds, Inc. reinvesting redemption proceeds from that fund under an employee benefit plan qualified under Section 401 of the Code in shares of the Fund; (6) certain unit investment trusts and unit holders of such trusts reinvesting their distributions from the trusts in the Fund; (7) registered securities dealers and their affiliates, for their investment account only, and (8) registered personnel and employees of securities dealers and by their spouses and family members, in accordance with the internal policies and procedures of the employing securities dealer. Shares of the Fund may be purchased at net asset value by persons who have redeemed, within the previous 120 days, their shares of the Fund or Class I shares of another of the Franklin Templeton Funds which were purchased with a front-end sales charge or assessed a contingent deferred sales charge on redemption. If a different class of shares is purchased, the full front-end sales charge must be paid at the time of purchase of the new shares. An investor may reinvest an amount not exceeding the redemption proceeds. While credit will be given for any contingent deferred sales charge paid on the shares redeemed and subsequently repurchased, a new contingency period will begin. Shares of the Fund redeemed in connection with an exchange into Class I shares of another of the Franklin Templeton Funds (see "Exchange Privilege") are not considered "redeemed" for this privilege. In order to exercise this privilege, a written order for the purchase of shares of the Fund must be received by the Fund or the Fund's Shareholder Services Agent within 120 days after the redemption. The 120 days, however, do not begin to run on redemption proceeds placed immediately after redemption in a Franklin Bank Certificate of Deposit ("CD") until the CD (including any rollover) matures. Reinvestment at net asset value may also be handled by a securities dealer or other financial institution, who may charge the shareholder a fee for this service. The redemption is a taxable transaction but reinvestment without a sales charge may affect the amount of gain or loss recognized and the tax basis of the shares reinvested. If there has been a loss on the redemption, the loss may be disallowed if a reinvestment in the same fund is made within a 30-day period. Information regarding the possible tax consequences of such a reinvestment is included in the tax section of this Prospectus and the SAI. Shares of the Fund or Class I shares of another of the Franklin Templeton Funds may be purchased at net asset value and without a contingent deferred sales charge by persons who have received dividends and capital gains distributions in cash from investments in the Fund within 120 days of the payment date of such distribution. To exercise this privilege, a written request to reinvest the distribution must accompany the purchase order. Additional information may be obtained from Shareholder Services at 1-800/632-2301. See "Distributions in Cash" under "Distributions to Shareholders." Shares of the Fund may be purchased at net asset value and without the imposition of a contingent deferred sales charge by investors who have, within the past 60 days, redeemed an investment in a mutual fund which is not part of the Franklin Templeton Funds and which charged the investor a contingent deferred sales charge upon redemption and which has investment objectives similar to those of the Fund. Shares of the Fund may be purchased at net asset value and without the imposition of a contingent deferred sales charge by broker-dealers who have entered into a supplemental agreement with Distributors, or by registered investment advisors affiliated with such broker-dealers, on behalf of their clients who are participating in a comprehensive fee program (sometimes known as a wrap fee program). Shares of the Fund may be purchased at net asset value and without the imposition of a contingent deferred sales charge by anyone who has taken a distribution from an existing retirement plan already invested in the Franklin Templeton Funds (including former participants of the Franklin Templeton Profit Sharing 401(k) plan), to the extent of such distribution. In order to exercise this privilege a written order for the purchase of shares of the Fund must be received by Franklin Templeton Trust Company (the "Trust Company"), the Fund or Investor Services, within 120 days after the plan distribution. Shares of the Fund may also be purchased at net asset value and without the imposition of a contingent deferred sales charge by any state, county, or city, or any instrumentality, department, authority or agency thereof which has determined that the Fund is a legally permissible investment and which is prohibited by applicable investment laws from paying a sales charge or commission in connection with the purchase of shares of any registered management investment company ("an eligible governmental authority"). SUCH INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM. Municipal investors considering investment of proceeds of bond offerings into the Fund should consult with expert counsel to determine the effect, if any, of various payments made by the Fund or its investment manager on arbitrage rebate calculations. If an investment by an eligible governmental authority at net asset value is made through a securities dealer who has executed a dealer agreement with Distributors, Distributors or one of its affiliates may make a payment, out of their own resources, to such securities dealer in an amount not to exceed 0.25% of the amount invested. Contact Franklin's Institutional Sales Department for additional information. DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES Shares of the Fund may also be purchased at net asset value and without the imposition of a contingent deferred sales charge by certain designated retirement plans, including profit sharing, pension, 401(k) and simplified employee pension plans ("designated plans"), subject to minimum requirements with respect to number of employees or amount of purchase, which may be established by Distributors. Currently those criteria require that the employer establishing the plan have 200 or more employees or that the amount invested or to be invested during the subsequent 13-month period in the Fund or in any of the Franklin Templeton Investments totals at least $1,000,000. Employee benefit plans not designated above or qualified under Section 401 of the Code ("non-designated plans") may be afforded the same privilege if they meet the above requirements as well as the uniform criteria for qualified groups previously described under "Group Purchases" which enable Distributors to realize economies of scale in its sales efforts and sales related expenses. Shares of the Fund may be purchased at net asset value and without the imposition of a contingent deferred sales charge by trust companies and bank trust departments for funds over which they exercise exclusive discretionary investment authority and which are held in a fiduciary, agency, advisory, custodial or similar capacity. Such purchases are subject to minimum requirements with respect to amount of purchase, which may be established by Distributors. Currently, those criteria require that the amount invested or to be invested during the subsequent 13-month period in this Fund or any of the Franklin Templeton Investments must total at least $1,000,000. Orders for such accounts will be accepted by mail accompanied by a check or by telephone or other means of electronic data transfer directly from the bank or trust company, with payment by federal funds received by the close of business on the next business day following such order. Shares of the Fund may be purchased at net asset value and without the imposition of a contingent deferred sales charge by trustees or other fiduciaries purchasing securities for certain retirement plans of organizations with collective retirement plan assets of $10 million or more, without regard to where such assets are currently invested. Refer to the SAI for further information regarding net asset value purchases of Fund shares. GENERAL Securities laws of states in which the Fund's shares are offered for sale may differ from the interpretations of federal law, and banks and financial institutions selling Fund shares may be required to register as dealers pursuant to state law. PURCHASING SHARES OF THE FUND IN CONNECTION WITH RETIREMENT PLANS INVOLVING TAX-DEFERRED INVESTMENTS Shares of the Fund may be used for individual or employer-sponsored retirement plans involving tax-deferred investments. The Fund may be used as an investment vehicle for an existing retirement plan, or Franklin Templeton Trust Company (the "Trust Company") may provide the plan documents and serve as custodian or trustee. A plan document must be adopted in order for a retirement plan to be in existence. The Trust Company, an affiliate of Distributors, can serve as custodian or trustee for retirement plans. Brochures for the Trust Company plans contain important information regarding eligibility, contribution and deferral limits and distribution requirements. Please note that an application other than the one contained in this Prospectus must be used to establish a retirement plan account with the Trust Company. To obtain a retirement plan brochure or application, call 1-800/DIAL BEN (1-800/342-5236). Please see "How to Sell Shares of the Fund" for specific information regarding redemptions from retirement plan accounts. Specific forms are required to be completed for distributions from Franklin Templeton Trust Company retirement plans. Individuals and plan sponsors should consult with legal, tax or benefits and pension plan consultants before choosing a retirement plan. In addition, retirement plan investors should consider consulting their investment representatives or advisers concerning investment decisions within their plans. OTHER PROGRAMS AND PRIVILEGES AVAILABLE TO FUND SHAREHOLDERS CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION MAY NOT BE AVAILABLE DIRECTLY FROM THE FUND TO SHAREHOLDERS WHOSE SHARES ARE HELD, OF RECORD, BY A FINANCIAL INSTITUTION OR IN A "STREET NAME" ACCOUNT OR NETWORKED ACCOUNT THROUGH THE NATIONAL SECURITIES CLEARING CORPORATION ("NSCC") (SEE THE SECTION CAPTIONED "ACCOUNT REGISTRATIONS" IN THIS PROSPECTUS). SHARE CERTIFICATES Shares for an initial investment, as well as subsequent investments, including the reinvestment of dividends and capital gain distributions, are generally credited to an account in the name of an investor on the books of the Fund, without the issuance of a share certificate. Maintaining shares in uncertificated form (also known as "plan balance") minimizes the risk of loss or theft of a share certificate. A lost, stolen or destroyed certificate cannot be replaced without obtaining a sufficient indemnity bond. The cost of such a bond, which is generally borne by the shareholder, can be 2% or more of the value of the lost, stolen or destroyed certificate. A certificate will be issued if requested in writing by the shareholder or by the securities dealer. CONFIRMATIONS A confirmation statement will be sent to each shareholder semi-annually to reflect the dividends reinvested during that period and after each other transaction which affects the shareholder's account. This statement will also show the total number of shares owned by the shareholder, including the number of shares in "plan balance" for the account of the shareholder. AUTOMATIC INVESTMENT PLAN Under the Automatic Investment Plan, a shareholder may be able to arrange to make additional purchases of shares automatically on a monthly basis by electronic funds transfer from a checking account, if the bank which maintains the account is a member of the Automated Clearing House, or by preauthorized checks drawn on the shareholder's bank account. A shareholder may, of course, terminate the program at any time. The Automatic Investment Plan Application included with this Prospectus contains the requirements applicable to this program. In addition, shareholders may obtain more information concerning this program from their securities dealers or from Distributors. The market value of the Fund's shares is subject to fluctuation. Before undertaking any plan for systematic investment, the investor should keep in mind that such a program does not assure a profit or protect against a loss. SYSTEMATIC WITHDRAWAL PLAN A shareholder may establish a Systematic Withdrawal Plan and receive regular periodic payments from the account, provided that the net asset value of the shares held by the shareholder is at least $5,000. There are no service charges for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount which the shareholder may withdraw is $50 per withdrawal transaction although this is merely the minimum amount allowed under the plan and should not be mistaken for a recommended amount. Retirement plans subject to mandatory distribution requirements are not subject to the $50 minimum. The plan may be established on a monthly, quarterly, semiannual or annual basis. If the shareholder establishes a plan, any capital gain distributions and income dividends paid by the Fund will be reinvested for the shareholder's account in additional shares at net asset value. Payments will then be made from the liquidation of shares at net asset value on the day of the transaction (which is generally the first business day of the month in which the payment is scheduled) with payment generally received by the shareholder three to five days after the date of liquidation. By completing the "Special Payment Instructions for Distributions" section of the Shareholder Application included with this Prospectus, a shareholder may direct the selected withdrawals to another of the Franklin Templeton Funds, to another person, or directly to a checking account. If the bank at which the account is maintained is a member of the Automated Clearing House, the payments may be made automatically by electronic funds transfer. If this last option is requested, the shareholder should allow at least 15 days for initial processing. Payments which may be paid in the interim will be sent to the address of record. Liquidation of shares may reduce or possibly exhaust the shares in the shareholder's account, to the extent withdrawals exceed shares earned through dividends and distributions, particularly in the event of a market decline. If the withdrawal amount exceeds the total plan balance, the account will be closed and the remaining balance will be sent to the shareholder. As with other redemptions, a liquidation to make a withdrawal payment is a sale for federal income tax purposes. Because the amount withdrawn under the plan may be more than the shareholder's actual yield or income, part of the payment may be a return of the shareholder's investment. The maintenance of a Systematic Withdrawal Plan concurrently with purchases of additional shares of the Fund would be disadvantageous because of the sales charge on the additional purchases. Also, redemptions of Fund shares may be subject to a contingent deferred sales charge if the shares are redeemed within 12 months of the calendar month of the original purchase date. The shareholder should ordinarily not make additional investments of less than $5,000 or three times the annual withdrawals under the plan during the time such a plan is in effect. With respect to Systematic Withdrawal Plans, the applicable contingent deferred sales charge is waived for share redemptions of up to 1% monthly of an account's net asset value (12% annually, 6% semiannually, 3% quarterly). For example, if an account maintained an annual balance of $1,000,000, only $120,000 could be withdrawn through a once-yearly Systematic Withdrawal Plan free of charge; any amount over that $120,000 would be assessed a 1% (or applicable) contingent deferred sales charge. A Systematic Withdrawal Plan may be terminated on written notice by the shareholder or the Fund, and it will terminate automatically if all shares are liquidated or withdrawn from the account, or upon the Fund's receipt of notification of the death or incapacity of the shareholder. Shareholders may change the amount (but not below the specified minimum) and schedule of withdrawal payments, or suspend one such payment by giving written notice to Investor Services at least seven business days prior to the end of the month preceding a scheduled payment. Share certificates may not be issued while a Systematic Withdrawal Plan is in effect. INSTITUTIONAL ACCOUNTS There may be additional methods of purchasing, redeeming or exchanging shares of the Fund available to institutional accounts. For further information, contact Franklin Templeton Institutional Services Department at 1-800/321-8563. EXCHANGE PRIVILEGE The Franklin Templeton Funds consist of a number of mutual funds with various investment objectives or policies. The shares of most of these mutual funds are offered to the public with a sales charge. If a shareholder's investment objective or outlook for the securities markets changes, the Fund shares may be exchanged for Class I shares of other Franklin Templeton Funds which are eligible for sale in the shareholder's state of residence and in conformity with such fund's stated eligibility requirements and investment minimums. A contingent deferred sales charge will not be imposed on exchanges. If, however, the exchanged shares were subject to a contingent deferred sales charge in the original fund purchased and shares are subsequently redeemed within 12 months of the calendar month following the original purchase date, a contingent deferred sales charge will be imposed. Investors should review the prospectus of the fund they wish to exchange from and the fund they wish to exchange into for all specific requirements or limitations on exercising the exchange privilege, for example, minimum holding periods or applicable sales charges. Exchanges between different classes of shares of the Franklin Templeton Funds are not permitted. Therefore, shares of the Fund may not be exchanged for Class II shares of other Franklin Templeton Funds. Shareholders, however, may choose to redeem shares of the Fund and purchase Class II shares of other Franklin Templeton Funds, subject to the Class II front-end sales charge and the contingent deferred sales charge for the 18 month contingency period. Exchanges may be made in any of the following ways: EXCHANGES BY MAIL Send written instructions signed by all account owners and accompanied by any outstanding share certificates properly endorsed. The transaction will be effective upon receipt of the written instructions together with any outstanding share certificates. EXCHANGES BY TELEPHONE SHAREHOLDERS, OR THEIR INVESTMENT REPRESENTATIVE OF RECORD, IF ANY, MAY EXCHANGE SHARES OF THE FUND BY TELEPHONE BY CALLING INVESTOR SERVICES AT 1-800/632-2301 OR THE AUTOMATED FRANKLIN TELEFACTS(R) SYSTEM (DAY OR NIGHT) AT 1-800/247-1753. IF THE SHAREHOLDER DOES NOT WISH THIS PRIVILEGE EXTENDED TO A PARTICULAR ACCOUNT, THE FUND OR INVESTOR SERVICES SHOULD BE NOTIFIED. The Telephone Exchange Privilege allows a shareholder to effect exchanges from the Fund into an identically registered Class I share account in one of the other available Franklin Templeton Funds. The Telephone Exchange Privilege is available only for uncertificated shares or those which have previously been deposited in the shareholder's account. The Fund and Investor Services will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. Please refer to "Telephone Transactions - Verification Procedures." During periods of drastic economic or market changes, it is possible that the Telephone Exchange Privilege may be difficult to implement and the TeleFACTS option may not be available. In this event, shareholders should follow the other exchange procedures discussed in this section, including the procedures for processing exchanges through securities dealers. EXCHANGES THROUGH SECURITIES DEALERS As is the case with all purchases and redemptions of the Fund's shares, Investor Services will accept exchange orders from securities dealers who execute a dealer or similar agreement with Distributors. See also "Exchanges By Telephone" above. Such a dealer-ordered exchange will be effective only for uncertificated shares on deposit in the shareholder's account or for which certificates have previously been deposited. A securities dealer may charge a fee for handling an exchange. ADDITIONAL INFORMATION REGARDING EXCHANGES The contingency period will be tolled (or stopped) for the period such shares are exchanged into and held in a Franklin or Templeton Class I money market fund. If the account has shares subject to a contingent deferred sales charge, shares will be exchanged into the new account on a "first-in," "first-out" basis. See also "How to Sell Shares of the Fund - Contingent Deferred Sales Charge." Exchanges are made on the basis of the net asset values of the funds involved, except as set forth below. Exchanges of shares of the Fund which were purchased without a sales charge will be charged a sales charge in accordance with the terms of the prospectus of the fund being purchased, unless the investment on which no sales charge was paid was transferred in from a fund on which the investor paid a sales charge. Exchanges of shares of the Fund which were purchased with a lower sales charge into a fund which has a higher sales charge will be charged the difference in sales charges, unless the shares were held in the Fund for at least six months prior to executing the exchange. When an investor requests the exchange of the total value of the Fund account, declared but unpaid income dividends and capital gain distributions will be transferred to the account in the fund being exchanged into and will be invested at net asset value. Because the exchange is considered a redemption and purchase of shares, the shareholder may realize a gain or loss for federal income tax purposes. Backup withholding and information reporting may also apply. Information regarding the possible tax consequences of such an exchange is included in the tax section in this Prospectus and in the SAI. There are differences among the Franklin Templeton Funds. Before making an exchange, a shareholder should obtain and review a current prospectus of the fund into which the shareholder wishes to transfer. If a substantial portion of the Fund's shareholders should, within a short period, elect to redeem their shares of the Fund pursuant to the exchange privilege, the Fund might have to liquidate portfolio securities it might otherwise hold and incur the additional costs related to such transactions. On the other hand, increased use of the exchange privilege may result in periodic large inflows of money. If this should occur, it is the general policy of the Fund to initially invest this money in short-term, interest-bearing money market instruments, unless it is felt that attractive investment opportunities consistent with the Fund's investment objective exist immediately. Subsequently, this money will be withdrawn from such short-term money market instruments and invested in portfolio securities in as orderly a manner as is possible when attractive investment opportunities arise. The Exchange Privilege may be modified or discontinued by the Fund at any time upon 60 days' written notice to shareholders. RETIREMENT PLANS Franklin Templeton IRA and 403(b) retirement plan accounts may accomplish exchanges by contacting the Fund directly. Certain restrictions may apply, however, to other types of retirement plans. See "Restricted Accounts" under "Telephone Transactions." TIMING ACCOUNTS Accounts which are administered by allocation or market timing services to purchase or redeem shares based on predetermined market indicators ("Timing Accounts") will be charged a $5.00 administrative service fee per each such exchange. All other exchanges are without charge. RESTRICTIONS ON EXCHANGES In accordance with the terms of their respective prospectuses, certain funds do not accept or may place differing limitations than those below on exchanges by Timing Accounts. The Fund reserves the right to temporarily or permanently terminate the exchange privilege or reject any specific purchase order for any Timing Account or any person whose transactions seem to follow a timing pattern who: (i) makes an exchange request out of the Fund within two weeks of an earlier exchange request out of the Fund, or (ii) makes more than two exchanges out of the Fund per calendar quarter, or (iii) exchanges shares equal in value to at least $5 million, or more than 1% of the Fund's net assets. Accounts under common ownership or control, including accounts administered so as to redeem or purchase shares based upon certain predetermined market indicators, will be aggregated for purposes of the exchange limits. The Fund also reserves the right to refuse the purchase side of an exchange request by any Timing Account, person, or group if, in the Manager's judgment, the Fund would be unable to invest effectively in accordance with its investment objective and policies, or would otherwise potentially be adversely affected. A shareholder's purchase exchanges may be restricted or refused if the Fund receives or anticipates simultaneous orders affecting significant portions of the Fund's assets. In particular, a pattern of exchanges that coincide with a "market timing" strategy may be disruptive to the Fund and therefore may be refused. The Fund and Distributors also, as indicated in "How to Buy Shares of the Fund," reserve the right to refuse any order for the purchase of shares. HOW TO SELL SHARES OF THE FUND A shareholder may at any time liquidate shares owned and receive from the Fund the value of the shares. Shares may be redeemed in any of the following ways: REDEMPTIONS BY MAIL Send a written request, signed by all registered owners, to Investor Services, at the address shown on the back cover of this Prospectus, and any share certificates which have been issued for the shares being redeemed, properly endorsed and in order for transfer. The shareholder will then receive from the Fund the value of the shares redeemed based upon the net asset value per share (less a contingent deferred sales charge, if applicable) next computed after the written request in proper form is received by Investor Services. Redemption requests received after the time at which the net asset value is calculated (at the scheduled closing of the New York Stock Exchange ["Exchange"], which is generally 1:00 p.m. Pacific time) each day that the Exchange is open for business will receive the price calculated on the following business day. Shareholders are requested to provide a telephone number(s) where they may be reached during business hours, or in the evening if preferred. Investor Services' ability to contact a shareholder promptly when necessary will speed the processing of the redemption. TO BE CONSIDERED IN PROPER FORM, SIGNATURE(S) MUST BE GUARANTEED IF THE REDEMPTION REQUEST INVOLVES ANY OF THE FOLLOWING: (1) the proceeds of the redemption are over $50,000; (2) the proceeds (in any amount) are to be paid to someone other than the registered owner(s) of the account; (3) the proceeds (in any amount) are to be sent to any address other than the shareholder's address of record, preauthorized bank account or brokerage firm account; (4) share certificates, if the redemption proceeds are in excess of $50,000; or (5) the Fund or Investor Services believes that a signature guarantee would protect against potential claims based on the transfer instructions, including, for example, when (a) the current address of one or more joint owners of an account cannot be confirmed, (b) multiple owners have a dispute or give inconsistent instructions to the Fund, (c) the Fund has been notified of an adverse claim, (d) the instructions received by the Fund are given by an agent, not the actual registered owner, (e) the Fund determines that joint owners who are married to each other are separated or may be the subject of divorce proceedings, or (f) the authority of a representative of a corporation, partnership, association, or other entity has not been established to the satisfaction of the Fund. Signature(s) must be guaranteed by an "eligible guarantor institution" as defined under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally, eligible guarantor institutions include (1) national or state banks, savings associations, savings and loan associations, trust companies, savings banks, industrial loan companies and credit unions; (2) national securities exchanges, registered securities associations and clearing agencies; (3) securities dealers which are members of a national securities exchange or a clearing agency or which have minimum net capital of $100,000; or (4) institutions that participate in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized signature guarantee medallion program. A notarized signature will not be sufficient for the request to be in proper form. Share Certificates - Where shares to be redeemed are represented by share certificates, the request for redemption must be accompanied by the share certificate and a share assignment form signed by the registered shareholders exactly as the account is registered, with the signature(s) guaranteed as referenced above. Shareholders are advised, for their own protection, to send the share certificate and assignment form in separate envelopes if they are being mailed in for redemption. Liquidation requests of corporate, partnership, trust and custodianship accounts, and accounts under court jurisdiction require the following documentation to be in proper form: Corporation - (1) Signature guaranteed letter of instruction from the authorized officer(s) of the corporation, and (2) a corporate resolution. Partnership - (1) Signature guaranteed letter of instruction from a general partner and (2) pertinent pages from the partnership agreement identifying the general partners or a certification for a partnership agreement. Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and (2) a copy of the pertinent pages of the trust document listing the trustee(s) or a Certification for Trust if the trustee(s) are not listed on the account registration. Custodial (other than a retirement account) - Signature guaranteed letter of instruction from the custodian. Accounts under court jurisdiction - Check court documents and the applicable state law since these accounts have varying requirements, depending upon the state of residence. Payment for redeemed shares will be sent to the shareholder within seven days after receipt of the request in proper form. REDEMPTIONS BY TELEPHONE Shareholders who complete the Franklin Templeton Telephone Redemption Authorization Agreement (the "Agreement"), included with this Prospectus may redeem shares of the Fund by telephone, subject to the Restricted Account exception noted under "Telephone Transactions - Restricted Accounts. INFORMATION MAY ALSO BE OBTAINED BY WRITING TO THE FUND OR INVESTOR SERVICES AT THE ADDRESS SHOWN ON THE COVER OR BY CALLING 1-800/632-2301. THE FUND AND INVESTOR SERVICES WILL EMPLOY REASONABLE PROCEDURES TO CONFIRM THAT INSTRUCTIONS GIVEN BY TELEPHONE ARE GENUINE. SHAREHOLDERS, HOWEVER, BEAR THE RISK OF LOSS IN CERTAIN CASES AS DESCRIBED UNDER "TELEPHONE TRANSACTIONS - Verification Procedures." For shareholder accounts with the completed Agreement on file, redemptions of uncertificated shares or shares which have previously been deposited with the Fund or Investor Services may be made for up to $50,000 per day per Fund account. Telephone redemption requests received before the scheduled closing of the Exchange (generally 1:00 p.m. Pacific time) on any business day will be processed that same day. The redemption check will be sent within seven days, made payable to all the registered owners on the account, and will be sent only to the address of record. Redemption requests by telephone will not be accepted within 30 days following an address change by telephone. In that case, a shareholder should follow the other redemption procedures set forth in this Prospectus. Institutional accounts (certain corporations, bank trust departments, government entities, and qualified retirement plans which qualify to purchase shares at net asset value pursuant to the terms of this Prospectus) which wish to execute redemptions in excess of $50,000 must complete an Institutional Telephone Privileges Agreement which is available from the Franklin Templeton Institutional Services Department by telephoning 1-800/321-8563. REDEEMING SHARES THROUGH SECURITIES DEALERS The Fund will accept redemption orders from securities dealers who have entered into an agreement with Distributors. This is known as a repurchase. The only difference between a normal redemption and a repurchase is that if the shareholder redeems shares through a dealer, the redemption price will be the net asset value next calculated after the shareholder's dealer receives the order which is promptly transmitted to the Fund, rather than on the day the Fund receives the shareholder's written request in proper form. The documents, as described in the preceding section, are required even if the shareholder's securities dealer has placed the repurchase order. After receipt of a repurchase order from the dealer, the Fund will still require a signed letter of instruction and all other documents set forth above. A shareholder's letter should reference the Fund, the account number, the fact that the repurchase was ordered by a dealer and the dealer's name. Details of the dealer-ordered trade, such as trade date, confirmation number, and the amount of shares or dollars, will help speed processing of the redemption. The seven-day period within which the proceeds of the shareholder's redemption will be sent will begin when the Fund receives all documents required to complete ("settle") the repurchase in proper form. The redemption proceeds will not earn dividends or interest during the time between receipt of the dealer's repurchase order and the date the redemption is processed upon receipt of all documents necessary to settle the repurchase. Thus, it is in a shareholder's best interest to have the required documentation completed and forwarded to the Fund as soon as possible. The shareholder's dealer may charge a fee for handling the order. The SAI contains more information on the redemption of shares. CONTINGENT DEFERRED SALES CHARGE In order to recover commissions paid to securities dealers on investments of $1 million or more redeemed within the contingency period of 12 months of the calendar month following their purchase will be assessed a contingent deferred sales charge, unless one of the exceptions described below applies. The charge is 1% of the lesser of the value of the shares redeemed (exclusive of reinvested dividends and capital gain distributions) or the net asset value at the time of purchase of such shares, and is retained by Distributors. The contingent deferred sales charge is waived in certain instances. In determining if a contingent deferred sales charge applies, shares not subject to a contingent deferred sales charge are deemed to be redeemed first, in the following order: (i) a calculated number of shares representing amounts attributable to capital appreciation of those shares held less than the contingency period of 12 months; (ii) shares purchased with reinvested dividends and capital gain distributions; and (iii) other shares held longer than the contingency period; and followed by any shares held less than the contingency period, on a "first in," "first out" basis. For tax purposes, a contingent deferred sales charge is treated as either a reduction in redemption proceeds or an adjustment to the cost basis of the shares redeemed. The contingent deferred sales charge is waived for: exchanges; any account fees; distributions to participants or their beneficiaries in Trust Company individual retirement plan accounts due to death, disability or attainment of age 591/2; tax-free returns of excess contributions from employee benefit plans; distributions from employee benefit plans, including those due to termination or plan transfer; redemptions through a Systematic Withdrawal Plan set up for shares prior to February 1, 1995, and for Systematic Withdrawal Plans set up thereafter, redemptions of up to 1% monthly of an account's net asset value (3% quarterly, 6% semiannually or 12% annually); redemptions initiated by the Fund due to a shareholder's account falling below the minimum specified account size; and redemptions following the death of the shareholder or the beneficial owner. All investments made during a calendar month, regardless of when during the month the investment occurred, will age one month on the last day of that month and each subsequent month. Requests for redemptions for a specified DOLLAR amount, unless otherwise specified, will result in additional shares being redeemed to cover any applicable contingent deferred sales charge while requests for redemption of a specific NUMBER of shares will result in the applicable contingent deferred sales charge being deducted from the total dollar amount redeemed. ADDITIONAL INFORMATION REGARDING REDEMPTIONS The Fund may delay the mailing of the redemption check, or a portion thereof, until the clearance of the check used to purchase Fund shares, which may take up to 15 days or more. Although the use of a certified or cashier's check will generally reduce this delay, shares purchased with these checks will also be held pending clearance. Shares purchased by federal funds wire are available for immediate redemption. In addition, the right of redemption may be suspended or the date of payment postponed if the Exchange is closed (other than customary closing) or upon the determination of the SEC that trading on the Exchange is restricted or an emergency exists, or if the SEC permits it, by order, for the protection of shareholders. Of course, the amount received may be more or less than the amount invested by the shareholder, depending on fluctuations in the market value of securities owned by the Fund. RETIREMENT PLAN ACCOUNTS Retirement plan account liquidations require the completion of certain additional forms to ensure compliance with IRS regulations. To liquidate a retirement plan account, a shareholder or securities dealer may call Franklin's Retirement Plans Department to obtain the necessary forms. Tax penalties will generally apply to any distribution from such plans to a participant under age 591/2, unless the distribution meets one of the exceptions set forth in the Code. OTHER For any information required about a proposed liquidation, a shareholder may call Franklin's Shareholder Services Department or the securities dealer may call Franklin's Dealer Services Department. TELEPHONE TRANSACTIONS Shareholders of the Fund and their investment representative of record, if any, may be able to execute various transactions by calling Investor Services at 1-800/632-2301. All shareholders will be able to: (i) effect a change in address, (ii) change a dividend option (see "Restricted Accounts" below), (iii) transfer Fund shares in one account to another identically registered account in the Fund, and (iv) exchange Fund shares as described in this Prospectus by telephone. In addition, shareholders who complete and file an Agreement as described under "How to Sell Shares of the Fund - Redemptions by Telephone" will be able to redeem shares of the Fund. VERIFICATION PROCEDURES The Fund and Investor Services will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. These will include: recording all telephone calls requesting account activity by telephone, requiring that the caller provide certain personal and/or account information requested by the telephone service agent at the time of the call for the purpose of establishing the caller's identification, and by sending a confirmation statement on redemptions to the address of record each time account activity is initiated by telephone. So long as the Fund and Investor Services follow instructions communicated by telephone which were reasonably believed to be genuine at the time of their receipt, neither they nor their affiliates will be liable for any loss to the shareholder caused by an unauthorized transaction. The Fund and Investor Services may be liable for any losses due to unauthorized or fraudulent instructions in the event such reasonable procedures are not followed. Shareholders are, of course, under no obligation to apply for or accept telephone transaction privileges. In any instance where the Fund or Investor Services is not reasonably satisfied that instructions received by telephone are genuine, the requested transaction will not be executed, and neither the Fund nor Investor Services will be liable for any losses which may occur because of a delay in implementing a transaction. RESTRICTED ACCOUNTS Telephone redemptions and dividend option changes may not be accepted on Franklin Templeton retirement accounts. To assure compliance with all applicable regulations, special forms are required for any distribution, redemption, or dividend payment. While the telephone exchange privilege is extended to Franklin Templeton IRA and 403(b) retirement accounts, certain restrictions may apply to other types of retirement plans. Changes to dividend options must also be made in writing. To obtain further information regarding distribution or transfer procedures, including any required forms, retirement account shareholders may call to speak to a Retirement Plan Specialist at 1-800/527-2020 for Franklin accounts or 1-800/354-9191 (press "2" when prompted to do so) for Templeton accounts. GENERAL During periods of drastic economic or market changes, it is possible that the telephone transaction privileges will be difficult to execute because of heavy telephone volume. In such situations, shareholders may wish to contact their investment representative for assistance, or to send written instructions to the Fund as detailed elsewhere in this Prospectus. Neither the Fund nor Investor Services will be liable for any losses resulting from the inability of a shareholder to execute a telephone transaction. The telephone transaction privilege may be modified or discontinued by the Fund at any time upon 60 days' written notice to shareholders. VALUATION OF FUND SHARES The net asset value per share of the Fund is determined as of the scheduled closing of the Exchange (generally 1:00 p.m. Pacific time) each day that the Exchange is open for trading. Many newspapers carry daily quotations of the prior trading day's closing "bid" (net asset value) and "ask" (offering price, which includes the maximum sales charge of the Fund). The net asset value per share of the Fund is determined in the following manner: The aggregate of all liabilities is deducted from the aggregate gross value of all assets, and the difference is divided by the number of shares of the Fund outstanding at the time. For the purpose of determining the aggregate net assets of the Fund, cash and receivables are valued at their realizable amounts. Interest is recorded as accrued and dividends are recorded on the ex-dividend date. Portfolio securities listed on a securities exchange or on the NASDAQ National Market System for which market quotations are readily available are valued at the last quoted sale price of the day or, if there is no such reported sale, within the range of the most recent quoted bid and ask prices. Over-the-counter portfolio securities for which market quotations are readily available are valued within the range of the most recent bid and ask prices as obtained from one or more dealers that make markets in the securities. Portfolio securities which are traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representative market as determined by the Manager. Portfolio securities underlying actively traded options are valued at their market price as determined above. The current market value of any option held by a Fund is its last sales price on the relevant Exchange prior to the time when assets are valued. Lacking any sales that day or if the last sale price is outside the bid and ask prices, the options are valued within the range of the current closing bid and ask prices if such valuation is believed to fairly reflect the contract's market value. Other securities for which market quotations are readily available are valued at the current market price, which may be obtained from a pricing service, based on a variety of factors, including recent trades, institutional size trading in similar types of securities (considering yield, risk and maturity) and/or developments related to specific issues. Securities and other assets for which market prices are not readily available are valued at fair value as determined following procedures approved by the Board of Trustees. The value of a foreign security is determined in its national currency as of the close of trading on the foreign exchange on which it is traded or as of the scheduled close of trading on the Exchange, if that is earlier, and that value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at noon, Eastern time, on the day the value of the foreign security is determined. Occasionally, events which affect the values of foreign securities and foreign exchange rates may occur between the times at which they are determined and the close of the exchange and will, therefore, not be reflected in the computation of the Fund's net asset value. If events which materially affect the value of these foreign securities occur during such period, then these securities will be valued at fair value as determined by management and approved in good faith by the Board of Trustees. With the approval of trustees, the Fund may utilize a pricing service, bank or securities dealer to perform any of the above described functions. HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND Any questions or communications regarding a shareholder's account should be directed to Investor Services at the address shown on the back cover of this Prospectus. From a touch-tone phone, shareholders may access an automated system (day or night) which offers the following features. By calling the Franklin TeleFACTS(R) system at 1-800/247-1753, shareholders may obtain account information, current price and, if available, yield or other performance information, specific to the Fund or any Franklin or Templeton Fund, regardless of class. In addition, shareholders may process an exchange, within the same class, into an identically registered Franklin account; and request duplicate confirmation or year-end statements, money fund checks, if applicable, and deposit slips. Information about the Fund may be accessed by entering Fund Code 203. The system will prompt the caller with easy to follow step-by-step instructions from the main menu. Other features may be added in the future. To assist shareholders and securities dealers wishing to speak directly with a representative, the following is a list of the various Franklin departments, telephone numbers and hours of operation to call. The same numbers may be used when calling from a rotary phone: HOURS OF OPERATION (PACIFIC TIME) DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY) Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m. Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m. Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m. 8:30 a.m. to 5:00 p.m. (Saturday) Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m. TDD (hearing impaired) 1-800/851-0637 6:00 a.m. to 5:00 p.m. In order to ensure that the highest quality of service is being provided, telephone calls placed to or by representatives in Franklin or Templeton's service departments may be accessed, recorded and monitored. These calls can be determined by the presence of a regular beeping tone. PERFORMANCE Advertisements, sales literature and communications to shareholders may contain various measures of the Fund's performance, including current yield, various expressions of total return and current distribution rate. They may occasionally cite statistics to reflect its volatility or risk. Average annual total return figures as prescribed by the SEC represent the average annual percentage change in value of $1,000 invested at the maximum public offering price (offering price includes sales charge) for one-, five- and ten-year periods, or portion thereof, to the extent applicable, through the end of the most recent calendar quarter, assuming reinvestment of all distributions. The Fund may also furnish total return quotations for other periods or based on investments at various sales charge levels or at net asset value. For such purposes total return equals the total of all income and capital gain paid to shareholders, assuming reinvestment of all distributions, plus (or minus) the change in the value of the original investment, expressed as a percentage of the purchase price. Current yield reflects the income per share earned by the Fund's portfolio investments; it is calculated by dividing the Fund's net investment income per share during a recent 30-day period by the maximum public offering price on the last day of that period and annualizing the result. Yield which is calculated according to a formula prescribed by the SEC (see the SAI ) is not indicative of the dividends or distributions which were or will be paid to the Fund's shareholders. Dividends or distributions paid to shareholders are reflected in the current distribution rate, which may be quoted to shareholders. The current distribution rate is computed by dividing the total amount of dividends per share paid by the Fund during the past 12 months by a current maximum offering price. Under certain circumstances, such as when there has been a change in the amount of dividend payout, or a fundamental change in investment policies, it might be appropriate to annualize the dividends paid during the period such policies were in effect, rather than using the dividends during the past 12 months. The current distribution rate differs from the current yield computation because it may include distributions to shareholders from sources other than dividends and interest, such as premium income from option writing, and short-term capital gain, and is calculated over a different period of time. In each case performance figures are based upon past performance, reflect all recurring charges against Fund income and will assume the payment of the maximum sales charge on the purchase of shares. When there has been a change in the sales charge structure, the historical performance figures will be restated to reflect the new rate. The investment results of the Fund, like all other investment companies, will fluctuate over time; thus, performance figures should not be considered to represent what an investment may earn in the future or what the Fund's yield, distribution rate or total return may be in any future period. GENERAL INFORMATION REPORTS TO SHAREHOLDERS The Fund's fiscal year ends on April 30. Annual Reports containing audited financial statements of the Trust, including the auditors' report, and Semi-Annual Reports containing unaudited financial statements are automatically sent to shareholders. Copies may be obtained, without charge, upon request to the Fund at the telephone number or address set forth on the cover page of this Prospectus. ORGANIZATION The Trust, a Delaware business trust, was organized on January 25, 1991. The Trust is authorized to issue an unlimited number of shares of beneficial interest, with a par value of $.01 per share in various series. All shares have one vote, and, when issued, are fully paid, non-assessable, and redeemable. Currently, the Trust issues shares in seven series. The Board of Trustees may from time to time issue other series, the assets and liabilities of which will likewise be separate and distinct from any other series. VOTING RIGHTS Shares of the Fund have equal rights as to voting and vote separately (from other Funds in the Trust) as to issues affecting the Fund, or the Trust, unless otherwise permitted by the 1940 Act. Voting rights are not cumulative, so that the holders of more than 50% of the shares voting in any election of trustees can, if they choose to do so, elect all of the trustees. The Trust does not intend to hold annual shareholders' meetings. The Trust may, however, hold a special shareholders' meeting for such purposes as changing fundamental investment restrictions, approving a new management agreement or any other matters which are required to be acted on by shareholders under the 1940 Act. A meeting may also be called by the trustees, in their discretion, or by shareholders holding at least ten percent of the shares of the Trust entitled to vote at the meeting. Shareholders will receive assistance in communicating with other shareholders in connection with the election or removal of trustees, such as that provided in Section 16(c) of the 1940 Act. Shares have no preemptive or subscription rights, and are fully transferable. There are no conversion rights; however, holders of shares of any fund in the Franklin Templeton Funds may reinvest all or any portion of the proceeds from the redemption or repurchase of such shares into shares of any other fund in the Franklin Templeton Funds as described under "Exchange Privilege." REDEMPTIONS BY THE FUND The Fund reserves the right to redeem, at net asset value, shares of any shareholder whose account has a value of less than $50 but only where the value of such account has been reduced by the shareholder's prior voluntary redemption of shares and has been inactive (except for the reinvestment of distributions) for a period of at least six months, provided advance notice is given to the shareholder. More information is included in the SAI. OTHER INFORMATION Distribution or redemption checks sent to shareholders do not earn interest or any other income during the time such checks remain uncashed and neither the Fund nor its affiliates will be liable for any loss to the shareholder caused by the shareholder's failure to cash such check(s). "Cash" payments to or from the Fund may be made by check, draft or wire. The Fund has no facility to receive, or pay out, cash in the form of currency. ACCOUNT REGISTRATIONS An account registration should reflect the investor's intentions as to ownership. Where there are two co-owners on the account, the account will be registered as "Owner 1" and "Owner 2"; the "or" designation is not used except for money market fund accounts. If co-owners wish to have the ability to redeem or convert on the signature of only one owner, a limited power of attorney may be used. Accounts should not be registered in the name of a minor, either as sole or co-owner of the account. Transfer or redemption for such an account may require court action to obtain release of the funds until the minor reaches the legal age of majority. The account should be registered in the name of one "Adult" as custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to Minors Act. A trust designation such as "trustee" or "in trust for" should only be used if the account is being established pursuant to a legal, valid trust document. Use of such a designation in the absence of a legal trust document may cause difficulties and require court action for transfer or redemption of the funds. Shares, whether in certificate form or not, registered as joint tenants or "Jt Ten" shall mean "as joint tenants with rights of survivorship" and not "as tenants in common." Except as indicated, a shareholder may transfer an account in the Fund carried in "street" or "nominee" name by the shareholder's securities dealer to a comparably registered Fund account maintained by another securities dealer. Both the delivering and receiving securities dealers must have executed dealer agreements on file with Distributors. Unless a dealer agreement has been executed and is on file with Distributors, the Fund will not process the transfer and will so inform the shareholder's delivering securities dealer. To effect the transfer, a shareholder should instruct the securities dealer to transfer the account to a receiving securities dealer and sign any documents required by the securities dealer(s) to evidence consent to the transfer. Under current procedures the account transfer may be processed by the delivering securities dealer and the Fund after the Fund receives authorization in proper form from the shareholder's delivering securities dealer. In the future it may be possible to effect such transfers electronically through the services of the NSCC. The Fund may conclusively accept instructions from an owner or the owner's nominee listed in publicly available nominee lists, regardless of whether the account was initially registered in the name of or by the owner, the nominee, or both. If a securities dealer or other representative is of record on an investor's account, the investor will be deemed to have authorized the use of electronic instructions on the account, including, without limitation, those initiated through the services of the NSCC, to have adopted as instruction and signature any such electronic instructions received by the Fund and the Shareholder Services Agent, and to have authorized them to execute the instructions without further inquiry. At the present time, such services which are available, include the NSCC's "Networking," "Fund/SERV," and "ACATS" systems. Any questions regarding an intended registration should be answered by the securities dealer handling the investment, or by calling Franklin's Fund Information Department. IMPORTANT NOTICE REGARDING TAXPAYER IRS CERTIFICATIONS Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to report to the IRS any taxable dividend, capital gain distribution, or other reportable payment (including share redemption proceeds) and withhold 31% of any such payments made to individuals and other non-exempt shareholders who have not provided a correct taxpayer identification number ("TIN") and made certain required certifications that appear in the Shareholder Application. A shareholder may also be subject to backup withholding if the IRS or a securities dealer notifies the Fund that the number furnished by the shareholder is incorrect or that the shareholder is subject to backup withholding for previous under-reporting of interest or dividend income. The Fund reserves the right to (1) refuse to open an account for any person failing to provide a TIN along with the required certifications and (2) close an account by redeeming its shares in full at the then-current net asset value upon receipt of notice from the IRS that the TIN certified as correct by the shareholder is in fact incorrect or upon the failure of a shareholder who has completed an "awaiting TIN" certification to provide the Fund with a certified TIN within 60 days after opening the account. PORTFOLIO OPERATIONS The following persons are primarily responsible for the day-to-day management of the Fund's portfolio: Suzanne Willoughby Killea, Douglas Barton and Robert Mullin since inception. Suzanne Willoughby Killea, Portfolio Manager of Advisers, holds a Master of Business Administration degree from Stanford University. She earned her Bachelor of Arts degree in architecture from Princeton University. Prior to joining Franklin, Ms. Killea worked as a summer intern with Dillion Read & Co., Inc. (1990) and Dodge & Cox (1989), and for five years as a broker with the Rubicon Group, a commercial real estate services firm. Douglas Barton, Portfolio Manager of Advisers, is a Chartered Financial Analyst and holds a Master of Business Administration degree from California State University in Hayward and a Bachelor of Science degree from California State University in Chico. Mr. Barton joined Franklin in July 1988. Robert Mullin, Portfolio Manager of Advisers, holds a Bachelor of Arts degree in economics and business from the University of Colorado at Boulder. Mr. Mullin joined Franklin in 1993 and prior thereto worked as a summer intern for the Silicon Valley Bank (1990) and for Shearson Lehman Hutton (1989). He is currently working toward his Chartered Financial Analyst certification and is a member of several industry-related associations. APPENDIX CORPORATE BOND RATINGS DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS: AAA - Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt-edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. AA - Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A - Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. BAA - Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. BA - Bonds which are rated Ba are judged to have predominantly speculative elements; their future cannot be considered well assured. Often the protection of interest and principal payments may be 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 which are 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 which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. CA - Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. DESCRIPTION OF S&P'S CORPORATE BOND RATINGS: 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 they differ from AAA issues only in small degree. A - Bonds rated A have a strong capacity to pay principal and interest, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions. BBB - Bonds rated BBB are regarded as having an adequate capacity to pay principal and interest. Whereas they normally exhibit protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this category than for bonds in the A category. 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 such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. COMMERCIAL PAPER RATINGS: A-1, A-2 AND PRIME-1, PRIME-2 Commercial paper rated by Standard & Poor's has the following characteristics: Liquidity ratios are adequate to meet cash requirements. Long-term senior debt is rated "A" or better. The issuer has access to at least two additional channels of borrowing. Basic earnings and cash flow have an upward trend with allowance made for unusual circumstances. Typically, the issuer's industry is well established and the issuer has a strong position within the industry. The reliability and quality of management are unquestioned. Relative strength or weakness of the above factors determines whether the issuer's commercial paper is rated A-1 or A-2. The ratings Prime-1 and Prime-2 are the two highest commercial paper ratings assigned by Moody's. Among the factors considered by Moody's in assigning ratings are the following: (1) evaluation of the management of the issuer; (2) economic evaluation of the issuer's industry or industries and an appraisal of speculative-type risks which may be inherent in certain areas; (3) evaluation of the issuer's products in relation to competition and customer acceptance. (4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over a period of ten years; (7) financial strength of a parent company and the relationships which exist with the issuer, and (8) recognition by the management of obligations which may be present or may arise as a result of public interest questions and preparations to meet such obligations. Relative strength or weakness of the above factors determines whether the issuer's commercial paper is rated Prime-1 or 2. FRANKLIN NATURAL RESOURCES FUND FRANKLIN STRATEGIC SERIES STATEMENT OF ADDITIONAL INFORMATION 777 MARINERS ISLAND BLVD., P.O. BOX 7777 SAN MATEO, CA 94403-7777 1-800/DIAL BEN JUNE 5, 1995 CONTENTS PAGE About the Fund (See also the Prospectus "About the Fund" and "General Information") The Fund's Investment Objective, Policies and Restrictions (See also the Prospectus "Investment Objective and Policies of the Fund") Risk Factors and Special Considerations Officers and Trustees Investment Advisory and Other Services (See also the Prospectus "Management of the Fund") The Fund's Policies Regarding Brokers Used on Portfolio Transactions Additional Information Regarding Fund Shares (See also the Prospectus "How to Buy Shares of the Fund," "How to Sell Shares of the Fund," and "Valuation of Fund Shares") Additional Information Regarding Taxation The Fund's Underwriter General Information Financial Statements Franklin Natural Resources Fund (the "Fund") is an open-end, non-diversified series of Franklin Strategic Series (the "Trust") a management investment company. The Fund seeks to provide high total return through investment primarily in securities of companies that own, produce, refine, process and market natural resources, as well as those that provide support services for natural resources companies (i.e. those that develop technologies or provide services or supplies directly related to the production of natural resources). The Fund may also invest in securities of issuers outside the U.S. A Prospectus for the Fund dated June 5, 1995, as may be amended from time to time, provides the basic information an investor should know before investing in the Fund and may be obtained without charge from the Fund or from its principal underwriter, Franklin/Templeton Distributors, Inc. ("Distributors"), at the address listed above. THIS STATEMENT OF ADDITIONAL INFORMATION (THE "SAI") IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE INVESTORS WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUNDS, AND SHOULD BE READ IN CONJUNCTION WITH THE FUND'S PROSPECTUS. ABOUT THE FUND The Franklin Natural Resources Fund is an open-end, non-diversified series of the Franklin Strategic Series, a management investment company, commonly called a mutual fund, and registered as such under the Investment Company Act of 1940 ("1940 Act"). The Trust is a Delaware business trust organized on January 25, 1991. THE FUND'S INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS As noted in the Prospectus, the Fund seeks to provide high total return. The Fund seeks to accomplish its objective by investing primarily in securities of companies that own, produce, refine, process and market natural resources, as well as those that provide support services for natural resources companies (i.e. those that develop technologies or provide services or supplies directly related to the production of natural resources). These companies are concentrated in the natural resources sector, but not limited to, the following industries: Integrated oil; oil and gas exploration and production; gold and precious metals; steel and iron ore production; aluminum production; forest products; farming products; paper products; chemicals; building materials; energy services and technology; and environmental services. The Fund may also invest in securities of issuers outside the U.S. The Fund's objective is a fundamental policy and may not be changed without shareholder approval. SOME OF THE FUND'S OTHER INVESTMENT POLICIES LOANS OF PORTFOLIO SECURITIES. As stated in the Prospectus, the Fund may make loans of its portfolio securities up to 33% of its total assets, in accordance with guidelines adopted by the Fund's Board of Trustees. The lending of securities is a common practice in the securities industry. The Fund will engage in security loan arrangements with the primary objective of increasing the Fund's income either through investing the collateral in short-term, interest-bearing obligations or by receiving loan premiums from the borrower. The Fund will continue to be entitled to all dividends or interest on any loaned securities. As with any extension of credit, there are risks of delay in recovery and loss of rights in the collateral should the borrower of the security fail financially. The Fund will not lend its portfolio securities if such loans are not permitted by the laws or regulations of any state in which its shares are qualified for sale. Loans will be subject to termination by the Fund in the normal settlement time, currently five business days after notice, or by the borrower on one day's notice. Borrowed securities must be returned when the loan is terminated. Any gain or loss in the market price of the borrowed securities which occurs during the term of the loan inures to the Fund and its shareholders. The Fund may pay reasonable finders', borrowers', administrative and custodial fees in connection with a loan of its securities. SHORT-TERM INVESTMENTS. As stated in the Prospectus, the Fund may temporarily invest cash in short-term debt instruments. The Fund may also invest its short-term cash in shares of the Franklin Money Fund, the assets of which are managed under a "master/feeder" structure by the Fund's investment adviser. Such temporary investments will only be made with cash held to maintain liquidity or pending investment, and for defensive purposes in the event or in anticipation of a general decline in the market prices of stocks in which the Fund invests. ILLIQUID SECURITIES. The Fund will not invest more than 15% of its net assets in illiquid securities. Generally, an "illiquid security" is any security that cannot be disposed of 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 Trust's Board of Trustees has authorized the Fund to invest in restricted securities where such investment is consistent with the Fund's investment objective and has authorized such securities to be considered to be liquid to the extent the Manager determines that there is a liquid institutional or other market for such securities - for example, restricted securities which may be freely transferred among qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, and for which a liquid institutional market has developed. The Board of Trustees will review any determination by the Manager to treat a restricted security as a liquid security on an ongoing basis, including the Manager's assessment of current trading activity and the availability of reliable price information. In determining whether a restricted security is properly considered a liquid security, the Manager and the Board of Trustees will take into account the following factors: (i) the frequency of trades and quotes for the security; (ii) the number of dealers willing to purchase or sell the security and the number of other potential purchasers; (iii) dealer undertakings to make a market in the security; and (iv) the nature of the security and the nature of the marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers, and the mechanics of transfer). To the extent the Fund invests in restricted securities that are deemed liquid, the general level of illiquidity in the Fund may be increased if qualified institutional buyers become uninterested in purchasing these securities or the market for these securities contracts. To comply with applicable state restrictions, the Fund will limit its investments in illiquid securities, including illiquid securities with legal or contractual restrictions on resale, except for Rule 144A restricted securities, and securities which are not readily marketable, to 15% of the Fund's net assets. WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities on a "when-issued" or "delayed delivery" basis. These transactions are arrangements under which the Fund purchases securities with payment and delivery scheduled for a future time. Such securities are subject to market fluctuation prior to delivery to the Fund and generally do not earn interest until their scheduled delivery date. Therefore, the value or yields at delivery may be more or less than the purchase price or the yields available when the transaction was entered into. Although the Fund will generally purchase these securities on a when-issued basis with the intention of acquiring such securities, it may sell such securities before the settlement date if it is deemed advisable. When the Fund is the buyer in such a transaction, it will maintain, in a segregated account with its custodian, cash or high-grade marketable securities having an aggregate value equal to the amount of such purchase commitments until payment is made. In such an arrangement, the Fund relies on the seller to complete the transaction. The other party's failure to do so may cause the Fund to miss a price or yield considered advantageous. Securities purchased on a when-issued or delayed delivery basis do not generally earn interest until their scheduled delivery date. The Fund is not subject to any percentage limit on the amount of its assets which may be invested in "when-issued" purchase obligations. To the extent the Fund engages in when-issued and delayed delivery transactions, it will do so only for the purpose of acquiring portfolio securities consistent with its investment objective and policies, and not for the purpose of investment leverage STANDBY COMMITMENT AGREEMENTS. The Fund may from time to time enter into standby commitment agreements. Such agreements commit the Fund, for a stated period of time, to purchase a stated amount of a security which may be issued and sold to the Fund at the option of the issuer. The price and coupon of the security is fixed at the time of the commitment. At the time of entering into the agreement, the Fund is paid a commitment fee, regardless of whether the security is ultimately issued, which is typically approximately 0.5% of the aggregate purchase price of the security which the Fund has committed to purchase. The Fund will enter into such agreements only for the purpose of investing in the security underlying the commitment at a yield and/or price which is considered advantageous to the Fund. The Fund will not enter into a standby commitment with a remaining term in excess of 45 days and will limit its investment in such commitments so that the aggregate purchase price of the securities subject to such commitments, together with the value of portfolio securities subject to legal restrictions on resale, will not exceed 15% of its assets, taken at the time of acquisition of such commitment or security. The Fund will at all times maintain a segregated account with its custodian bank of cash, cash equivalents, U.S. Government Securities or other high grade liquid debt securities denominated in U.S. dollars or non-U.S. currencies in an aggregate amount equal to the purchase price of the securities underlying the commitment. There can be no assurance that the securities subject to a standby commitment will be issued, and the value of the security, if issued, on the delivery date may be more or less than its purchase price. Since the issuance of the security underlying the commitment is at the option of the issuer, the Fund may bear the risk of a decline in the value of such security and may not benefit from an appreciation in the value of the security during the commitment period. The purchase of a security subject to a standby commitment agreement and the related commitment fee will be recorded on the date on which the security can reasonably be expected to be issued, and the value of the security will thereafter be reflected in the calculation of the Fund's net asset value. The cost basis of the security will be adjusted by the amount of the commitment fee. In the event the security is not issued, the commitment fee will be recorded as income on the expiration date of the standby commitment. INVESTMENT RESTRICTIONS The Fund has adopted the following restrictions as fundamental policies, which means that they may not be changed without the approval of a majority of the outstanding voting securities of the Fund. Under the Investment Company Act of 1940 (the "1940 Act"), a "vote of a majority of the outstanding voting securities" of the Fund means the affirmative vote of the lesser of (1) more than 50% of the outstanding shares of the Fund, or (2) 67% or more of the shares of the Fund present at a shareholder's meeting if more than 50% of the outstanding shares of the Fund are not represented at the meeting in person or by proxy. The Fund may not: 1. Make loans to other persons, except by the purchase of bonds, debentures or similar obligations which are publicly distributed or of a character usually acquired by institutional investors, or through loans of the Fund's portfolio securities, or to the extent the entry into a repurchase agreement or similar transaction may be deemed a loan; 2. Borrow money or mortgage or pledge any of its assets, except in the form of reverse repurchase agreements or from banks for temporary or emergency purposes in an amount up to 33% of the value of the Fund's total assets (including the amount borrowed) based on the lesser of cost or market, less liabilities (not including the amount borrowed) at the time the borrowing is made. While borrowings exceed 5% of the Fund's total assets, the Fund will not make any additional investments; 3. Underwrite securities of other issuers (does not preclude the Fund from obtaining such short-term credit as may be necessary for the clearance of purchases and sales of its portfolio securities) or invest more than 5% of its assets in illiquid securities with legal or contractual restrictions on resale (although the Fund may invest in Rule 144A restricted securities to the full extent permitted under the federal securities laws); except 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. 4. Invest in securities for the purpose of exercising management or control of the issuer; except 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. 5. Effect short sales, unless at the time the Fund owns securities equivalent in kind and amount to those sold (which will normally be for deferring recognition of gains or losses for tax purposes); 6. Invest directly in real estate, real estate limited partnerships or illiquid securities issued by real estate investment trusts (the Fund may, however, invest up to 10% of its assets in marketable securities issued by real estate investment trusts); 7. Invest directly in interests in oil, gas or other mineral leases, exploration or development programs. 8. Invest in the securities of other investment companies, except where there is no commission other than the customary brokerage commission or sales charge, or except that securities of another investment company may be acquired pursuant to a plan of reorganization, merger, consolidation or acquisition, and except where the Fund would not own, immediately after the acquisition, securities of the investment companies which exceed in the aggregate i) more than 3% of the issuer's outstanding voting stock, ii) more than 5% of the Fund's total assets and iii) together with the securities of all other investment companies held by the Fund, exceed, in the aggregate, more than 10% of the Fund's total assets; except 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. Pursuant to available exemptions from the 1940 Act, the Fund may invest in shares of one or more money market funds managed by Franklin Advisers, Inc. or its affiliates; 9. Purchase from or sell to its officers and trustees, or any firm of which any officer or trustee is a member, as principal, any securities, but may deal with such persons or firms as brokers and pay a customary brokerage commission; or purchase or retain securities of any issuer if one or more of the officers or trustees of the Trust, or its investment adviser, own beneficially more than one-half of 1% of the securities of such issuer and all such officers and trustees together own beneficially more than 5% of such securities; 10. Concentrate in any industry, except that under normal circumstances the Fund will invest at least 25% of total assets in the securities issued by domestic and foreign companies operating within the natural resources sector; except 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; and 11. Invest more than 10% of its assets in securities of companies which have a record of less than three years continuous operation, including the operations of any predecessor companies; except 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. In addition to these fundamental policies, it is the present policy of the Fund (which may be changed without the approval of the shareholders) not to engage in joint or joint and several trading accounts in securities, except that it may participate in joint repurchase arrangements, invest its short-term cash in shares of the Franklin Money Fund (pursuant to the terms of any order, and any conditions therein, issued by the SEC permitting such investments), or combine orders to purchase or sell with orders from other persons to obtain lower brokerage commissions. The Fund may not invest in excess of 5% of its net assets, valued at the lower of cost or market, in warrants, nor more than 2% of its net assets in warrants not listed on either the New York or American Stock Exchange. RISK FACTORS AND SPECIAL CONSIDERATIONS POLITICAL AND ECONOMIC RISKS. Investing in securities of non-U.S. companies may entail additional risks due to the potential political and economic instability of certain countries and the risks of expropriation, nationalization, confiscation or the imposition of restrictions on foreign investment and on repatriation of capital invested. In the event of such expropriation, nationalization or other confiscation by any country, the Fund could lose its entire investment in any such country. ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in securities the disposition of which may be subject to legal or contractual restrictions or the markets for which may be illiquid. To comply with applicable state restrictions, the Fund will limit its investments in illiquid securities, including illiquid securities with legal or contractual restrictions on resale and securities which are not readily marketable to 10% of the Fund's net assets. The sale of restricted or illiquid securities often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than does the sale of securities eligible for trading on national securities exchanges or in the over-the-counter markets. Restricted securities often sell at a price lower than similar securities that are not subject to restrictions on resale. RELIGIOUS AND ETHNIC INSTABILITY. Certain countries in which the Fund may invest may have vocal minorities that advocate radical religious or revolutionary philosophies or support ethnic independence. Any disturbance on the part of such individuals could carry the potential for wide-spread destruction or confiscation of property owned by individuals and entities foreign to such country and could cause the loss of the Fund's investment in those countries. FOREIGN INVESTMENT RESTRICTIONS. Certain countries prohibit or impose substantial restrictions on investments in their capital markets, particularly their equity markets, by foreign entities such as the Fund. As illustrations, certain countries require governmental approval prior to investments by foreign persons, or limit the amount of investment by foreign persons in a particular company, or limit the investment by foreign persons to only a specific class of securities of a company that may have less advantageous terms than securities of the company available for purchase by nationals. Moreover, the national policies of certain countries may restrict investment opportunities in issuers or industries deemed sensitive to national interests. In addition, some countries require governmental approval for the repatriation of investment income, capital or the proceeds of securities sold by foreign investors. The Fund could be adversely affected by delays in, or a refusal to grant, any required governmental approval for repatriation, as well as by the application to it of other restrictions on investments. NON-UNIFORM CORPORATE DISCLOSURE STANDARDS AND GOVERNMENTAL REGULATION. Foreign companies are not generally subject to uniform accounting, auditing and financial reporting standards or to other regulatory requirements comparable to those applicable to U.S. companies. There will be less available information concerning foreign issuers of securities held by the Fund than is available concerning U.S. issuers. In instances where the financial statements of an issuer are not deemed to reflect accurately the financial situation of the issuer, Advisers may take appropriate steps to evaluate the proposed investment, which may include on-site inspection of the issuer, interviews with its management and consultations with accountants, bankers and other specialists. ADVERSE MARKET CHARACTERISTICS. Securities of many foreign issuers may be less liquid and their prices more volatile than securities of comparable U.S. issuers. In addition, foreign securities exchanges and brokers are generally subject to less governmental supervision and regulation than in the U.S., and foreign securities exchange transactions are usually subject to fixed commissions, which are generally higher than negotiated commissions on U.S. transactions. In addition, foreign securities exchange transactions may be subject to difficulties associated with the settlement of such transactions. Delays in settlement could result in temporary periods when assets of the Fund are uninvested and no return is earned thereon. The inability of the Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of a portfolio security due to settlement problems could either result in losses to the Fund due to subsequent declines in value of the portfolio security or, if the Fund has entered into a contract to sell the security, could result in possible gain to the purchaser. The Manager will consider such difficulties when determining the allocation of the Fund's assets, although the Manager does not believe that such difficulties will have a material adverse effect on the Fund's portfolio trading activities. NON-U.S. TAXES. The Fund's net investment income from foreign issuers may be subject to non-U.S. withholding or other taxes, thereby reducing the Fund's net investment income. CURRENCY FLUCTUATIONS. Because the Fund under normal circumstances will invest a substantial portion of its total assets in the securities of foreign issuers which are denominated in foreign currencies, the strength or weakness of the U.S. dollar against such foreign currencies will account for part of the Fund's investment performance. A decline in the value of any particular currency against the U.S. dollar will cause a decline in the U.S. dollar value of the Fund's holdings of securities denominated in such currency and, therefore, will cause an overall decline in the Fund's net asset value and any net investment income and capital gains to be distributed in U.S. dollars to shareholders of the Fund. The rate of exchange between the U.S. dollar and other currencies is determined by several factors, including the supply and demand for particular currencies, central bank efforts to support particular currencies, the movement of interest rates, the pace of business activity in certain other countries and the U.S., and other economic and financial conditions affecting the world economy. Although the Fund values its assets daily in terms of U.S. dollars, the Fund does not intend to convert its holdings of foreign currencies into U.S. dollars on a daily basis. The Fund will do so from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (the "spread") between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at one rate, while offering a lesser rate of exchange should the Fund desire to sell that currency to the dealer. CURRENCY HEDGING TRANSACTIONS AND ASSOCIATED RISKS In order to hedge against currency exchange rate risks, the Fund may enter into forward currency exchange contracts and currency futures contracts and options on such futures contracts, as well as purchase put or call options and write covered put and call options on currencies traded in U.S. or foreign markets. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund may enter into forward foreign currency exchange contracts in certain circumstances, as indicated in the Fund's Prospectus. Additionally, when the Fund's investment manager believes that the currency of a particular foreign country may suffer a substantial decline against the U.S. dollar, the Fund may enter into a forward contract to sell, for a fixed amount of dollars, the amount of foreign currency approximating the value of some or all of the Fund's portfolio securities denominated in such foreign currency. The precise matching of the forward contract amounts and the value of the securities involved is not generally possible because the future value of such securities in foreign currencies changes as a consequence of market movements in the value of those securities between the date on which the contract is entered into and the date it matures. Using forward contracts to protect the value of the Fund's portfolio securities against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange which each Fund can achieve at some future point in time. The precise projection of short-term currency market movements is not possible, and short-term hedging provides a means of fixing the dollar value of only a portion of the Fund's foreign assets. The Fund may engage in cross-hedging by using forward contracts in one currency to hedge against fluctuations in the value of securities denominated in a different currency if the Fund's investment manager determines that there is a pattern of correlation between the two currencies. The Fund may also purchase and sell forward contracts (to the extent they are not deemed "commodities") for non-hedging purposes when the Fund's investment manager anticipates that the foreign currency will appreciate or depreciate in value, but securities denominated in that currency do not present attractive investment opportunities and are not held in the Fund's portfolio. The Fund's custodian will place cash or liquid high grade debt securities (i.e., securities rated in one of the top three ratings categories by Moody's Investors Service ("Moody's") or Standard & Poor's Corporation ("S&P") or, if unrated, deemed by the Fund's investment manager to be of comparable credit quality) into a segregated account of the Fund in an amount equal to the value of the Fund's total assets committed to the consummation of forward foreign currency exchange contracts requiring the Fund to purchase foreign currencies. If the value of the securities placed in the segregated account declines, additional cash or securities is placed in the account on a daily basis so that the value of the account equals the amount of the Fund's commitments with respect to such contracts. The segregated account is marked-to-market on a daily basis. Although the contracts are not presently regulated by the Commodity Futures Trading Commission (the "CFTC"), the CFTC may in the future assert authority to regulate these contracts. In such event, a Fund's ability to utilize forward foreign currency exchange contracts may be restricted. The Fund generally will not enter into a forward contract with a term of greater than one year. While the Fund may enter into forward contracts to reduce currency exchange rate risks, transactions in such contracts involve certain other risks. Thus, while the Fund may benefit from such transactions, unanticipated changes in currency prices may result in a poorer overall performance for the Fund than if it had not engaged in any such transactions. Moreover, there may be imperfect correlation between the Fund's portfolio holdings of securities denominated in a particular currency and forward contracts entered into by the Fund. Such imperfect correlation may cause the Fund to sustain losses which will prevent the Fund from achieving a complete hedge or expose the Fund to risk of foreign exchange loss. WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. The Fund may write covered put and call options and purchase put and call options on foreign currencies for the purpose of protecting against declines in the dollar value of portfolio securities and against increases in the dollar cost of securities to be acquired. The Fund may use options on currency to cross-hedge, which involves writing or purchasing options on one currency to hedge against changes in exchange rates for a different currency with a pattern of correlation. In addition, the Fund may purchase call options on currency for non-hedging purposes when the Fund's investment manager anticipates that the currency will appreciate in value, but the securities denominated in that currency do not present attractive investment opportunities and are not included in the Fund's portfolio. A call option written by the Fund obligates the Fund to sell specified currency to the holder of the option at a specified price at any time before the expiration date. A put option written by the Fund would obligate the Fund to purchase specified currency from the option holder at a specified time before the expiration date. The writing of currency options involves a risk that the Fund will, upon exercise of the option, be required to sell currency subject to a call at a price that is less than the currency's market value or be required to purchase currency subject to a put at a price that exceeds the currency's market value. The Fund may terminate its obligations under a call or put option by purchasing an option identical to the one it has written. Such purchases are referred to as "closing purchase transactions." The Fund would also be able to enter into closing sale transactions in order to realize gains or minimize losses on options purchased by the Fund. The Fund would normally purchase call options in anticipation of an increase in the dollar value of the currency in which securities to be acquired by the Fund are denominated. The purchase of a call option would entitle the Fund, in return for the premium paid, to purchase specified currency at a specified price during the option period. The Fund would ordinarily realize a gain if, during the option period, the value of such currency exceeded the sum of the exercise price, the premium paid and transaction costs; otherwise the Fund would realize either no gain or a loss on the purchase of the call option. The Fund would normally purchase put options in anticipation of a decline in the dollar value of currency in which securities in its portfolio are denominated ("protective puts"). The purchase of a put option would entitle the Fund, in exchange for the premium paid, to sell specific currency at a specified price during the option period. The purchase of protective puts is designed merely to offset or hedge against a decline in the dollar value of the Fund's portfolio securities due to currency exchange rate fluctuations. The Fund would ordinarily realize a gain if, during the option period, the value of the underlying currency decreased below the exercise price sufficiently to more than cover the premium and transaction costs; otherwise the Fund would realize either no gain or a loss on the purchase of the put option. Gains and losses on the purchase of protective put options would tend to be offset by countervailing changes in the value of the underlying currency. SPECIAL RISKS ASSOCIATED WITH OPTIONS ON CURRENCY. An exchange-traded options position may be closed out only on an options exchange which provides a secondary market for an option of the same series. Although the Fund will generally purchase or write only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange will exist for any particular option or at any particular time. For some options, no secondary market on an exchange may exist. In such event, it might not be possible to effect closing transactions in particular options, with the result that the Fund would have to exercise its options in order to realize any profit and would incur transaction costs upon the sale of underlying securities pursuant to the exercise of put options. If the Fund as a covered call option writer is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying currency (or security denominated in that currency) until the option expires or it delivers the underlying currency upon exercise. There is no assurance that higher than anticipated trading activity or other unforeseen events might not, at times, render certain of the facilities of the OCC inadequate, and thereby result in the institution by an exchange of special procedures which may interfere with the timely execution of customers' orders. The Fund may purchase and write over-the-counter options to the extent consistent with its limitation on investments in restricted securities, as described in its Prospectus. Trading in over-the-counter options is subject to the risk that the other party will be unable or unwilling to close-out options purchased or written by a Fund. The amount of the premiums which the Fund may pay or receive may be adversely affected as new or existing institutions, including other investment companies, engage in or increase their option purchasing and writing activities. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund's investment manager may choose to hedge against changes in interest rates, securities prices or currency exchange rates, by purchasing and selling various kinds of futures contracts. The Fund may also enter into closing purchase and sale transactions with respect to any such contracts and options. The futures contracts may be based on foreign currencies. The Fund will engage in futures and related options transactions only for bona fide hedging or other appropriate risk management purposes as defined below. All futures contracts entered into by the Fund are traded on U.S. exchanges or boards of trade that are licensed and regulated by the CFTC or on foreign exchanges. FUTURES CONTRACTS. A futures contract may generally be described as an agreement between two parties to buy and sell particular financial instruments for an agreed price during a designated month (or to deliver the final cash settlement price, in the case of a contract relating to an index or otherwise not calling for physical delivery at the end of trading in the contract). The Fund can sell futures contracts on a specified currency to protect against a decline in the value of such currency and its portfolio securities which are denominated in such currency. The Fund can purchase futures contracts on foreign currency to fix the price in U.S. dollars of a security denominated in such currency that the Fund has acquired or expects to acquire. Although futures contracts by their terms generally call for the actual delivery or acquisition of underlying securities, in most cases the contractual obligation is fulfilled before the date of the contract without having to make or take such delivery. The contractual obligation is offset 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 or the cash value of the index underlying the contractual obligations. The Fund may incur brokerage fees when it purchases or sells futures contracts. Positions taken in the futures markets are not normally held to maturity, but are instead liquidated through offsetting transactions which may result in a profit or a loss. While the Fund's futures contracts on currency will usually be liquidated in this manner, the Fund may instead make or take delivery of the currency whenever it appears economically advantageous for it to do so. A clearing corporation associated with the exchange on which futures on currency are traded guarantees that, if still open, the sale or purchase will be performed on the settlement date. HEDGING STRATEGIES WITH FUTURES. Hedging by use of futures contracts seeks to establish with more certainty than would otherwise be possible with respect to the effective price, currency exchange rate on portfolio securities or securities that a Fund owns or proposes to acquire. The Fund may sell futures contracts on currency in which its portfolio securities are denominated or in one currency to hedge against fluctuations in the value of securities denominated in a different currency if there is an established historical pattern of correlation between the two currencies. The CFTC and U.S. commodities exchanges have established limits referred to as "speculative position limits" on the maximum net long or net short position which any person may hold or control in a particular futures contract. Trading limits are imposed on the maximum number of contracts which any person may trade on a particular trading day. An exchange may order the liquidation of positions found to be in violation of these limits and it may impose other sanctions or restrictions. The Fund does not believe that these trading and positions limits will have an adverse impact on its strategies for hedging its securities. OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on futures contracts will give the Fund the right (but not the obligation), for a specified price, to sell or to purchase, respectively, the underlying futures contract at any time during the option period. As the purchaser of an option on a futures contract, a Fund obtains the benefit of the futures position if prices move in a favorable direction but limits its risk of loss in the event of an unfavorable price movement to the loss of the premium and transaction costs. The writing of a call option on a futures contract generates a premium which may partially offset a decline in the value of the Fund's assets. By writing a call option, the Fund becomes obligated, in exchange for the premium, to sell a futures contract, which may have a value higher than the exercise price. Conversely, the writing of a put option on a futures contract generates a premium which may partially offset an increase in the price of securities that a Fund intends to purchase. However, the Fund becomes obligated to purchase a futures contract, which may have a value lower than the exercise price. Thus, the loss incurred by the Fund in writing options on futures is potentially unlimited and may exceed the amount of the premium received. The Fund will incur transaction costs in connection with the writing of options on futures. The holder or writer of an option on a futures contract may terminate its position by selling or purchasing an offsetting option on the same series. There is no guarantee that such closing transactions can be effected. The Fund's ability to establish and close out positions on such options will be subject to the development and maintenance of a liquid market. While transactions in futures contracts and options on futures may reduce certain risks, such transactions themselves entail certain other risks. Thus, while the Fund may benefit from the use of futures and options on futures, unanticipated changes in interest rates, securities prices or currency exchange rates may result in a poorer overall performance for the Fund than if it had not entered into any futures contracts or options transactions. In the event of an imperfect correlation between a future position and portfolio position which is intended to be protected, the desired protection may not be obtained and the Fund may be exposed to risk of loss. Transactions in options and forward and futures contracts and options related thereto are generally considered "derivative securities" by the popular media. RISK FACTORS RELATING TO HIGH YIELDING, FIXED-INCOME SECURITIES The Fund may invest up to 15% of its assets in lower-rated, fixed-income securities and unrated securities of comparable quality (known as "junk bonds"). The market values of such securities tend to reflect individual corporate developments to a greater extent than do values of higher-rated securities, which react primarily to fluctuations in the general level of interest rates. Such lower-rated securities also tend to be more sensitive to economic conditions than higher-rated securities. These lower-rated, fixed-income securities are considered by Standard and Poor's Corporation ("S&P") and Moody's Investors Service ("Moody's"), two nationally recognized statistical rating organizations ("NRSROs") on balance, to be predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligation and will generally involve more credit risk than securities in the higher-rating categories. Even securities rated BBB or Baa by S&P and Moody's, respectively, ratings which are considered investment grade, possess some speculative characteristics. Companies that issue high yielding, fixed-income securities are often highly leveraged and may not have more traditional methods of financing available to them. Therefore, the risk associated with acquiring the securities of such issuers is generally greater than is the case with higher-rated securities. For example, during an economic downturn or a sustained period of rising interest rates, highly leveraged issuers of high yielding securities may experience financial stress. During these periods, such issuers may not have sufficient cash flow to meet their interest payment obligations. The issuer's ability to service its debt obligations may also be adversely affected by specific corporate developments, or the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by the issuer may be significantly greater for the holders of high yielding securities because such securities are generally unsecured and are often subordinated to other creditors of the issuer. High yielding, fixed-income securities frequently have call or buy-back features which would permit an issuer to call or repurchase the security from the Fund. Although such securities are typically not callable for a period from three to five years after their issuance, when calls are exercised by the issuer during periods of declining interest rates, the Fund would likely have to replace such called security with a lower yielding security, thus decreasing the net investment income to the Fund and dividends to shareholders. The premature disposition of a high yielding security due to a call or buy-back feature, the deterioration of the issuer's creditworthiness, or a default may also make it more difficult for the Fund to manage the timing of its receipt of income, which may have tax implications. The Fund may have difficulty disposing of certain high yielding securities because there may be a thin trading market for a particular security at any given time. The market for lower-rated, fixed-income securities generally tends to be concentrated among a smaller number of dealers than is the case for securities which trade in a broader secondary retail market. Generally, purchasers of these securities are predominantly dealers and other institutional buyers, rather than individuals. To the extent a secondary trading market for a particular high yielding, fixed-income security does exist, it is generally not as liquid as the secondary market for higher-rated securities. Reduced liquidity in the secondary market may have an adverse impact on market price and the Fund's ability to dispose of particular issues, when necessary, to meet the Fund's liquidity needs or in response to a specific economic event, such as the deterioration in the creditworthiness of the issuer. Reduced liquidity in the secondary market for certain securities may also make it more difficult for the Fund to obtain market quotations based on actual trades for purposes of valuing the Fund's portfolio. Current values for these high yield issues are obtained from pricing services and/or a limited number of dealers and may be based upon factors other than actual sales. (See "Valuation of Fund Shares" in the Prospectus.) The Fund is authorized to acquire high yielding, fixed-income securities that are sold without registration under the federal securities laws and therefore carry restrictions on resale. While many recent high yielding securities have been sold with registration rights, covenants and penalty provisions for delayed registration, if the Fund were required to sell such restricted securities before the securities have been registered, it may be deemed an underwriter of such securities as defined in the Securities Act of 1933, which entails special responsibilities and liabilities. The Fund may incur special costs in disposing of such securities; however, the Fund will generally incur no costs when the issuer is responsible for registering the securities. The Fund may acquire such securities during an initial underwriting. Such securities involve special risks because they are new issues. The Fund has no arrangement with any person concerning the acquisition of such securities, and the Manager will carefully review the credit and other characteristics pertinent to such new issues. Factors adversely impacting the market value of high yielding securities will adversely impact the Fund's net asset values. The Fund may also incur additional expenses to the extent it is required to seek recovery upon a default in the payment of principal or interest on its portfolio holdings. The Fund will rely on the Manager's judgment, analysis and experience in evaluating the creditworthiness of an issuer. In this evaluation, the Manager will take into consideration, among other things, the issuer's financial resources, its sensitivity to economic conditions and trends, its operating history, the quality of the issuer's management and regulatory matters. Rather than relying principally on the ratings assigned by the NRSROs, however, the Manager will perform its own internal investment analysis of debt securities being considered for the Fund's portfolio. Such analysis may include, among other things, consideration of relative values, based on such factors as: anticipated cash flow; interest coverage; asset coverage; earning prospects; the experience and managerial strength of the issuer; responsiveness to changes in interest rates and business conditions; debt maturity schedules and borrowing requirements; and the issuer's changing financial condition and public recognition thereof. Investments will be evaluated in the context of economic and political conditions in the issuer's domicile, such as the inflation rate, growth prospects, global trade patterns and government policies. In the event the rating on an issue held in the Fund's portfolio is changed by the ratings service, such change will be considered by the Fund in its evaluation of the overall investment merits of that security but will not necessarily result in an automatic sale of the security. The Fund may engage in a substantial number of portfolio transactions. Portfolio turnover is calculated by dividing the lesser of the Fund's annual sales or purchases of portfolio securities (exclusive of securities whose maturities at the time of acquisition were one year or less) by the monthly average value of the securities in the portfolio during the year. OFFICERS AND TRUSTEES The Board of Trustees has the responsibility for the overall management of the Fund, including general supervision and review of its investment activities. The trustees, in turn, elect the officers of the Trust who are responsible for administering the day-to-day operations of the Fund. The affiliations of the officers and trustees and their principal occupations for the past five years are listed below. Trustees who are deemed to be "interested persons" of the Trust, as defined in the 1940 Act, are indicated by an asterisk (*). Frank H. Abbott, III (74) 1045 Sansome St. San Francisco, CA 94111 Trustee President and Director, Abbott Corporation (an investment company); and director, trustee or managing general partner, as the case may be, of 31 of the investment companies in the Franklin Group of Funds. Harris J. Ashton (62) General Host Corporation Metro Center, 1 Station Place Stamford, CT 06904-2045 Trustee President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods; and director, trustee or managing general partner, as the case may be, of 55 of the investment companies in the Franklin Templeton Group of Funds. *Harmon E. Burns (50) 777 Mariners Island Blvd. San Mateo, CA 94404 Vice President and Trustee Executive Vice President, Secretary and Director, Franklin Resources, Inc.; Executive Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton Investor Services, Inc.; officer and/or director, as the case may be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee of 42 of the investment companies in the Franklin Templeton Group of Funds. S. Joseph Fortunato (62) 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 of General Host Corporation; director, trustee or managing general partner, as the case may be, of 57 of the investment companies in the Franklin Templeton Group of Funds. David W. Garbellano (80) 111 New Montgomery St., #402 San Francisco, CA 94105 Trustee Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science Corporation (a venture capital company); and director, trustee or managing general partner, as the case may be, of 30 of the investment companies in the Franklin Group of Funds. *Charles B. Johnson (62) 777 Mariners Island Blvd. San Mateo, CA 94404 Chairman of the Board and Trustee President and Director, Franklin Resources, Inc.; Chairman of the Board and Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services, Inc. and General Host Corporation; and officer and/or director, trustee or managing general partner, as the case may be, of most other subsidiaries of Franklin Resources, Inc. and of 56 of the investment companies in the Franklin Templeton Group of Funds. *Rupert H. Johnson, Jr. (54) 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.; Director, Franklin/Templeton Investor Services, Inc.; and officer and/or director, trustee or managing general partner, as the case may be, of most other subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies in the Franklin Templeton Group of Funds. Frank W. T. LaHaye (66) 20833 Stevens Creek Blvd. Suite 102 Cupertino, CA 95014 Trustee General Partner, Peregrine Associates and Miller & LaHaye, which are General Partners of Peregrine Ventures and Peregrine Ventures II (venture capital firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.; Director, FischerImaging Corporation; and director or trustee, as the case may be, of 26 of the investment companies in the Franklin Group of Funds. Gordon S. Macklin (66) 8212 Burning Tree Road Bethesda, MD 20817 Trustee Chairman, White River Corporation (information services); Director, Fund American Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI Communications Corporation, MedImmune, Inc. (biotechnology), InfoVest Corporation (information services), and Fusion Systems Corporation (industrial technology); and director, trustee or managing general partner, as the case may be, of 52 of the investment companies in the Franklin Templeton Group of Funds; formerly Chairman, Hambrecht and Quist Group; Director, H & Q Healthcare Investors; and formerly President, National Association of Securities Dealers, Inc. Kenneth V. Domingues (62) 777 Mariners Island Blvd. San Mateo, CA 94404 Vice President - Financial Reporting and Accounting Standards Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and Franklin Templeton Distributors, Inc.; officer and/or director, as the case may be, of other subsidiaries of Franklin Resources, Inc.; and Officer and/or managing general partner, as the case may be, of 37 of the investment companies in the Franklin Group of Funds. Martin L. Flanagan (34) 777 Mariners Island Blvd. San Mateo, CA 94404 Vice President and Chief Financial Officer Senior Vice President, Chief Financial Officer and Treasurer, Franklin Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services, Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and officer of 61 of the investment companies in the Franklin Templeton Group of Funds. Deborah R. Gatzek (46) 777 Mariners Island Blvd. San Mateo, CA 94404 Vice President and Secretary Senior Vice President - Legal, Franklin Resources, Inc. and Franklin Templeton Distributors, Inc.; Vice President, Franklin Advisers, Inc. and officer of 37 of the investment companies in the Franklin Group of Funds. Charles E. Johnson (38) 777 Mariners Island Blvd. San Mateo CA 94404 Vice President Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President and Director, Templeton Worldwide, Inc. and Franklin Institutional Services Corporation; officer and/or director, as the case may be, of some of the subsidiaries of Franklin Resources, Inc. and officer and/or director or trustee, as the case may be, of 24 of the investment companies in the Franklin Templeton Group of Funds. Diomedes Loo-Tam (56) 777 Mariners Island Blvd. San Mateo, CA 94404 Treasurer and Principal Accounting Officer Employee of Franklin Advisers, Inc.; and officer of 37 of the investment companies in the Franklin Group of Funds. Edward V. McVey (57) 777 Mariners Island Blvd. San Mateo, CA 94404 Vice President Senior Vice President/National Sales Manager, Franklin Templeton Distributors, Inc.; and officer of 32 of the investment companies in the Franklin Group of Funds. Trustees not affiliated with the investment manager may be, but are not currently, paid fees or expenses incurred in connection with attending meetings. As indicated above, certain of the Trust's nonaffiliated trustees also serve as directors, trustees or managing general partners of other investment companies in the Franklin Group of Funds(R) and the Templeton Group of Funds (the "Franklin Templeton Group of Funds"). The following table indicates the total fees paid to the Trust's nonaffiliated trustees by other funds in the Franklin Templeton Group of Funds. NUMBER OF BOARDS IN THE TOTAL FEES RECEIVED FRANKLIN TEMPLETON FROM THE FRANKLIN GROUP OF FUNDS* ON TEMPLETON WHICH EACH SERVES** NAME GROUP OF FUNDS* - ---- -------------- Frank H. Abbott, III $176,870 31 Harris J. Ashton 319,925 55 S. Joseph Fortunato 336,065 57 David Garbellano 153,300 30 Frank W.T. LaHaye 150,817 26 Gordon S. Macklin 303,685 52 *For the calendar year ended December 31, 1994. **The number of boards is based on the number of registered investment companies in the Franklin Templeton Group of Funds and does not include the total number of series or funds within each investment company for which the trustees are responsible. The Franklin Templeton Group of Funds currently includes 61 registered investment companies, consisting of more than 112 U.S. based mutual funds or series. Nonafilliated trustees 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, trustee or managing general partner. Certain officers or trustees who are shareholders of Franklin Resources, Inc. may be deemed to receive indirect remuneration by virtue of their participation, if any, in the fees paid to its subsidiaries. For additional information concerning trustee compensation and expenses, please see the Trust's Annual Report to Shareholders. 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. As of the date of this document, Franklin Resources, Inc. owned substantially all of the outstanding shares of the Fund as a result of having provided the Fund's initial capitalization. Charles E. Johnson is the son and nephew, respectively, of Charles B. Johnson and Rupert H. Johnson, Jr., who are brothers. INVESTMENT ADVISORY AND OTHER SERVICES The investment manager of the Fund is Franklin Advisers, Inc. ("Advisers" or "Manager"). Advisers is a wholly-owned subsidiary of Franklin Resources, Inc. ("Resources"), a publicly owned holding company whose shares are listed on the New York Stock Exchange ("Exchange"). Resources owns several other subsidiaries which are involved in investment management and shareholder services. The Manager and other subsidiary companies of Resources currently manage over $118 billion in assets for more than 3.7 million shareholders. The preceding table indicates those officers and trustees who are also affiliated persons of Distributors and Advisers. Pursuant to the management agreement, the Manager provides investment research and portfolio management services, including the selection of securities for the Fund to purchase, hold or sell and the selection of brokers through whom the Fund's portfolio transactions are executed. The Manager's activities are subject to the review and supervision of the Trust's Board of Trustees to whom the Manager renders periodic reports of the Fund's investment activities. The Manager, at its own expense, furnishes the Fund with office space and office furnishings, facilities and equipment required for managing the business affairs of the Fund; maintains all internal bookkeeping, clerical, secretarial and administrative personnel and services; and provides certain telephone and other mechanical services. The Manager is covered by fidelity insurance on its officers, directors and employees for the protection of the Fund. The Fund bears all of its expenses not assumed by the Manager. Pursuant to the management agreement, the Fund is obligated to pay the Manager a fee computed and accrued daily and paid monthly at the annual rate of 0.625 of 1% of the value of average daily net assets up to and including $100 million; 0.50 of 1% of the value of average daily net assets over $100 million up to and including $250 million; 0.45 of 1% of the value of average daily net assets over $250 million up to and including $10 billion; 0.44 of 1% of the value of average daily net assets over $10 billion up to and including $12.5 billion; 0.42 of 1% of the value of average daily net assets over $12.5 billion up to and including $15 billion; and 0.40 of 1% of the value of average daily net assets over $15 billion. During the start-up period of the Fund, Advisers has elected to reduce the fees payable under the management agreement and to assume responsibility for making payments, if necessary, to offset certain operating expenses otherwise payable by the Fund so that total ordinary operating expenses do not exceed 1.00% of the Fund's average net assets. This arrangement is in effect until April 30, 1996, and then may be continued or terminated by the Manager at any time. In addition, the management agreement specifies that the management fee will be reduced to the extent necessary to comply with the most stringent limits on the expenses which may be borne by the Fund as prescribed by any state in which the Fund's shares are offered for sale. The most stringent current limit requires the Manager to reduce or eliminate its fee to the extent that aggregate operating expenses of the Fund (excluding interest, taxes, brokerage commissions and extraordinary expenses such as litigation costs) would otherwise exceed in any fiscal year 2.5% of the first $30 million of average net assets of the Fund, 2% of the next $70 million of average net assets of the Fund and 1.5% of average net assets of the Fund in excess of $100 million. Expense reductions have not been necessary based on state requirements. The management agreement is in effect until April 30, 1996. Thereafter, it may continue in effect for successive annual periods providing such continuance is specifically approved at least annually by a vote of the Trust's Board of Trustees or by a vote of the holders of a majority of the Fund's outstanding voting securities, and in either event by a majority vote of the Fund's trustees who are not parties to the management agreement or interested persons of any such party (other than as trustees of the Fund), cast in person at a meeting called for that purpose. The management agreement may be terminated without penalty at any time by the Fund or by the Manager on 30 days' written notice and will automatically terminate in the event of its assignment, as defined in the 1940 Act. Franklin/Templeton Investor Services, Inc. ("Investor Services" or "Shareholder Services Agent"), a wholly-owned subsidiary of Resources, is the shareholder servicing agent for the Fund and acts as the Fund's transfer agent and dividend-paying agent. Investor Services is compensated on the basis of a fixed fee per account. Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco, California 94104, acts as custodian of the securities and other assets of the Fund. Citibank Delaware, One Penn's Way, New Castle, Delaware 19720, acts as custodian in connection with transfer services through bank automated clearing houses. The custodians do not participate in decisions relating to the purchase and sale of portfolio securities. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California 94105, are the Fund's independent auditors. THE FUND'S POLICIES REGARDING BROKERS USED ON PORTFOLIO TRANSACTIONS Under the current management agreement with Advisers, the selection of brokers and dealers to execute transactions in the Fund's portfolio is made by the Manager in accordance with criteria set forth in the management agreement and any directions which the Trust's Board of Trustees may give. When placing a portfolio transaction, the Manager attempts to obtain the best net price and execution of the transaction. On portfolio transactions which are done on a securities exchange, the amount of commission paid by the Fund is negotiated between the Manager and the broker executing the transaction. The Manager seeks to obtain the lowest commission rate available from brokers which are felt to be capable of efficient execution of the transactions. The determination and evaluation of the reasonableness of the brokerage commissions paid in connection with portfolio transactions are based to a large degree on the professional opinions of the persons responsible for the placement and review of such transactions. These opinions are formed on the basis of, among other things, the experience of these individuals in the securities industry and information available to them concerning the level of commissions being paid by other institutional investors of comparable size. The Manager will ordinarily place orders for the purchase and sale of over-the-counter securities on a principal rather than agency basis with a principal market maker unless, in the opinion of the Manager, a better price and execution can otherwise be obtained. Purchases of portfolio securities from underwriters will include a commission or concession paid by the issuer to the underwriter, and purchases from dealers will include a spread between the bid and ask price. As a general rule, the Fund does not purchase bonds in underwritings where it is not given any choice, or only limited choice, in the designation of dealers to receive the commission. The Fund seeks to obtain prompt execution of orders at the most favorable net price. The amount of commission is not the only relevant factor to be considered in the selection of a broker to execute a trade. If it is felt to be in the Fund's best interests, the Manager may place portfolio transactions with brokers who provide the types of services described below, even if it means the Fund will have to pay a higher commission than would be the case if no weight were given to the broker's furnishing of these services. This will be done only if, in the opinion of the Manager, the amount of any additional commission is reasonable in relation to the value of the services. Higher commissions will be paid only when the brokerage and research services received are bona fide and produce a direct benefit to the Fund or assist the Manager in carrying out its responsibilities to the Fund, or when it is otherwise in the best interest of the Fund to do so, whether or not such data may also be useful to the Manager in advising other clients. When it is felt that several brokers are equally able to provide the best net price and execution, the Manager may decide to execute transactions through brokers who provide quotations and other services to the Fund, specifically including the quotations necessary to determine the value of the Fund's net assets, in such amount of total brokerage as may reasonably be required in light of such services, and through brokers who supply research, statistical and other data to the Fund and Manager in such amount of total brokerage as may reasonably be required. It is not possible to place a dollar value on the special executions or on the research services received by Advisers from dealers effecting transactions in portfolio securities. The allocation of transactions in order to obtain additional research services permits Advisers to supplement its own research and analysis activities and to receive the views and information of individuals and research staff of other securities firms. As long as it is lawful and appropriate to do so, the Manager and its affiliates may use this research and data in their investment advisory capacities with other clients. Provided that the Fund's officers are satisfied that the best execution is obtained, the sale of Fund shares may also be considered as a factor in the selection of broker dealers to execute the Fund's portfolio transactions. Because Distributors is a member of the National Association of Securities Dealers, it is sometimes entitled to obtain certain fees when the Fund tenders portfolio securities pursuant to a tender-offer solicitation. As a means of recapturing brokerage for the benefit of the Fund, any portfolio securities tendered by the Fund will be tendered through Distributors if it is legally permissible to do so. In turn, the next management fee payable to Advisers under the management agreement will be reduced by the amount of any fees received by Distributors in cash, less any costs and expenses incurred in connection therewith. If purchases or sales of securities of the Fund and one or more other investment companies or clients supervised by the Manager are considered at or about the same time, transactions in such securities will be allocated among the several investment companies and clients in a manner deemed equitable to all by the Manager, taking into account the respective sizes of the funds and the amount of securities to be purchased or sold. It is recognized that in some cases this procedure could possibly have a detrimental effect on the price or volume of the security so far as the Fund is concerned. In other cases it is possible that the ability to participate in volume transactions and to negotiate lower brokerage commissions will be beneficial to the Fund. ADDITIONAL INFORMATION REGARDING FUND SHARES All checks, drafts, wires and other payment mediums used for purchasing or redeeming shares of the Fund must be denominated in U.S. dollars. The Fund reserves the right, in its sole discretion, to either (a) reject any order for the purchase or sale of shares denominated in any other currency, or (b) honor the transaction or make adjustments to a shareholder's account for the transaction as of a date and with a foreign currency exchange factor determined by the drawee bank. In connection with exchanges (see the Prospectus "Exchange Privilege"), it should be noted that since the proceeds from the sale of shares of an investment company generally are not available until the fifth business day following the redemption, the funds into which the Fund shareholders are seeking to exchange reserve the right to delay issuing shares pursuant to an exchange until said fifth business day. The redemption of shares of the Fund to complete an exchange for shares of any of the investment companies will be effected at the close of business on the day the request for exchange is received in proper form at the net asset value then effective. If a substantial portion of the Fund's shareholders should, within a short period, elect to redeem their shares of the Fund pursuant to the exchange privilege, the Fund might have to liquidate portfolio securities it might otherwise hold and incur the additional costs related to such transactions. On the other hand, increased use of the exchange privilege may result in periodic large inflows of money. If this should occur, it is the general policy of the Fund to initially invest this money in short-term, interest-bearing money market instruments, unless it is felt that attractive investment opportunities consistent with the Fund's investment objectives exist immediately. Subsequently, this money will be withdrawn from such short-term money market instruments and invested in portfolio securities in as orderly a manner as is possible when attractive investment opportunities arise. Dividend checks which are returned to the Fund marked "unable to forward" by the postal service will be deemed to be a request by the shareholder to change the dividend option and the proceeds will be reinvested in additional shares at net asset value until new instructions are received. The Fund may impose a $10 charge for each returned item, against any shareholder account which, in connection with the purchase of Fund shares, submits a check or a draft which is returned unpaid to the Fund. The Fund may deduct from a shareholder's account the costs of its efforts to locate a shareholder if mail is returned as undeliverable or the Fund is otherwise unable to locate the shareholder or verify the current mailing address. These costs may include a percentage of the account when a search company charges a percentage fee in exchange for its location services. Under agreements with certain banks in Taiwan, Republic of China, the Fund's shares are available to such banks' discretionary trust funds at net asset value. The banks may charge service fees to their customers who participate in the discretionary trusts. Pursuant to agreements, a portion of such service fees may be paid to Distributors, or an affiliate of Distributors, to help defray expenses of maintaining a service office in Taiwan, including expenses related to local literature fulfillment and communication facilities. Shares of the Fund may be offered to investors in Taiwan through securities firms known locally as Securities Investment Consulting Enterprises. In conformity with local business practices in Taiwan, shares of the Fund will be offered with the following schedule of sales charges: SALES SIZE OF PURCHASE CHARGE ---------------- ------ Up to U.S. $100,000 3% U.S. $100,000 to U.S. $1,000,000 2% Over U.S. $1,000,000 1% PURCHASES AND REDEMPTIONS THROUGH SECURITIES DEALERS Orders for the purchase of shares of the Fund received in proper form prior to the closing of the Exchange (generally 1:00 p.m. Pacific time) any business day that the Exchange is open for trading and promptly transmitted to the Fund will be based upon the public offering price determined that day. Purchase orders received by securities dealers or other financial institutions after the closing of the Exchange (generally 1:00 p.m. Pacific time) will be effected at the Fund's public offering price on the day it is next calculated. The use of the term "securities dealer" herein shall include other financial institutions which, pursuant to an agreement with Distributors (directly or through affiliates), handle customer orders and accounts with the Fund. Such reference, however, is for convenience only and does not indicate a legal conclusion of capacity. Orders for the redemption of shares are effected at net asset value subject to the same conditions concerning time of receipt in proper form. It is the securities dealer's responsibility to transmit the order in a timely fashion and any loss to the customer resulting from failure to do so must be settled between the customer and the securities dealer. SPECIAL NET ASSET VALUE PURCHASES. As discussed in the Prospectus under "How to Buy Shares of the Fund - Description of Special Net Asset Value Purchases," certain categories of investors may purchase shares of the Fund without a front-end sales charge ("net asset value") or a contingent deferred sales charge. Distributors or one of its affiliates may make payments, out of its own resources, to securities dealers who initiate and are responsible for such purchases, as indicated below. Distributors may make these payments in the form of contingent advance payments, which may be recovered from the securities dealer, or set off against other payments due to the securities dealer, in the event of investor redemptions made within 12 months of the calendar month following purchase. Other conditions may apply. All terms and conditions may be imposed by an agreement between Distributors, or its affiliates, and the securities dealer. The following amounts may be paid by Distributors or one of its affiliates, out of its own resources, to securities dealers who initiate and are responsible for (i) purchases of most equity and taxable-income Franklin Templeton Funds made at net asset value by certain designated retirement plans (excluding IRA and IRA rollovers): 1.00% on sales of $1 million but less than $2 million, plus 0.80% on sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million but less than $50 million, plus 0.25% on sales of $50 million but less than $100 million, plus 0.15% on sales of $100 million or more; and (ii) purchases of most taxable income Franklin Templeton Funds made at net asset value by non-designated retirement plans: 0.75% on sales of $1 million but less than $2 million, plus 0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million but less than $50 million, plus 0.25% on sales of $50 million but less than $100 million, plus 0.15% on sales of $100 million or more. These payment breakpoints are reset every 12 months for purposes of additional purchases. With respect to purchases made at net asset value by certain trust companies and trust departments of banks and certain retirement plans of organizations with collective retirement plan assets of $10 million or more, Distributors, or one of its affiliates, out of its own resources, may pay up to 1% of the amount invested. LETTER OF INTENT. An investor may qualify for a reduced sales charge on the purchase of shares of the Fund, as described in the prospectus. At any time within 90 days after the first investment which the investor wants to qualify for the reduced sales charge, a signed Shareholder Application, with the Letter of Intent section completed, may be filed with the Fund. After the Letter of Intent is filed, each additional investment will be entitled to the sales charge applicable to the level of investment indicated on the Letter. Sales charge reductions based upon purchases in more than one of the Franklin Templeton Funds will be effective only after notification to Distributors that the investment qualifies for a discount. The shareholder's holdings in the Franklin Templeton Funds, including Class II shares, acquired more than 90 days before the Letter of Intent is filed will be counted towards completion of the Letter of Intent but will not be entitled to a retroactive downward adjustment in the sales charge. Any redemptions made by the shareholder, other than by a designated benefit plan during the 13-month period will be subtracted from the amount of the purchases for purposes of determining whether the terms of the Letter of Intent have been completed. If the Letter of Intent is not completed within the 13-month period, there will be an upward adjustment of the sales charge, depending upon the amount actually purchased (less redemptions) during the period. The upward adjustment does not apply to designated benefit plans. An investor who executes a Letter of Intent prior to a change in the sales charge structure for the Fund will be entitled to complete the Letter of Intent at the lower of (i) the new sales charge structure; or (ii) the sales charge structure in effect at the time the Letter of Intent was filed with the Fund. As mentioned in the Prospectus, five percent (5%) of the amount of the total intended purchase will be reserved in shares of the Fund registered in the investor's name, unless the investor is a designated benefit plan. If the total purchases, less redemptions, equal the amount specified under the Letter, the reserved shares will be deposited to an account in the name of the investor or delivered to the investor or the investor's order. If the total purchases, less redemptions, exceed the amount specified under the Letter of Intent and is an amount which would qualify for a further quantity discount, a retroactive price adjustment will be made by Distributors and the securities dealer through whom purchases were made pursuant to the Letter of Intent (to reflect such further quantity discount) on purchases made within 90 days before and on those made after filing the Letter. The resulting difference in offering price will be applied to the purchase of additional shares at the offering price applicable to a single purchase or the dollar amount of the total purchases. If the total purchases, less redemptions, are less than the amount specified under the Letter, the investor will remit to Distributors an amount equal to the difference in the dollar amount of sales charge actually paid and the amount of sales charge which would have applied to the aggregate purchases if the total of such purchases had been made at a single time. The shareholder will receive a written notification from Distributors requesting the remittance. Upon such remittance the reserved shares held for the investor's account will be deposited to an account in the name of the investor or delivered to the investor or to the investor's order. If within 20 days after written request such difference in sales charge is not paid, the redemption of an appropriate number of reserved shares to realize such difference will be made. In the event of a total redemption of the account prior to fulfillment of the Letter of Intent, the additional sales charge due will be deducted from the proceeds of the redemption, and the balance will be forwarded to the investor. If a Letter of Intent is executed on behalf of a benefit plan (such plans are described under "Purchases at Net Asset Value" in the Prospectus), the level and any reduction in sales charge for these designated benefit plans will be based on actual plan participation and the projected investments in the Franklin Templeton Funds under the Letter of Intent. Benefit plans are not subject to the requirement to reserve 5% of the total intended purchase, or to any penalty as a result of the early termination of a plan, nor are benefit plans entitled to receive retroactive adjustments in price for investments made before executing the Letter of Intent. REDEMPTIONS IN KIND The Fund has committed itself to pay in cash (by check) all requests for redemption by any shareholder of record, limited in amount, however, during any 90-day period to the lesser of $250,000 or 1% of the value of the Fund's net assets at the beginning of such period. Such commitment is irrevocable without the prior approval of the Securities and Exchange Commission ("SEC"). In the case of requests for redemption in excess of such amounts, the trustees reserve the right to make payments in whole or in part in securities or other assets of the Fund from which the shareholder is redeeming, in case of an emergency, or if the payment of such a redemption in cash would be detrimental to the existing shareholders of the Fund. In such circumstances, the securities distributed would be valued at the price used to compute the Fund's net assets. Should the Fund do so, a shareholder may incur brokerage fees in converting the securities to cash. The Fund does not intend to redeem illiquid securities in kind; however, should it happen, shareholders may not be able to timely recover their investment and may also incur brokerage costs in selling such securities. REDEMPTIONS BY THE FUND Due to the relatively high cost of handling small investments, the Fund reserves the right to redeem, involuntarily, at net asset value, the shares of any shareholder whose account has a value of less than one-half of the initial minimum investment required for that shareholder, but only where the value of such account has been reduced by the shareholder's prior voluntary redemption of shares. Until further notice, it is the present policy of the Fund not to exercise this right with respect to any shareholder whose account has a value of $50 or more. In any event, before the Fund redeems such shares and sends the proceeds to the shareholder, it will notify the shareholder that the value of the shares in the account is less than the minimum amount and allow the shareholder 30 days to make an additional investment in an amount which will increase the value of the account to at least $100. CALCULATION OF NET ASSET VALUE As noted in the Prospectus, the Fund generally calculates net asset value as of the closing of the Exchange (generally 1:00 p.m. Pacific time) each day that the Exchange is open for trading. As of the date of this SAI, the Fund is informed that the Exchange observes the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. As stated in the Prospectus, the net asset value per share for the Fund is determined in the following manner: The aggregate of all liabilities, including, without limitation, the current market value of any outstanding options written by the Fund, accrued expenses and taxes and any necessary reserves is deducted from the aggregate gross value of all assets, and the difference is divided by the number of shares of the Fund outstanding at the time. For the purpose of determining the aggregate net assets of the Fund, cash and receivables are valued at their realizable amounts. Interest is recorded as accrued and dividends are recorded on the ex-dividend date. Portfolio securities listed on a securities exchange or on the NASDAQ National Market System for which market quotations are readily available are valued at the last quoted sale price of the day or, if there is no such reported sale, within the range of the most recent quoted bid and ask prices. Over-the-counter portfolio securities for which market quotations are readily available are valued within the range of the most recent bid and ask prices as obtained from one or more dealers that make markets in the securities. Portfolio securities which are traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representative market as determined by the Manager. Portfolio securities underlying actively traded call options are valued at their market price as determined above. The current market value of any option held by the Fund is its last sale price on the relevant exchange prior to the time when assets are valued. Lacking any sales that day or if the last sale price is outside the bid and ask prices, the options are valued within the range of the current closing bid and ask prices if such valuation is believed to fairly reflect the contract's market value. Other securities for which market quotations are readily available are valued at the current market price, which may be obtained from a pricing service, based on a variety of factors, including recent trades, institutional size trading in similar types of securities (considering yield, risk and maturity) and/or developments related to specific issues. Securities and other assets for which market prices are not readily available are valued at fair value as determined following procedures approved by the Board of Trustees. With the approval of trustees, the Fund may utilize a pricing service, bank or securities dealer to perform any of the above described functions. The value of a foreign security is determined in its national currency as of the close of trading on the foreign exchange on which it is traded or as of the schedule close of trading on the Exchange, if that is earlier, and that value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at noon, Eastern time, on the day the value of the foreign security is determined. Occasionally, events which affect the values of foreign securities and foreign exchange rates may occur between the times at which they are determined and the close of the exchange and will, therefore, not be reflected in the computation of the Fund's net asset value. If events which materially affect the value of these foreign securities occur during such period, then these securities will be valued at fair value as determined by management and approved in good faith by the Board of Trustees. REINVESTMENT DATE Shares acquired through the reinvestment of dividends will be purchased at the net asset value determined on the business day following the dividend record date (sometimes known as "ex-dividend date"). The processing date for the reinvestment of dividends may vary from month to month, and does not affect the amount or value of the shares acquired. REPORTS TO SHAREHOLDERS The Trust sends annual and semiannual reports to its shareholders regarding the Fund's performance and its portfolio holdings. SPECIAL SERVICES Franklin Institutional Services Corporation ("FISCO") provides specialized services, including recordkeeping, for institutional investors of the Fund. The cost of these services is not borne by the Fund. Investor Services may pay certain financial institutions which maintain omnibus accounts with the Fund on behalf of numerous beneficial owners for recordkeeping operations performed with respect to such beneficial owners. For each beneficial owner in the omnibus account, the Fund may reimburse Investor Services an amount not to exceed the per account fee which the Fund normally pays Investor Services. Such financial institutions may also charge a fee for their services directly to their clients. ADDITIONAL INFORMATION REGARDING TAXATION As stated in the Prospectus, the Fund intends to be treated as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The trustees reserve the right not to maintain the qualification of the Fund as a regulated investment company if they determine such course of action to be beneficial to the shareholders. In such case, the Fund will be subject to federal and possibly state corporate taxes on its taxable income and gains, and distributions to shareholders will be taxable to the extent of the Fund's available earnings and profits. Subject to the limitations discussed below, all or a portion of the income distributions paid by the Fund may be treated by corporate shareholders as qualifying dividends for purposes of the dividends-received deduction under federal income tax law. If the aggregate qualifying dividends received by the Fund (generally, dividends from U.S. domestic corporations, the stock in which is not debt-financed by the Fund and is held for at least a minimum holding period) is less than 100% of its distributable income, then the amount of the Fund's dividends paid to corporate shareholders which may be designated as eligible for such deduction will not exceed the aggregate qualifying dividends received by the Fund for the taxable year. The amount or percentage of income qualifying for the corporate dividends-received deduction will be declared by the Fund annually in a notice to shareholders mailed shortly after the end of the Fund's fiscal year. Corporate shareholders should note that dividends paid by a Fund from sources other than the qualifying dividends it receives will not qualify for the dividends-received deduction. For example, any interest income and short-term capital gain (in excess of any net long-term capital loss or capital loss carryover) included in investment company taxable income and distributed by a Fund as a dividend will not qualify for the dividends-received deduction. Corporate shareholders should also note that availability of the corporate dividends-received deduction is subject to certain restrictions. For example, the deduction is eliminated unless the Fund shares have been held (or deemed held) for at least 46 days in a substantially unhedged manner. The dividends-received deduction may also be reduced to the extent interest paid or accrued by a corporate shareholder is directly attributable to its investment in Fund shares. The entire dividend, including the portion which is treated as a deduction, is includable in the tax base on which the alternative minimum tax is computed and may also result in a reduction in the shareholder's tax basis in its Fund shares, under certain circumstances, if the shares have been held for less than two years. Corporate shareholders whose investment in the Fund is "debt financed" for these tax purposes should consult with their tax advisors concerning the availability of the dividends-received deduction. The Code requires all funds to distribute at least 98% of their taxable ordinary income earned during the calendar year and at least 98% of their capital gain net income earned during the twelve month period ending October 31 of each year (in addition to amounts from the prior year that were neither distributed, nor taxed to the Fund) to shareholders by December 31 of each year in order to avoid the imposition of a federal excise tax. Under these rules, certain distributions which are declared in October, November or December but which, for operational reasons, may not be paid to the shareholder until the following January, will be treated for tax purposes as if paid by the Fund and received by the shareholder on December 31 of the calendar year in which they are declared. The Fund intends as a matter of policy to declare such dividends, if any, in December and to pay these dividends in December or January to avoid the imposition of this tax, but does not guarantee that its distributions will be sufficient to avoid any or all federal excise taxes. Redemptions and exchanges of Fund shares are taxable transactions for federal and state income tax purposes. For most shareholders, gain or loss will be recognized in an amount equal to the difference between the shareholder's basis in the shares and the amount received, subject to the rules described below. If such shares are a capital asset in the hands of the shareholder, gain or loss will be capital gain or loss and will be long-term for federal income tax purposes if the shares have been held for more than one year. All or a portion of the sales charge incurred in purchasing shares of the Fund will not be included in the federal tax basis of such shares sold or exchanged within 90 days of their purchase (for purposes of determining gain or loss with respect to such shares) if the sales proceeds are reinvested in the Fund or in another fund in the Franklin/Templeton Funds and a sales charge which would otherwise apply to the reinvestment is reduced or eliminated. Any portion of such sales charge excluded from the tax basis of the shares sold will be added to the tax basis of the shares acquired in the reinvestment. All or a portion of a loss realized upon a redemption of shares will be disallowed to the extent other shares of the Fund are purchased (through reinvestment of dividends or otherwise) within 30 days before or after such redemption. Any loss disallowed under these rules will be added to the tax basis of the shares purchased. Any loss realized upon the redemption of shares within six months from the date of their purchase will be treated as a long-term capital loss to the extent of amounts treated as distributions of net long-term capital gain during such six-month period. The Fund's investment in options and forward contracts are subject to many complex and special tax rules. For example, 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. By contrast, the Fund's treatment of certain other options, futures and forward contracts entered into by the Fund is generally governed by Section 1256 of the Code. These "Section 1256" positions generally include listed options on debt securities, options on broad-based stock indexes, options on securities indexes, options on futures contracts, regulated futures contacts and certain foreign currency contacts and options thereon. Absent a tax election to the contrary, each such Section 1256 position held by the Fund will be marked-to-market (i.e., treated as if it were sold for fair market value) on the last business day of the Fund's fiscal year, and all gain or loss associated with fiscal year transactions and mark-to-market positions at fiscal year end (except certain foreign currency gain or loss covered by Section 988 of the Code) will generally be treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss. The effect of Section 1256 mark-to-market rules may be to accelerate income or to convert what otherwise would have been long-term capital gains into short-term capital gains or short-term capital losses into long-term capital losses within the Fund. The acceleration of income on Section 1256 positions may require the Fund to accrue taxable income without the corresponding receipt of cash. In order to generate cash to satisfy the distribution requirements of the Code, the Fund may be required to dispose of portfolio securities that it otherwise would have continued to hold or to use cash flows from other sources such as the sale of Fund shares. In these ways, any or all of these rules may affect both the amount, character and timing of income distributed to shareholders by the Fund. When the Fund holds an option or contract which substantially diminishes the Fund's risk of loss with respect to another position of the Fund (as might occur in some hedging transactions), this combination of positions could be treated as a "straddle" for tax purposes, resulting in possible deferral of losses, adjustments in the holding periods of Fund securities and conversion of short-term capital losses into long-term capital losses. Certain tax elections exist for mixed straddles [i.e., straddles comprised of at least one Section 1256 position and at least one non-Section 1256 position] which may reduce or eliminate the operation of these straddle rules. In order for the Fund to qualify as a regulated investment company, at least 90% of the Fund's annual gross income must consist of dividends, interest and certain other types of qualifying income and no more than 30% of its annual gross income may be derived from the sale or other disposition of securities or certain other instruments held for less than 3 months. Foreign exchange gains derived by a Fund with respect to the Fund's business investing in stock or securities, or options or futures with respect to such stock or securities is qualifying income for purposes of this 90% limitation. Currency speculation or the use of currency forward contracts or other currency instruments for non-hedging purposes may generate gains deemed to be not derived with respect to the Fund's business of investing in stock or securities and related options or forwards. Under current law, non-directly-related gains rising from foreign currency positions or instruments held for less than 3 months are treated as derived from the disposition of securities held less than 3 months in determining the Fund's compliance with the 30% limitation. The Fund will limit its activities involving foreign exchange gains to the extent necessary to comply with these requirements. The Fund is authorized to invest in foreign securities (see the discussion in the Prospectus under "Investment Objectives and Policies of the Fund"). Such investments, if made, will have the following tax consequences. The Fund may be subject to foreign withholding taxes on income from certain of its foreign securities. Because the Fund will likely invest 50% or less of its total assets in securities of foreign corporations, the Fund will not be entitled under the Code to pass-through to its shareholders their pro-rata share of the foreign taxes paid by the Fund. These taxes will be taken as a deduction by the Fund. Foreign exchange gains and losses realized by the Fund in connection with certain transactions involving foreign currencies, foreign currency payables or receivables, foreign currency-denominated debt securities, foreign currency forward contracts, and options or futures contracts on foreign currencies are subject to special tax rules which may cause such gains and losses to be treated as ordinary income and losses rather than capital gains and losses and may affect the amount and timing of the Fund's income or loss from such transactions and in turn its distributions to shareholders. Additionally, investments in foreign securities pose special issues to the Fund in meeting its asset diversification and income tests as a regulated investment company. The Fund will limit its investments in foreign securities to the extent necessary to comply with these requirements. THE FUND'S UNDERWRITER Pursuant to an underwriting agreement in effect until April 30, 1996, Distributors acts as principal underwriter in a continuous public offering for shares of the Fund. Distributors pays the expenses of distribution of Fund shares, including advertising expenses and the costs of printing sales material and prospectuses used to offer shares to the public. The Fund pays the expenses of preparing and printing amendments to its registration statements and prospectuses (other than those necessitated by the activities of Distributors) and of sending prospectuses to existing shareholders. The underwriting agreement will continue in effect for successive annual periods provided that its continuance is specifically approved at least annually by a vote of the Trust's Board of Trustees, or by a vote of the holders of a majority of the Fund's outstanding voting securities, and in either event by a majority vote of the Trust's trustees who are not parties to the underwriting agreement or interested persons of any such party (other than as trustees of the Trust), cast in person at a meeting called for that purpose. The underwriting agreement terminates automatically in the event of its assignment and may be terminated by either party on 90 days' written notice. DISTRIBUTION PLAN The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). Under the Plan, the Fund may pay to Distributors or others up to 0.25% per annum of its average daily net assets, for expenses incurred in the promotion and distribution of its shares. Under the Plan, the Fund is permitted to pay Distributors up to an additional 0.10% per annum of its average daily net assets for reimbursement of such distribution expenses. Pursuant to the Plan, Distributors or others will be entitled to be reimbursed each quarter for actual expenses incurred in the distribution and promotion of the Fund's shares, including, but not limited to, the printing of prospectuses and reports used for sales purposes, expenses of preparing and distributing of sales literature and related expenses, advertisements, and other distribution-related expenses, including a prorated portion of Distributors' overhead expenses attributable to the distribution of Fund shares, as well as any distribution or service fees paid to securities dealers or their firms or others who have executed a servicing agreement with the Fund, Distributors or its affiliates. In addition to the payments to which Distributors or others are entitled under the Plan, the Plan also provides that to the extent the Fund, the Manager or Distributors or other parties on behalf of the Fund, the Manager or Distributors, make payments that are deemed to be payments for the financing of any activity primarily intended to result in the sale of shares of the Fund within the context of Rule 12b-1 under the 1940 Act, then such payments shall be deemed to have been made pursuant to the Plan. In no event shall the aggregate asset-based sales charges which include payments made under the Plan, plus any other payments deemed to be made pursuant to the Plan, exceed the amount permitted to be paid pursuant to the Rules of Fair Practice of the National Association of Securities Dealers, Inc., Article III, Section 26(d)4. The terms and provisions of the Plan relating to required reports, term, and approval are consistent with Rule 12b-1. The Plan does not permit unreimbursed expenses incurred in a particular year to be carried over to or reimbursed in subsequent years. To the extent fees are for distribution or marketing functions, as distinguished from administrative servicing or agency transactions, certain banks may not be entitled to participate in the Plan to the extent that applicable federal law prohibits certain banks from engaging in the distribution of mutual fund shares. Such banking institutions, however, are permitted to receive fees under the Plan for administrative servicing or for agency transactions. If a bank were prohibited from providing such services, its customers who are shareholders would be permitted to remain shareholders of the Fund, and alternate means for continuing the servicing of such shareholders would be sought. In such an event, changes in the services provided might occur and such shareholders might no longer be able to avail themselves of any automatic investment or other services then being provided by the bank. It is not expected that shareholders would suffer any adverse financial consequences as a result of any of these changes. Securities laws of states in which the Fund's shares are offered for sale may differ from the interpretations of federal law expressed herein, and banks and financial institutions selling shares of the Fund may be required to register as dealers pursuant to state law. The Board of Trustees has determined that a consistent cash flow resulting from the sale of new shares is necessary and appropriate to meet redemptions and to take advantage of buying opportunities of portfolio securities without having to make unwarranted liquidations of other portfolio securities. The Board of Trustees, therefore, felt that it would benefit the Fund to have monies available for the direct distribution activities of Distributors or others in promoting the sale of its shares. The Board of Trustees, including the non-interested trustees, concluded that, in the exercise of their reasonable business judgment and in light of their fiduciary duties, there is a reasonable likelihood that the Plan will benefit the Fund and its shareholders. The Plan has been approved by Resources, the initial shareholder of the Trust, and by the trustees of the Trust, including those trustees who are not interested persons, as defined in the 1940 Act. The Plan is effective through April 30, 1996, and renewable annually by a vote of the Trust's Board of Trustees, including a majority vote of the trustees who are non-interested persons of the Trust and who have no direct or indirect financial interest in the operation of the Plan, cast in person at a meeting called for that purpose. It is also required that the selection and nomination of such trustees be done by the non-interested trustees. The Plan and any related agreement may be terminated at any time, without any penalty, by vote of a majority of the non-interested trustees on not more than 60 days' written notice, by Distributors, on not more than 60 days' written notice, by any act that constitutes an assignment of the Management Agreement with the Manager or the Underwriting Agreement with Distributors, or by vote of a majority of the Fund's outstanding shares. Distributors or any dealer or other firm may also terminate their respective distribution or service agreement at any time upon written notice. The Plan and any related agreements may not be amended to increase materially the amount to be spent for distribution expenses without approval by a majority of the Fund's outstanding shares, and all material amendments to the Plan or any related agreements shall be approved by a vote of the non-interested trustees, cast in person at a meeting called for the purpose of voting on any such amendment. Distributors is required to report in writing to the Board of Trustees at least quarterly on the amounts and purpose of any payment made under the Plan and any related agreements, as well as to furnish the Board of Trustees with such other information as may reasonably be requested in order to enable the Board of Trustees to make an informed determination of whether the Plan should be continued. GENERAL INFORMATION PERFORMANCE As noted in the Prospectus, the Fund may from time to time quote various performance figures to illustrate the Fund's past performance. It may occasionally cite statistics to reflect its volatility or risk. Performance quotations by investment companies are subject to rules adopted by the SEC. These rules require the use of standardized performance quotations or, alternatively, that every non-standardized performance quotation furnished by the Fund be accompanied by certain standardized performance information computed as required by the SEC. Current yield and average annual compounded total return quotations used by the Fund are based on the new standardized methods of computing performance mandated by the SEC. An explanation of those and other methods used by the Fund to compute or express performance follows. TOTAL RETURN The average annual total return is determined by finding the average annual compounded rates of return over one-, five-, and ten-year periods (or fractional portion thereof) that would equate an initial hypothetical $1,000 investment to its ending redeemable value. The calculation assumes the maximum front-end sales charge is deducted from the initial $1,000 purchase order and income dividends and capital gains are reinvested at net asset value. The quotation assumes the account was completely redeemed at the end of each one-, five- and ten-year period and the deduction of all applicable charges and fees. In considering the quotations of total return by the Fund, investors should remember that the 4.50% maximum initial sales charge reflected in each quotation is a one-time fee (charged on all direct purchases) which will have its greatest impact during the early stages of an investor's investment in the Fund. The actual performance of an investment will be affected less by this charge the longer an investor retains the investment in the Fund. Quotation figures will be calculated according to the following 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 the one-, five-, or ten-year periods at the end of the one-, five-, or ten-year periods (or fractional portion thereof). As discussed in the Prospectus, the Fund may quote total rates of return in addition to its average annual total return. Such quotations are computed in the same manner as the Fund's average annual compounded rate, except that such quotations will be based on the Fund's actual return for a specified period rather than on its average return over one-, five- and ten-year periods, or fractional portion thereof. YIELD Current yield reflects the income per share earned by the Fund's portfolio investments. Current yield is determined by dividing the net investment income per share earned during a 30-day base period by the maximum offering price per share on the last day of the period and annualizing the result. Expenses accrued for the period include any fees charged to all shareholders during the base period. Current yield figures will be 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 Yield which is calculated according to a formula prescribed by the SEC is not indicative of the amounts which were or will be paid to the Fund's shareholders. Amounts paid to shareholders are reflected in the quoted "current distribution rate." The current distribution rate is computed by dividing the total amount of dividends per share paid by the Fund during the past 12 months by a current maximum offering price. Under certain circumstances, such as when there has been a change in the amount of dividend payout, or a fundamental change in investment policies, it might be appropriate to annualize the dividends paid over the period such policies were in effect, rather than using the dividends during the past 12 months. The current distribution rate differs from the current yield computation because it may include distributions to shareholders from sources other than dividends and interest, such as short-term capital gains, and is calculated over a different period of time. VOLATILITY Occasionally statistics may be used to specify Fund volatility or risk. Measures of volatility or risk are generally used to compare Fund net asset value or performance relative to a market index. One measure of volatility is beta. Beta is the volatility of a fund relative to the total market as represented by the Standard & Poor's 500 Stock Index. A beta of more than 1.00 indicates volatility greater than the market, and a beta of less than 1.00 indicates volatility less than the market. Another measure of volatility or risk is standard deviation. Standard deviation is used to measure variability of net asset value or total return around an average over a specified period of time. The premise is that greater volatility connotes greater risk undertaken in achieving performance. OTHER PERFORMANCE QUOTATIONS With respect to those categories of investors who are permitted to purchase shares of the Fund at net asset value, sales literature pertaining to the Fund may quote a current distribution rate, yield, total return, average annual total return and other measures of performance as described elsewhere in this SAI with the substitution of net asset value for the public offering price. Sales literature referring to the use of the Fund as a potential investment for Individual Retirement Accounts (IRAs), Business Retirement Plans, and other tax-advantaged retirement plans may quote a total return based upon compounding of dividends on which it is presumed no federal income tax applies. Regardless of the method used, past performance is not necessarily indicative of future results, but is an indication of the return to shareholders only for the limited historical period used. The Fund may include in its advertising or sales material information relating to investment objectives and performance results of funds belonging to the Templeton Group of Funds. Resources is the parent company of the advisers and underwriter of both the Franklin Group of Funds and Templeton Group of Funds. COMPARISONS To help investors better evaluate how an investment in the Fund might satisfy their investment objective, advertisements and other materials regarding the Fund may discuss various measures of Fund performance as reported by various financial publications. Materials may also compare performance (as calculated above) to performance as reported by other investments, indices, and averages. Such comparisons may include, but are not limited to, the following examples: a) Dow Jones Composite Average or its component averages - an unmanaged index composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20 transportation company stocks. Comparisons of performance assume reinvestment of dividends. b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged index composed of 400 industrial stocks, 40 financial stocks, 40 utilities stocks, and 20 transportation stocks. Comparisons of performance assume reinvestment of dividends. c) The New York Stock Exchange composite or component indices - unmanaged indices of all industrial, utilities, transportation, and finance stocks listed on the New York Stock Exchange. d) Wilshire 5000 Equity Index - represents the return on the market value of all common equity securities for which daily pricing is available. Comparisons of performance assume reinvestment of dividends. e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund Performance Analysis - measure of total return and average current yield for the mutual fund industry. Rank individual mutual fund performance over specified time periods, assuming reinvestment of all distributions, exclusive of any applicable sales charges. f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. - analyzes price, current yield, risk, total return, and average rate of return (average annual compounded growth rate) over specified time periods for the mutual fund industry. g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price, yield, risk, and total return for equity funds. h) Valueline Index - an unmanaged index which follows the stocks of approximately 1,700 companies. i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau of Labor Statistics - a statistical measure of change, over time, in the price of goods and services in major expenditure groups. j) Historical data supplied by the research departments of First Boston Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce, Fenner & Smith, Lehman Brothers and Bloomberg L.P. k) Financial publications: The Wall Street Journal and Business Week, Changing Times, Financial World, Forbes, Fortune and Money magazines - provide performance statistics over specified time periods. l) Morgan Stanley Capital International World Indices, including, among others, the Morgan Stanley Capital International Europe, Australia, Far East Index ("EAFE Index"). The EAFE index is an unmanaged index of more than 1,000 companies of Europe, Australia and the Far East. m) Financial Times Actuaries Indices - including the FTA-World Index (and components thereof), which are based on stocks in major world equity markets. From time to time, advertisements or information for the Fund may include a discussion of certain attributes or benefits to be derived by an investment in the Fund. Such advertisements or information may include symbols, headlines, or other material which highlight or summarize the information discussed in more detail in the communication. Advertisements or information may also compare the Fund's performance to the return on certificates of deposit or other investments. Investors should be aware, however, that an investment in the Fund involves the risk of fluctuation of principal value, a risk generally not present in an investment in a certificate of deposit issued by a bank. For example, as the general level of interest rates rise, the value of the Fund's fixed-income investments, as well as the value of its shares which are based upon the value of such portfolio investments, can be expected to decrease. Conversely, when interest rates decrease, the value of the Fund's shares can be expected to increase. Certificates of deposit are frequently insured by an agency of the U.S. government. An investment in the Fund is not insured by any federal, state or private entity. In assessing such comparisons of performance, an investor should keep in mind that the composition of the investments in the reported indices and averages is not identical to the Fund's portfolio, that the indices and averages are generally unmanaged, and that the items included in the calculations of such averages may not be identical to the formula used by the Fund to calculate its figures. In addition there can be no assurance that the Fund will continue this performance as compared to such other averages. OTHER FEATURES AND BENEFITS The Fund may help investors achieve various investment goals such as accumulating money for retirement, saving for a down payment on a home, college cost and/or other long-term goals. The Franklin College Costs Planner may assist an investor in determining how much money must be invested on a monthly basis in order to have a projected amount available in the future to fund a child's college education. (Projected college cost estimates are based upon current costs published by the College Board.) The Franklin Retirement Planning Guide leads an investor through the steps to start a retirement savings program. Of course, an investment in the Fund cannot guarantee that such goals will be met. MISCELLANEOUS INFORMATION The Fund is a member of the Franklin Templeton Group, one of the largest mutual fund organizations in the United States and may be considered in a program for diversification of assets. Founded in 1947, Franklin, one of the oldest mutual fund organizations, has managed mutual funds for over 47 years and now services more than 2.5 million shareholder accounts. In 1992, Franklin, a leader in managing fixed-income mutual funds and an innovator in creating domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer in international investing. Together, the Franklin Templeton Group has over $118 billion in assets under management for more than 3.7 million shareholder accounts and offers 112 U.S.-based mutual funds. The Fund may identify itself by its NASDAQ or CUSIP number. The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin number one in service quality for five of the past seven years. Access persons of the Franklin Templeton Group, as defined in SEC Rule 17(j) under the 1940 Act, who are employees of Resources or its subsidiaries, are permitted to engage in personal securities transactions subject to the following general restrictions and procedures: (1) The trade must receive advance clearance from a Compliance Officer and must be completed within 24 hours after this clearance; (2) Copies of all brokerage confirmations must be sent to the Compliance Officer and within 10 days after the end of each calendar quarter, a report of all securities transactions must be provided to the Compliance Officer; (3) In addition to items (1) and (2), access persons involved in preparing and making investment decisions must file annual reports of their securities holdings each January and also inform the Compliance Officer (or other designated personnel) if they own a security that is being considered for a fund or other client transaction or if they are recommending a security in which they have an ownership interest for purchase or sale by a fund or other client. OWNERSHIP AND AUTHORITY DISPUTES In the event of disputes involving multiple claims of ownership or authority to control a shareholder's account, the Fund has the right (but has no obligation) to (a) freeze the account and require the written agreement of all persons deemed by the Fund to have a potential property interest in the account, prior to executing instructions regarding the account; (b) interplead disputed funds or accounts with a court of competent jurisdiction; or (c) surrender ownership of all or a portion of the account to the Internal Revenue Service in response to a Notice of Levy. FRANKLIN STRATEGIC SERIES File Nos. 33-39088 811-6243 FORM N-1A PART C Other Information Item 24 Financial Statements and Exhibits a) Unaudited Financial Statements dated October 31, 1995 included herein as Exhibit 99.A1. (i) Statement of Investments in Securities and Net Assets - for the six months ended October 31, 1995 (ii) Statements of Assets and Liabilities - for the six months ended October 31, 1995 (iii)Statements of Operations - for the six months ended October 31, 1995 (iv) Statements of Changes in Net Assets - for the six months ended October 31, 1995 (v) Notes to Financial Statements b) Exhibits: The following exhibits are incorporated by reference, except for exhibit 11(i) and 13(iii) which is attached herewith. (1) copies of the charter as now in effect; (i) Agreement and Declaration of Trust of Franklin California 250 Growth Index Fund as of 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 the 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 (2) copies of the existing By-Laws or instruments corresponding thereto; (i) 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) 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 (5) copies of all investment advisory contracts relating to the management of the assets of the Registrant; (i) Management Agreement between the Registrant on behalf of Franklin Small Cap Growth Fund, Franklin Global Health Care Fund, Franklin Global Utilities 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) Administration Agreement between the Registrant on behalf of Franklin MidCap Growth Fund and Franklin Advisers, Inc. dated April 12, 1993: Registrant: Franklin Strategic Series Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (iii)Administration Agreement between the Registrant on behalf of FISCO MidCap Growth Fund and Franklin Advisers, Inc. dated August 17, 1993: Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (iv) Management Agreement between the Registrant on behalf of Franklin Strategic Income Fund and Franklin Advisers, Inc. effective 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 (v) Subadvisory Agreement between Franklin Advisers, Inc. and Templeton Investment Counsel, Inc., providing for services to Franklin Strategic Income Fund 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 (vi) Amended and Restated Management Agreement between Franklin Advisers, Inc. and the Registrant on behalf of Franklin California Growth Fund effective 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 (6) 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 the Registrant on behalf of all Series except Franklin Strategic Income Series 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 Series 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 Dealers Filing: Post-Effective Amendment No. 16 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: September 12, 1995 (7) copies of all bonus, profit sharing, pension or other similar contracts or arrangements wholly or partly for the benefit of Trustees 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 (8) copies of all custodian agreements and depository contracts under Section 17(f) of the Investment Company Act of 1940 (the "1940 Act"), with respect to securities and similar investments of the Registrant, including the schedule of remuneration; (i) Custodian Agreement between Registrant and Bank of America NT & SA 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 (ii) Custodian Agreements between Registrant and Citibank Delaware 1. Citicash Management ACH Customer Agreement 2. Citibank Cash Management Services Master Agreement 3. Short Form Bank Agreement - Deposits and Disbursements of Funds Registrant: Franklin Premier Return Fund Filing: Post-Effective Amendment No. 54 to Registration Statement on Form N-1A File No. 2-12647 Filing Date: February 22, 1995 (iii)Amendment to Custodian Agreement between Registrant and Bank of America NT & SA dated April 12, 1995 Filing: Post-Effective Amendment No. 16 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: September 12, 1995 (9) 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; Not Applicable (10) an opinion and consent of counsel as to the legality of the securities being registered, indicating whether they will when sold be legally issued, fully paid and nonassessable; Not Applicable (11) Copies of any other opinions, appraisals or rulings and consents to the use thereof relied on in the preparation of this registration statement and required by Section 7 of the 1933 Act; (i) Consent of Independent Auditors dated December 1, 1995 (12) all financial statements omitted from Item 23; Not Applicable (13) copies of any agreements or understandings made in consideration for providing the initial capital between or among the Registrant, the underwriter, adviser, promoter or initial stockholders and written assurances from promoters or initial stockholders that their purchases were made for investment purposes without any present intention of redeeming or reselling; (i) Letter of Understanding dated August 20, 1991. Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (ii) Letter of Understanding dated April 12, 1995. Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (iii)Letter of Understanding dated June 5, 1995 (14) copies of the model plan used in the establishment of any retirement plan in conjunction with which Registrant offers its securities, any instructions thereto and any other documents making up the model plan. Such form(s) should disclose the costs and fees charged in connection therewith; (i) Copy of Model Retirement Plan is Incorporated herein by reference to: Registrant: AGE High Income Fund, Inc. Filing: Post-effective Amendment No. 26 to Registration Statement on Form N-1A File No. 2-30203 Filing Date: August 1, 1989 (15) copies of any plan entered into by Registrant pursuant to Rule 12b-l 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 Franklin Strategic Series on behalf of Franklin California Growth Fund, Franklin Small Cap Growth Fund, Franklin Global Health Care Fund and Franklin Global Utilities Fund and Franklin 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 Franklin Strategic Series 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 Distributors, Inc. dated May 24, 1994 is Incorporated herein by reference to: Registrant: Franklin Strategic Series 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 is Incorporated herein by reference to: Registrant: Franklin Strategic Series Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (16) schedule for computation of each performance quotation provided in the registration statement in response to Item 22 (which need not be audited). (i) Schedule for Computation of Performance and Quotations is Incorporated herein by reference to: Registrant: Franklin Tax-Advantaged U.S. Government Securities Fund Filing: Post-Effective Amendment No. 8 to Registration Statement on Form N-1A File No. 33-11963 Filing Date: March 1, 1995 (17) Powers of Attorney (i) Power of Attorney for Franklin Strategic Series dated February 16, 1995 is Incorporated herein by Reference to: Registrant: Franklin Strategic Series Filing: Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: June 1, 1995 (ii) Power of Attorney for MidCap Growth Portfolio dated June 29, 1995: Filing: Post-Effective Amendment No. 15 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: July 3, 1995 (iii)Certificate of Secretary for Franklin Strategic Series dated February 16, 1995: 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 Secretary for MidCap Growth Portfolio dated June 29, 1995: Filing: Post-Effective Amendment No. 15 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: July 3, 1995 (18) Copies of any plan entered into by Registrant pursuant to Rule 18f-3 under the 1940 Act (i) Form of Multiple Class Plan: Filing: Post-Effective Amendment No. 15 to Registration Statement on Form N-1A File No. 33-39088 Filing Date: July 3, 1995 (27) Financial Data Schedule Computation Not Applicable Item 25 Persons Controlled by or under Common Control with Registrant None Item 26 Number of Holders of Securities As of November 27, 1995 the number of record holders of the only classes of securities of the Registrant were as follows: Number of Title of Class Record Holders Class I Shares of Beneficial Interest: Franklin Natural Resources Fund 266 Item 27 Indemnification 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 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 or 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 28 Business and Other Connections of Investment Adviser a) Franklin Advisers, Inc. The officers and Directors of the Registrant's manager also serve as officers and/or directors for (1) the manager's corporate parent, Franklin Resources, Inc., and/or (2) other investment companies in the Franklin Group of Funds (Registered Trademark). In addition, Mr. Charles B. Johnson is a director of General Host Corporation. For additional information please see Part B and Schedules A and D of Form ADV of the Funds' Investment Manager (SEC File 801-26292), incorporated herein by reference, which sets forth the officers and directors of the Investment Manager and information as to any business, profession, vocation or employment of a substantial nature engaged in by those officers and directors during the past two years. b) Templeton Investment Counsel, Inc. Templeton Investment Counsel, Inc. ("TICI"), an indirect, wholly owned subsidiary of Franklin Resources, Inc., serves as the Franklin Strategic Income Fund's Sub-adviser, furnishing to Franklin Advisers, Inc. in that capacity, portfolio management services and investment research. For additional information please see Part B and Schedules A and D of Form ADV of the Franklin Strategic Income Fund's Sub-adviser (SEC File 801-15125), incorporated herein by reference, which sets forth the officers and directors of the Sub-adviser and information as to any business, profession, vocation or employment of a substantial nature engaged in by those officers and directors during the past two years. Item 29 Principal Underwriters a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as principal underwriter of shares of AGE High Income Fund, Inc., Franklin California Tax-Free Income Fund, Inc., Franklin California Tax-Free Trust, Franklin Custodian Funds, Inc., Franklin Equity Fund, Franklin Federal Money Fund, Franklin Federal Tax-Free Income Fund, Franklin Gold Fund, Franklin International Trust, Franklin Investors Securities Trust, Franklin Managed Trust, Franklin Money Fund, Franklin Municipal Securities Trust, Franklin New York Tax-Free Income Fund, Inc., Franklin New York Tax-Free Trust, Franklin Premier Return Fund, Franklin Real Estate Securities Trust, Franklin Strategic Mortgage Portfolio, Franklin Tax-Exempt Money Fund, Franklin Tax-Advantaged High Yield Securities Fund, Franklin Tax-Advantaged International Bond Fund, Franklin Tax-Advantaged U.S. Government Securities Fund, Franklin Tax-Free Trust, Franklin Value Investors Trust, Institutional Fiduciary Trust, Templeton American Trust, Inc., Franklin Templeton Japan Fund, Franklin Templeton Money Fund Trust, Templeton Capital Accumulator Fund, Inc., Templeton Developing Markets Trust, Templeton Funds, Inc., Templeton Global Investment Trust, Templeton Global Opportunities Trust, Templeton Growth Fund, Inc., Templeton Income Trust, Templeton Institutional Funds, Inc., Templeton Real Estate Securities Fund, Templeton Smaller Companies Growth Fund, Inc., Templeton Variable Products Series Fund. b) The information required by this Item 29 with respect to each director and officer of Distributors is incorporated by reference to Part B of this N-1A and Schedule A of Form BD filed by Distributors with the Securities and Exchange Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889) c) Not Applicable. Registrant's principal underwriter is an affiliated person of an affiliated person of the Registrant. Item 30 Location of Accounts and Records The accounts, books or other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940 are kept by the Registrant or its shareholder services agent, Franklin/Templeton Investor Services, Inc., both of whose address is 777 Mariners Island Blvd., San Mateo, CA 94404. Item 31 Management Services There are no management-related service contracts not discussed in Part A or Part B. Item 32 Undertakings a) The Registrant hereby undertakes to promptly call a meeting of shareholders for the purpose of voting upon the question of removal of any trustee or trustees when requested in writing to do so by the record holders of not less than 10 per cent of the Registrant's outstanding shares to assist its shareholders in the communicating with other shareholders in accordance with the requirements of Section 16(c) of the Investment Company Act of 1940. b) The Registrant hereby undertakes to comply with the information requirement in Item 5A of the Form N-1A by including the required information in the Trust's annual report and to furnish each person to whom a prospectus is delivered a copy of the annual report upon request and without charge. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, as amended, the Registrant has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized in the City of San Mateo and the State of California, on the 4th day of December 1995. Franklin Strategic Series (Registrant) By: Rupert H. Johnson, Jr., President Rupert H. Johnson, Jr., President Pursuant to the requirements of the Securities Act of 1933, this Amendment to its Registration Amendment has been signed below by the following persons in the capacities and on the dates indicated: Rupert H. Johnson, Jr.* Principal Executive Officer and Rupert H. Johnson, Jr. Trustee Dated: December 4, 1995 Martin L. Flanagan* Principal Financial Officer Martin L. Flanagan Dated: December 4, 1995 Diomedes Loo-Tam* Principal Accounting Officer Diomedes Loo-Tam Dated: December 4, 1995 Frank H. Abbott, III* Trustee Frank H. Abbott, III Dated: December 4, 1995 Harris J. Ashton* Trustee Harris J. Ashton Dated: December 4, 1995 Harmon E. Burns* Trustee Harmon E. Burns Dated: December 4, 1995 S. Joseph Fortunato* Trustee S. Joseph Fortunato Dated: December 4, 1995 David W. Garbellano* Trustee David W. Garbellano Dated: December 4, 1995 Charles B. Johnson* Trustee Charles B. Johnson Dated: December 4, 1995 Frank W.T. LaHaye* Trustee Frank W.T. LaHaye Dated: December 4, 1995 Gordon S. Macklin* Trustee Gordon S. Macklin Dated: December 4, 1995 *By /S/ Larry L. Greene Larry L. Greene, Attorney-in-Fact (Pursuant to Power of Attorney previously filed) EX-99.EXIND 2 FRANKLIN STRATEGIC SERIES REGISTRATION STATEMENT EXHIBITS INDEX EXHIBIT NO. DESCRIPTION LOCATION EX-99.A1(i) Unaudited Financial Statements dated Attached October 31, 1995 EX-99.B1(i) Agreement and Declaration of Trust of * Franklin California 250 Growth Index Fund as of January 22, 1991 EX-99.B1(ii) Certificate of Trust of Franklin California * 250 Growth Index Fund dated January 22, 1991 EX-99.B1(iii) Certificate of Amendment of Certificate of * Trust to the Franklin California 250 Growth Index Fund dated November 19, 1991 EX-99.B1(iv) Certificate of Amendment to the Certificate * of Trust of Franklin Strategic Series dated May 14, 1992 EX-99.B2(i) Amended and Restated By-Laws of Franklin * California250 Growth Index Fund as of April 25, 1991 EX-99.B2(ii) Amendment to By-Laws dated October 27, 1994 * EX-99.B5(i) Management Agreement between Registrant on * behalf of Franklin Small Cap Growth Fund, Franklin Global Healthcare Fund, Franklin Global Utilities Fund and Franklin Advisers, Inc. dated February 24, 1992 EX-99.B5(ii) Administration Agreement between Registrant * on behalf of Franklin MidCap Growth Fund and Franklin Advisers, Inc. dated April 12, 1993 EX-99.B5(iii) Administration Agreement between Registrant * on behalf of FISCO MidCap Growth Fund and Franklin Advisers, Inc. dated August 17, 1993 EX-99.B5(iv) Management Agreement between Registrant on * behalf of Franklin Strategic Income Fund and Franklin Advisers, Inc. effective May 24, 1994 EX-99.B5(v) Subadvisory Agreement between Franklin * Advisers, Inc. and Templeton Investment Counsel, Inc., providing for services to Franklin Strategic Income Fund dated May 24, 1994 EX-99.B5(vi) Amended and Restated Management Agreement * between Franklin Advisers, Inc. and the Registrant, on behalf of Franklin California Growth Fund effective July 12, 1993 EX-99.B6(i) Amended and Restated Distribution Agreement * between Registrant and Franklin/Templeton Distributors, Inc. on behalf of all Series except Franklin Strategic Income Series dated April 23, 1995 EX-99.B6(ii) Amended and Restated Distribution * Agreements between Registrant and Franklin/Templeton Distributors, Inc. on behalf of Franklin Strategic Income Series dated March 29, 1995 Ex-99.B6(iii) Forms of Dealer Agreements between * Franklin/Templeton Distributors, Inc. and dealers EX-99.B8(i) Custodian Agreement between Registrant and * Bank of America (Franklin Small Cap Growth Fund) dated May 24, 1994 EX-99.B8(ii) Custodian Agreements between Registrant and * Citibank Delaware EX-99.B8(iii) Amendment to Custodian Agreement between * Registrant and Bank of America NT & SA dated April 12, 1995 EX-99.B11(i) Consent of Independent Auditors for Attached Franklin Strategic Series dated December 1, 1995 EX-99.B13(i) Letter of Understanding dated August 20, * 1991 EX-99.B13(ii) Letter of Understanding dated April 12, * 1995 EX-99.B13(iii) Letter of Understanding for Franklin Attached Natural Resources Fund, dated June 5, 1995 EX-99.B14(i) Copy of Model Retirement Plan * EX-99.B15(i) Amended and Restated Distribution Plan * between Franklin Strategic Series and Franklin Templeton Distributors, Inc. on behalf of Franklin California Growth Fund, Franklin Small Cap Growth Fund, Franklin Global Health Care Fund and Franklin Global Utilities Fund dated July 1, 1993 EX-99.B15(ii) Distribution Plan between Franklin * Strategic Series and Franklin Templeton Distributors, Inc. on behalf of Franklin Global Utilities Fund-Class II dated March 30, 1995 EX-99.B15(iii) Distribution Plan pursuant to Rule 12b-1 * between Registrant, on behalf of the Franklin Strategic Income Fund, and Franklin Distributors, Inc. dated May 24, 1994 EX-99.B15(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 EX-99.B16(i) Schedule for Computation * EX-99.B17(i) Power of Attorney for Franklin Strategic * Series dated February 16, 1995 EX-99.B17(ii) Power of Attorney for MidCap Growth * Portfolio dated June 29, 1995 EX-99.B17(iii) Certificate of Secretary for Franklin * Strategic Series dated February 16, 1995 EX-99.B17(iv) Certificate of Secretary for MidCap Growth * Portfolio dated June 29, 1995 EX-99.B18(i) Form of Multiple Class Plan * * Incorporated by reference EX-99.A1(I) 3 FRANKLIN STRATEGIC SERIES
Statement of Investments in Securities and Net Assets, October 31, 1995 (unaudited) Value Shares Franklin California Growth Fund (Note 1) Common Stocks 85.7% Business Services 3.5% 15,000 Avery-Dennison Corp. ............................................................ $ 671,250 16,500 aRobert Half International, Inc. ................................................. 602,250 1,273,500 Consumer Services 2.7% 3,700 Disney (Walt) Co. ............................................................... 213,212 17,000 McClatchy Newspapers, Inc., Series A ............................................ 335,750 5,000 United Television, Inc. ......................................................... 426,250 975,212 Electronic Technology 16.0% 3,600 a3Com Corp. ...................................................................... 169,200 14,000 aBay Networks, Inc. .............................................................. 927,500 8,000 aCisco Systems, Inc. ............................................................. 620,000 5,000 aComputer Sciences Corp. ......................................................... 334,375 25,000 aConner Peripherals, Inc. ........................................................ 450,000 20,000 Logicon, Inc. ................................................................... 457,500 15,000 aNovell, Inc. .................................................................... 247,500 13,000 aRead-Rite Corp. ................................................................. 453,375 11,800 aSeagate Technology, Inc. ........................................................ 528,050 40,000 aSilicon Graphics, Inc. .......................................................... 1,330,000 13,000 aVeriFone, Inc. .................................................................. 351,000 5,868,500 Energy/Minerals 7.0% 6,000 Atlantic Richfield Co. (ARCO) ................................................... 640,500 10,000 Chevron Corp. ................................................................... 467,500 25,000 Ultramar Corp. .................................................................. 609,375 20,000 Unocal Corp. .................................................................... 525,000 7,500 aWestern Atlas, Inc. ............................................................. 329,063 2,571,438 Finance 2.4% 20,600 aSilicon Valley Bancshares ....................................................... 396,550 10,000 The PMI Group, Inc. ............................................................. 480,000 876,550 Health Services 4.9% 15,000 aAccess Health, Inc. ............................................................. 466,875 15,000 aFoundation Health Corp. ......................................................... 635,625 10,000 aPacifiCare Health Systems, Class A .............................................. 705,000 1,807,500 Health Technology 3.2% 6,000 aAmgen, Inc. ..................................................................... $ 288,000 5,000 aGenentech, Inc. ................................................................. 250,625 25,000 Mentor Corp. .................................................................... 550,000 10,000 aPenederm, Inc. .................................................................. 98,750 1,187,375 Leisure Time 3.8% 60,000 aAldila, Inc. .................................................................... 266,250 25,000 Anthony Industries, Inc. ........................................................ 465,625 40,000 Callaway Golf Co. ............................................................... 655,000 1,386,875 Other 486 a,bLynx Therapeutics, Inc. ......................................................... - Producer/Manufacturing 4.1% 7,000 Clorox Co. ...................................................................... 502,250 22,000 Mattel, Inc. .................................................................... 632,500 13,000 Superior Industries International, Inc. ......................................... 365,625 1,500,375 Real Estate 4.3% 30,000 Bay Apartment Communities, Inc. ................................................. 618,750 30,000 Irvine Apartment Communities, Inc. .............................................. 536,250 10,000 Nationwide Health Property, Inc. ................................................ 411,250 1,566,250 Retail Trade 2.9% 17,000 aPrice/Costco, Inc. .............................................................. 289,000 35,000 aStrouds, Inc. ................................................................... 161,875 25,000 aVons Companies, Inc. ............................................................ 634,375 1,085,250 Semiconductors/Equipment 11.3% 15,000 aAdaptec, Inc. ................................................................... 667,500 6,000 aApplied Materials, Inc. ......................................................... 300,750 7,000 aElectroglas, Inc. ............................................................... 491,750 12,000 Intel Corp. ..................................................................... 838,500 9,800 Linear Technology Corp. ......................................................... 428,750 25,000 aNational Semiconductor Corp. .................................................... 609,375 10,000 aXilinx, Inc. .................................................................... 460,000 10,000 aZilog, Inc. ..................................................................... 355,000 4,151,625 Technology Services 6.8% 8,000 aBusiness Objects SA, ADR ........................................................ $ 346,000 12,700 aDendrite International, Inc. .................................................... 220,662 10,000 aInformix Corp. .................................................................. 291,250 10,000 aIntegrated Systems, Inc. ........................................................ 350,000 4,000 aMicrosoft Corp. ................................................................. 400,000 12,000 aOracle Systems Corp. ............................................................ 523,500 27,000 aSystemsoft Corp. ................................................................ 388,125 2,519,537 Telecommunications 1.7% 18,000 aSpectrian Corp. ................................................................. 391,500 15,000 aTekelec ......................................................................... 217,500 609,000 Transportation 4.6% 14,750 Air Express International Corp. ................................................. 306,063 10,600 Expeditors International of Washington, Inc. .................................... 279,575 25,000 Harper Group, Inc. .............................................................. 450,000 40,000 aMesa Airlines, Inc. ............................................................. 380,000 12,459 aSouthern Pacific Rail Corp. ..................................................... 277,212 1,692,850 Utilities 6.5% 17,000 aAirTouch Communications, Inc. ................................................... 484,500 20,000 Pacific Enterprises ............................................................. 495,000 23,000 San Diego Gas & Electric Co. .................................................... 534,750 30,000 SCEcorp ......................................................................... 510,000 20,000 Southern California Water ....................................................... 377,500 2,401,750 Total Common Stocks (Cost $28,455,209) .................................... 31,473,587 Preferred Stocks .7% Real Estate 6,800 cCatellus Development Corp., $3.625 cvt. pfd., Series B (Cost $256,700) .......... 259,250 Convertible Bonds .8%............................................................ Electronic Technology $195,000 c3COM Corp., cvt. sub. notes, 10.25%, 11/01/01 (Cost $243,275) ................... $ 311,025 Total Investments before Repurchase Agreements (Cost $28,955,184) ......... 32,043,862 dReceivables from Repurchase Agreements 14.8% 3,000,000 Citicorp Securities, Inc., 5.85%, 11/01/95 (Maturity Value $3,000,488) Collateral: U.S. Treasury Notes, 6.125%, 07/31/96 .............................. 3,000,000 425,000 Daiwa Government Securities, Inc., 5.90%, 11/01/95 (Maturity Value $425,070) Collateral: U.S. Treasury Notes, 6.125%, 09/30/00 .............................. 425,000 1,976,693 eJoint Repurchase Agreement, 5.887%, 11/01/95 Daiwa Securities America, Inc., (Maturity Value $441,685) Collateral: U.S. Treasury Bills, 04/25/96 U.S. Treasury Notes, 6.125%, 09/30/00 Donaldson, Lufkin & Jenrette, (Maturity Value $521,991) Collateral: U.S. Treasury Notes, 5.125% - 8.25%, 07/31/96 - 03/31/00 Swiss Bank Corp., (Maturity Value $521,991) Collateral: U.S. Treasury Notes, 6.875%, 03/31/00 UBS Securities, Inc., (Maturity Value $521,991) Collateral: U.S. Treasury Notes, 5.125% - 8.50%, 11/15/95 - 01/31/00........... 2,007,330 Total Receivables from Repurchase Agreements (Cost $5,432,330) ............ 5,432,330 Total Investments (Cost $34,387,514) 102.0% .......................... 37,476,192 Liabilities in Excess of Other Assets, Net (2.0)% .................... (733,610) Net Assets 100% ...................................................... $36,742,582 At October 31, 1995, the net unrealized appreciation based on the cost of investments for income tax purposes of $34,387,514 was as follows: Aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost .................................... $ 3,917,443 Aggregate gross unrealized depreciation for all investments in which there was an excess of value over tax cost .................................... (828,765) Net unrealized appreciation ................................................... $ 3,088,678
aNon-income producing. bSee Note 7 regarding restricted securities. cSee Note 8 regarding Rule 144A securities. dFace amount for repurchase agreements is for the underlying collateral. eSee Note 1(H) regarding Joint Repurchase Agreement. The accompanying notes are an integral part of these financial statements. FRANKLIN STRATEGIC SERIES
Statement of Investments in Securities and Net Assets, October 31, 1995 (unaudited) Value Country* Shares Franklin Strategic Income Fund (Note 1) Preferred Stocks 2.5% Financial Services 1.3% US 1,000 First Nationwide Bank, 11.50% pfd. ................................. $ 113,500 Media & Broadcasting 1.2% US 103 PanAmSat Corp., L.P., 12.75% pfd., PIK ............................. 111,985 Total Preferred Stocks (Cost $203,094) ....................... 225,485 Convertible Preferred Stocks 2.5% Financial Services 2.1% US 1,500 Integon Corp., $3.875 cvt. pfd. .................................... 80,813 US 2,500 cParker & Parsley Capital, 6.25% cvt. pfd. .......................... 111,250 192,063 Real Estate Investment Trust .4% US 1,400 Property Trust of America, $1.75 cvt. pfd., Series A ............... 33,250 Total Convertible Preferred Stocks (Cost $223,383) ........... 225,313 Face Amount Corporate Bonds 26.0% Cable Television 2.3% US $ 150,000 fBell Cablemedia, Plc., senior disc. notes, zero coupon to 07/15/99, (original accretion rate 11.95%), 11.95% thereafter, 07/15/04 ....... 102,563 US 100,000 Rogers Cablesystems, Inc., guaranteed notes, 9.625%, 08/01/02 ...... 102,250 204,813 Consumer Goods 3.3% US 100,000 cHerff Jones Inc., senior sub. notes, 11.00%, 08/15/05 .............. 103,500 US 100,000 Playtex Family Products Corp., senior sub. deb., 9.00%, 12/15/03 ... 90,500 US 100,000 Sealy Corp., senior sub. notes, 9.50%, 05/01/03 .................... 101,000 295,000 Containers & Packaging 1.2% US 100,000 Owens Illinois, Inc., senior sub. deb., 10.50%, 06/15/02 ........... 105,500 Energy 1.2% US 100,000 Gulf Canada Resources, Ltd., senior sub. deb., 9.25%, 01/15/04 ..... 103,063 Food/Beverages 1.2% US 100,000 Curtice-Burns Foods, Inc., senior sub. notes, 12.25%, 02/01/05 ..... 104,500 Food Retailing 3.4% US 100,000 Brunos Inc., senior sub. notes, 10.50%, 08/01/05 ................... 98,500 US 100,000 Dominick's Finer Foods, senior sub. notes, 10.875%, 05/01/05 ....... 105,375 US 100,000 Grand Union Co., senior notes, 12.00%, 09/01/04 .................... 96,750 300,625 Forest & Paper Products 2.4% US $ 100,000 Repap New Brunswick, senior notes, second priority, 10.625%, 04/15/05 $ 102,500 US 100,000 S.D. Warren Co., senior sub. notes, 12.00%, 12/15/04 ............... 111,500 214,000 Gaming & Hotels 3.5% US 100,000 Aztar Corp., senior sub. notes, 13.75%, 10/01/04 ................... 108,500 US 100,000 cPlayers International, Inc., senior notes, 10.875%, 04/15/05 ....... 95,375 US 100,000 Showboat, Inc., senior sub. notes, 13.00%, 08/01/09 ................ 109,500 313,375 Health Care 2.4% US 100,000 OrNda Healthcorp., guaranteed, senior sub. notes, 11.375%, 08/15/04 112,000 US 100,000 Tenet Healthcare Corp., senior sub. notes, 10.125%, 03/01/05 ....... 107,500 219,500 Industrial 1.4% US 150,000 fAmerican Standard, Inc., senior sub. deb., zero coupon to 06/01/98, (original accretion rate 10.50%), 10.50% thereafter, 06/01/05 ...... 126,375 Media & Broadcasting 1.1% US 100,000 American Media Operation, senior sub. notes, 11.625%, 11/15/04 ..... 102,500 Metals & Mining 1.5% US 100,000 fAcme Metals, Inc., guaranteed senior secured disc. notes, zero coupon to 08/01/97, (original accretion rate 13.50%), 13.50% thereafter, 08/01/04 78,625 US 50,000 Ucar Global Enterprises, Inc., senior sub. notes, 12.00%, 01/15/05 . 56,375 135,000 Textile 1.1% US 100,000 WestPoint Stevens, Inc., senior notes, 8.75%, 12/15/01 ............. 101,500 Total Corporate Bonds (Cost $2,210,203) ...................... 2,325,751 Convertible Bonds 9.7% Electronics 3.6% US 65,000 cAltera Corp., cvt. sub. notes, 5.75%, 10/15/02 ..................... 87,588 US 125,000 cDovatron International, Inc., cvt. sub. notes, 6.00%, 10/15/02...... 127,500 US 100,000 cSanmina Corp., sub. notes, 5.50%, 08/15/02 ......................... 111,500 326,588 Food/Beverages .7% US 65,000 Chock Full O'Nuts Corp., cvt. deb., 7.00%, 10/15/02 ................ 59,475 Health Care 1.2% US $ 40,000 Integrated Health Services, Inc., senior sub. deb., 5.75%, 01/01/01 $ 40,200 US 70,000 Maxxim Medical, Inc., cvt. sub. deb., 6.75%, 03/01/03 .............. 69,300 109,500 Industrial 1.0% US 70,000 Raymond Corp., cvt. sub. deb., 6.50%, 12/15/03 ..................... 87,675 Information/Technology .8% US 65,000 cBay Networks Inc., cvt. sub. deb., 5.25%, 05/15/03 ................. 73,369 Lodging 1.2% US 100,000 Prime Hospitality Corp., cvt. sub. notes, 7.00%, 04/15/02 .......... 105,625 Telecommunications 1.2% US 110,000 cAll American Communications, cvt. sub. deb., 6.50%, 10/01/03 ....... 107,800 Total Convertible Bonds (Cost $817,827) ...................... 870,032 Foreign Corporate Bonds 6.2% US 100,000 Bridas Corp., senior notes, 12.50%, 11/15/99 ....................... 96,000 US 120,000 Centrais Eletricas Brasileiras S.A., 10.00%, 10/30/98 .............. 119,400 US 100,000 cEssar Guajarat, Ltd., floating rate deb., 9.40%, 07/15/99 .......... 99,625 US 125,000 cSEI Holdings IX, Inc., senior notes, 11.00%, 11/30/00 .............. 127,031 US 100,000 Tjiwi Kimia International, 13.25%, 08/01/01 ........................ 109,500 Total Foreign Corporate Bonds (Cost $541,442) ................ 551,556 Foreign Government Agencies 24.6% ES 9,480,000 Bonos y Obligacion del Estado, 12.25%, 03/25/00 .................... 82,208 DD 60,000 Bundesschatzanweisungen, 6.875%, 12/02/98 .......................... 45,012 IT 135,000,000 Buoni Poliennali del Tesoro, 9.188%, 07/15/00 ...................... 82,718 DD 80,000 Deutsche Bundespost, 7.75%, 10/01/04 ............................... 60,818 DD 75,000 Deutschland Bundesrepublik, 8.375%, 05/21/01 ....................... 59,682 DD 70,000 Deutschland Bundesrepublik, 8.250%, 09/20/01 ....................... 55,440 DD 75,000 Deutschland Bundesrepublik, 7.125%, 12/20/02 ....................... 56,079 DD 80,000 Deutschland Bundesrepublik, 6.50%, 07/15/03 ........................ 57,446 DD 150,000 German Unity Fund, 8.00%, 01/21/02 ................................. 117,211 CA 100,000 Government of Canada, 10.25%, 12/01/98 ............................. 81,560 CA 100,000 Government of Canada, 5.75%, 03/01/99............................... 72,075 CA 53,000 Government of Canada, 6.50%, 06/01/04 .............................. 36,948 CA 100,000 Government of Canada, 10.50%, 10/01/04 ............................. 88,518 CA 20,000 Government of Canada, 9.00%, 12/01/04 .............................. 16,305 FR 470,000 Government of France, 8.50%, 03/28/00 .............................. 103,566 FR 442,000 Government of France, 9.50%, 01/25/01 .............................. 101,723 DD $ 20,000 International Bank of Reconstruction and Development, 7.125%, 04/12/05 $ 14,672 DK 108,000 Kingdom of Denmark, 9.00%, 11/15/98 ................................ 21,159 DK 501,000 Kingdom of Denmark, 8.00%, 11/15/01 ................................ 95,118 DK 167,000 Kingdom of Denmark, 8.00%, 05/15/03 ................................ 31,263 DK 327,000 Kingdom of Denmark, 7.00%, 12/15/04 ................................ 56,935 AU 100,000 New South Wales Treasury Corp., 7.00%, 04/01/04..................... 67,594 NZ 100,000 New Zealand Government, 6.50%, 02/15/00 ............................ 64,323 NZ 80,000 New Zealand Government, 10.00%, 03/15/02 ........................... 60,247 NZ 80,000 New Zealand Government, 8.00%, 04/15/04............................. 55,411 AU 225,000 Queensland Treasury Corp., 8.875%, 11/08/96 ........................ 173,347 AU 25,000 Queensland Treasury Corp., 8.00%, 05/14/03 ......................... 18,152 US 170,000 Republic of Argentina, 6.813%, 03/31/05 ............................ 100,513 US 166,250 Republic of Brazil, 6.688%, 01/01/01 ............................... 142,040 US 408,594 Republic of Equador, 3.00%, 02/27/15 ............................... 135,858 AU 65,000 Treasury Corp. of Victoria, 8.25%, 10/15/03 ........................ 47,786 Total Foreign Government Agencies (Cost $2,134,830) .......... 2,201,727 U.S. Government 2.8% US 250,000 U.S. Treasury Notes, 6.75%, 05/31/97 (Cost $248,974) ............... 254,297 U.S. Government Agencies/Mortgages 6.8% US 28,262 FHLMC, 7.00%, 01/01/09 ............................................. 28,527 US 28,143 FHLMC, 6.00%, 04/01/09 ............................................. 27,493 US 50,097 FHLMC, 7.00%, 04/01/24 ............................................. 49,814 US 48,380 FHLMC, 7.50%, 04/01/24 ............................................. 49,014 US 43,055 FHLMC, 8.50%, 12/01/24 ............................................. 44,710 US 34,924 FNMA, 6.50%, 02/01/09 .............................................. 34,695 US 44,371 FNMA, 6.50%, 01/01/24 .............................................. 43,137 US 24,547 FNMA, 7.00%, 05/01/24 .............................................. 24,386 US 47,664 FNMA, 8.00%, 01/01/25 .............................................. 48,960 US 21,686 FNMA, 9.00%, 05/01/25 .............................................. 22,696 US 46,225 FNMA, 7.50%, 10/01/07 .............................................. 47,222 US 23,574 GNMA, SF, 7.50%, 09/15/23 .......................................... 23,934 US 49,711 GNMA, SF, 6.50%, 03/15/24 .......................................... 48,390 US 49,957 GNMA, SF, 8.00%, 06/15/24 .......................................... 51,517 US 9,568 GNMA, SF, 9.00%, 01/15/25 .......................................... 10,066 US 59,321 GNMA, SF, 7.00%, 09/20/25 .......................................... 58,690 Total U.S. Government Agencies/Mortgages (Cost $585,101) ..... 613,251 Total Long Term Investments (Cost $6,964,854) ................ 7,267,412 gShort Term Investments Foreign Corporate Agencies 2.2% TH $ 5,000,000 Thailand Military Bank Notes, 11.00%, 06/05/96 (Cost $203,128) ..... $ 198,690 Total Investments before Repurchase Agreements (Cost $7,167,982) ............................................ 7,466,102 d,eReceivables from Repurchase Agreements 11.7% US 1,032,062 Joint Repurchase Agreement, 5.887 %, 11/01/95 (Cost $1,047,641) Daiwa Securities America, Inc., (Maturity Value $230,519) Collateral: U.S. Treasury Bills, 04/25/96 Collateral: U.S. Treasury Notes, 6.125%, 09/30/00 Donaldson, Lufkin & Jenrette, (Maturity Value $272,431) Collateral: U.S. Treasury Notes, 5.125% - 8.25%, 07/31/96 - 03/31/00 Swiss Bank Corp., (Maturity Value $272,431) Collateral: U.S. Treasury Notes, 6.875%, 03/31/00 UBS Securities, Inc., (Maturity Value $272,431) Collateral: U.S. Treasury Notes, 5.125% - 8.50%, 11/15/95 - 01/31/00 1,047,641 Total Investments (Cost $8,215,623) 95.0% ............... 8,513,743 Other Assets and Liabilities, Net 5.0% .................. 450,001 Net Assets 100.0% ....................................... $8,963,744 At October 31, 1995, the net unrealized appreciation based on the cost of investments for income tax purposes of $8,215,623 was as follows: Aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost ...................... $ 321,316 Aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value ...................... (23,196) Net unrealized appreciation ...................................... $ 298,120
PORTFOLIO ABBREVIATIONS: FHLMC - Federal Home Loan Mortgage Corp. FNMA - Federal National Mortgage Association GNMA - Government National Mortgage Association L.P. - Limited Partnership LYONs - Liquid Yield Option Notes PIK - Payment-in-Kind SF - Single Family COUNTRY LEGEND: AU - Australia CA - Canada DD - Germany DK - Denmark ES - Spain FR - France IT - Italy NZ - New Zealand TH - Thailand US - United States of America *Securities traded in currency of country indicated. cSee Note 8 regarding Rule 144A securities. dFace amount for repurchase agreements is for the underlying collateral. eSee Note 1(H) regarding Joint Repurchase Agreement. fZero coupon/step-up bonds. The current effective yield may vary. The original accretion rate will remain constant. gCertain short-term securities are traded on a discount basis; the rates shown are the discount rates at the time of purchase by the Fund. Other securities bear interest at the rates shown , payable at fixed rates or upon maturity. The accompanying notes are an integral part of these financial statements. FRANKLIN STRATEGIC SERIES
Statement of Investments in Securities and Net Assets, October 31, 1995 (unaudited) Value Country* Shares Franklin Global Utilities Fund (Note 1) Common Stocks 92.6% Electric & Gas Utilities 66.7% US 166,000 aAES Corp. .......................................................... $ 3,278,500 US 57,200 American Electric Power Co., Inc. .................................. 2,180,750 US 49,500 Central & South West Corp. ......................................... 1,324,125 HK 227,400 China Light & Power, Ltd. .......................................... 1,211,748 US 150,000 CINergy Corp. ...................................................... 4,256,250 US 49,700 Dominion Resources, Inc. ........................................... 1,975,575 US 22,300 DPL, Inc. .......................................................... 529,625 US 60,950 Duke Power Co. ..................................................... 2,727,513 US 62,900 Empresa Nacional de Electricidad, ADR .............................. 3,160,725 US 127,000 Enron Corp. ........................................................ 4,365,625 US 107,700 Enron Global Power & Pipelines ..................................... 2,598,263 US 110,000 Entergy Corp. ...................................................... 3,135,000 US 195,000 cEspoon Sahko Oy .................................................... 2,618,070 US 39,000 FPL Group, Inc. .................................................... 1,633,125 US 49,600 General Public Utilities Corp. ..................................... 1,550,000 HK 1,180,000 Hong Kong Electric Holdings, Ltd. .................................. 4,013,865 US 62,000 aHuaneng Power International, Inc., ADR ............................. 1,030,750 KR 33,700 Korea Electric Power Corp. ......................................... 1,526,113 US 109,000 National Fuel Gas Co. .............................................. 3,242,750 US 6,900 New England Electric System ........................................ 269,100 US 29,100 NIPSCO Industries, Inc. ............................................ 1,062,150 US 126,000 Pacific Enterprises ................................................ 3,118,500 US 20,200 Pacific Gas & Electric Co. ......................................... 593,375 US 176,700 PacifiCorp ......................................................... 3,335,213 US 133,500 Panhandle Eastern Corp. ............................................ 3,370,875 US 59,000 Pinnacle West Capital Corp. ........................................ 1,622,500 US 50,000 Public Service Co. of Colorado ..................................... 1,706,250 GB 360,000 Scottish Power, Plc. ............................................... 1,986,246 US 208,000 Southern Co. ....................................................... 4,966,000 US 41,200 Southern Indiana Gas & Electric Co. ................................ 1,390,500 US 183,900 TECO Energy, Inc. .................................................. 4,344,638 US 51,500 Texas Utilities Co. ................................................ 1,892,625 US 146,000 TransCanada Pipelines, Ltd. ........................................ 1,952,750 US 160,000 Transportadora Gas Sur, ADR ........................................ 1,640,000 US 4,600 Wicor, Inc. ........................................................ 136,275 US 53,400 Williams Cos., Inc. ................................................ 2,062,575 81,807,944 Telecommunications Services 25.9% US 20,150 aAirTouch Communications, Inc. ...................................... $ 574,275 US 30,000 Ameritech Corp. .................................................... 1,620,000 US 59,300 AT&T Corp. ......................................................... 3,795,200 GB 300,000 Cable & Wireless, Plc. ............................................. 1,963,481 US 19,700 aComcast UK Cable Partners, Ltd. .................................... 253,638 MX 44,400 aGrupo Iusacell, SA, Series D ....................................... 39,826 US 100,560 aGrupo Iusacell, SA, Series L, ADR .................................. 1,194,150 US 55,300 GTE Corp. .......................................................... 2,281,125 US 124,000 aNynex Cablecomms Group, ADR ........................................ 2,526,500 US 130,000 Portugal Telecom SA, ADR ........................................... 2,437,500 US 40,000 SBC Communications, Inc. ........................................... 2,235,000 IT 550,000 STET-Societa Finanziaria Telefonica ................................ 1,556,040 US 120,000 Tele Danmark, A/S, ADS ............................................. 3,135,000 US 62,750 Telecom de Argentina, SA, ADR ...................................... 2,408,030 US 20,400 Telefonica de Argentina, ADS ....................................... 423,300 US 65,950 Telefonica de Espana, ADR .......................................... 2,481,369 US 45,700 Telefonos de Mexico, ADR ........................................... 1,256,750 US 57,500 aTelewest Communications, Plc., ADR ................................. 1,595,625 31,776,809 Total Common Stocks (Cost $109,638,643) ...................... 113,584,753 Face Amount d,eReceivables from Repurchase Agreements 4.7% US $5,707,700 Joint Repurchase Agreement, 5.887%, 11/01/95 (Cost $5,798,095) Daiwa Securities America, Inc., (Maturity Value $1,275,790) Collateral: U.S. Treasury Bills, 04/25/96 U.S. Treasury Notes, 6.125%, 09/30/00 Donaldson, Lufkin & Jenrette, (Maturity Value $1,507,751) Collateral: U.S. Treasury Notes, 5.125% - 8.25%, 07/31/96 - 03/31/00 Swiss Bank Corp., (Maturity Value $1,507,751) Collateral: U.S. Treasury Notes, 6.875%, 03/31/00 UBS Securities, Inc., (Maturity Value $1,507,751) Collateral: U.S. Treasury Notes, 5.125% - 8.50%, 11/15/95 - 01/31/00 5,798,095 Total Investments (Cost $115,436,738) 97.3% ............. 119,382,848 Other Assets and Liabilities, Net 2.7% .................. 3,364,637 Net Assets 100.0% ....................................... $122,747,485 At October 31, 1995, the net unrealized appreciation based on the cost of investments for income tax purposes of $115,438,556 was as follows: Aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost ....................... $ 9,336,798 Aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value ...................... (5,392,506) Net unrealized appreciation ...................................... $ 3,944,292 COUNTRY LEGEND: GB - United Kingdom HK - Hong Kong IT - Italy KR - South Korea MX - Mexico US - United States of America
*Securities traded in currency of country indicated. aNon-income producing. cSee Note 8 regarding Rule 144A securities. dFace amount for repurchase agreements is for the underlying collateral. eSee Note 1(H) regarding Joint Repurchase Agreement. The accompanying notes are an integral part of these financial statements. FRANKLIN STRATEGIC SERIES
Statement of Investments in Securities and Net Assets, October 31, 1995 (unaudited) Value Shares Franklin Small Cap Growth Fund (Note 1) Common Stocks 95.2% Commercial Services 1.3% 71,000 aRobert Half International, Inc. ................................................ $ 2,591,500 Consumer Durables 3.1% 160,000 aBeazer Homes USA, Inc. ......................................................... 2,800,000 65,000 Continental Homes Holding Corp. ................................................ 1,332,500 29,200 aNVR, Inc. ...................................................................... 292,000 114,000 aSouthern Energy Homes, Inc. .................................................... 1,681,500 6,106,000 Consumer Non-Durables 4.2% 330,000 aAldila, Inc. ................................................................... 1,464,375 185,000 Callaway Golf Co. .............................................................. 3,029,375 25,000 aGucci Group .................................................................... 750,000 80,700 aTommy Hilfiger Corp. ........................................................... 3,076,688 8,320,438 Consumer Services 3.4% 319,600 aAztar Corp. .................................................................... 2,596,750 50,000 Gillett Holdings, Inc. ......................................................... 1,050,000 152,100 aRed Lion Hotels, Inc. .......................................................... 3,003,975 6,650,725 Electronic Technology 16.9% 40,000 aAspect Telecommunications Corp. ................................................ 1,375,000 275,000 Aviall, Inc. ................................................................... 2,303,125 75,000 aBay Networks, Inc. ............................................................. 4,968,750 88,000 aBell & Howell Holdings Co. ..................................................... 2,200,000 45,000 aDSC Communications Corp. ....................................................... 1,665,000 180,000 aECI Telecommunications, Ltd. ................................................... 3,420,000 60,000 aGeneral Instrument Corp. ....................................................... 1,140,000 15,000 aKomag, Inc. .................................................................... 855,000 100,000 Logicon, Inc. .................................................................. 2,287,500 80,000 aSilicon Graphics, Inc. ......................................................... 2,660,000 90,100 aSpectrian Corp. ................................................................ 1,959,675 120,000 aTekelec ........................................................................ 1,740,000 60,000 a3Com Corp. ..................................................................... 2,820,000 105,000 aTracor, Inc. ................................................................... 1,680,000 79,000 aVerifone, Inc. ................................................................. 2,133,000 33,207,050 Energy Minerals 4.8% 615,000 aAbacan Resource Corp. .......................................................... $ 1,515,118 65,000 aBarrett Resources Corp. ........................................................ 1,511,250 230,000 aForcenergy Gas Exploration, Inc. ............................................... 2,242,500 110,000 Parker & Parsley Petroleum Co. ................................................. 2,035,000 210,000 Total Petroleum (North America), Ltd. .......................................... 2,126,250 9,430,118 Financials 7.8% 200,000 ACMAT Corp., Class A ........................................................... 2,350,000 200,000 aAmeriCredit Corporation ........................................................ 2,450,000 18,200 Leucadia National Corp. ........................................................ 1,003,275 49,300 aPrudential Reinsurance Holdings, Inc. .......................................... 1,004,488 166,900 aRisk Capital Holdings, Inc. .................................................... 3,671,800 110,000 aSilicon Valley Bancshares ...................................................... 2,117,500 50,000 aThe PMI Group, Inc. ............................................................ 2,400,000 15,600 aWFS Financial, Inc. ............................................................ 259,350 15,256,413 Health Services 4.8% 50,000 aAccess Health, Inc. ............................................................ 1,556,250 185,000 aAdvocat, Inc. .................................................................. 1,988,750 10,500 Integrated Health Services, Inc. ............................................... 240,188 10,000 aMedic Computer Systems, Inc. ................................................... 532,500 150,000 aSierra Health Services, Inc. ................................................... 4,293,750 75,000 aSun Healthcare Group, Inc. ..................................................... 890,625 9,502,063 Health Technology 1.4% 60,000 aKV Pharmaceutical Co., Class B ................................................. 495,000 50,000 aMatrix Pharmaceutical, Inc. .................................................... 725,000 88,200 aNoven Pharmaceutical, Inc. ..................................................... 904,050 73,000 aPenederm, Inc. ................................................................. 720,875 2,844,925 Industrial Services 1.1% 112,000 AES Corp. ...................................................................... 2,212,000 Non-Energy Minerals 1.9% 80,000 Freeport-McMoRan Copper & Gold, Inc., Class B .................................. 1,820,000 110,000 aMagma Copper Co. ............................................................... 1,842,500 3,662,500 Process Industries 1.3% 92,600 aUcar International, Inc. ....................................................... $ 2,639,100 Producer Manufacturing 2.6% 61,300 aAtchison Casting Corp. ......................................................... 973,138 205,000 aEasco, Inc. .................................................................... 1,537,500 15,000 aRaymond Corp. .................................................................. 300,000 65,000 Roper Industries, Inc. ......................................................... 2,356,250 5,166,888 Real Estate 4.0% 175,000 Equity Inns, Inc. .............................................................. 2,056,250 55,000 FelCor Suite Hotels, Inc. ...................................................... 1,588,125 90,000 Omega Healthcare Investors, Inc. ............................................... 2,283,750 165,500 Winston Hotels, Inc. ........................................................... 1,841,188 7,769,313 Retail 2.4% 100,000 aBorders Group, Inc. ............................................................ 1,712,500 37,500 aErnst Home Center, Inc. ........................................................ 173,438 15,000 aGadzooks, Inc. ................................................................. 277,500 252,800 aStrouds, Inc. .................................................................. 1,169,200 75,000 aWilliams-Sonoma, Inc. .......................................................... 1,303,125 4,635,763 Semiconductors 17.6% 70,000 aAdaptec, Inc. .................................................................. 3,115,000 105,000 aAdvanced Semiconductor Materials International N.V. ............................ 4,921,875 40,000 aAltera Corp. ................................................................... 2,420,000 30,000 aElectroglas, Inc. .............................................................. 2,107,500 50,000 aElectro Scientific Industries, Inc. ............................................ 1,550,000 2,000 aESS Technology, Inc. ........................................................... 60,000 55,000 aExar Corp. ..................................................................... 1,306,250 80,000 aLattice Semiconductor Corp. .................................................... 3,140,000 60,000 Linear Technology Corp. ........................................................ 2,625,000 150,000 aMicro Linear Corp. ............................................................. 2,306,250 55,000 aSGS-Thomson Microelectronics, Inc., ADR ........................................ 2,488,750 60,000 aSilicon Valley Group, Inc. ..................................................... 1,935,000 70,000 aUniphase Corp. ................................................................. 2,047,500 40,000 aXilinx, Inc. ................................................................... 1,840,000 75,000 aZilog, Inc. .................................................................... 2,662,500 34,525,625 Technology Services 8.4% 70,000 aBusiness Objects SA, ADR ....................................................... $ 3,027,500 54,000 aIntegrated Systems, Inc. ....................................................... 1,890,000 45,000 aIntersolv, Inc. ................................................................ 708,750 110,000 aMapInfo Corp. .................................................................. 2,213,750 160,000 aMicrotec Research, Inc. ........................................................ 2,230,000 55,000 aSterling Software, Inc. ........................................................ 2,536,875 142,000 aSystemsoft Corp. ............................................................... 2,041,250 41,200 Wyle Electronics ............................................................... 1,756,150 16,404,275 Transportation 6.0% 74,000 Air Express International Corp. ................................................ 1,535,500 348,200 aAtlantic Coast Airlines, Inc. .................................................. 2,850,887 110,000 Harper Group, Inc. ............................................................. 1,980,000 116,000 aLandstar System, Inc. .......................................................... 3,045,000 250,000 aMesa Airlines, Inc. ............................................................ 2,375,000 11,786,387 Utilities/Communication 2.2% 140,000 aBell Cablemedia, Plc. .......................................................... 2,082,500 25,000 aCellular Communications, Inc. .................................................. 1,340,624 25,000 aComnet Cellular, Inc. .......................................................... 628,124 8,000 aSilver King Communications, Inc. ............................................... 234,000 4,285,248 Total Common Stocks (Cost $179,523,630) .................................. 186,996,331 Preferred Stocks 1.0% Electronic Technology 35,000 Nokia Corp., pfd., ADR (Cost $1,341,320) ....................................... 1,951,250 Total Common Stocks and Preferred Stocks (Cost $180,864,950) ............. 188,947,581 dReceivables from Repurchase Agreements 8.2%.................................... $ 3,140,000 Daiwa Securities America, Inc., 5.90%, 11/01/95 (Maturity Value $3,128,513) Collateral: U.S. Treasury Notes, 6.125%, 09/30/00 .............................. $ 3,128,000 12,776,277 eJoint Repurchase Agreement, 5.887%, 11/01/95 Daiwa Securities America, Inc., (Maturity Value $2,855,941) Collateral: U.S. Treasury Bills, 04/25/96 U.S. Treasury Notes, 6.125%, 09/30/00 Donaldson, Lufkin & Jenrette, (Maturity Value $3,375,203) Collateral: U.S. Treasury Notes, 5.125% - 8.25%, 07/31/96 - 03/31/00 Swiss Bank Corp., (Maturity Value $3,375,203) Collateral: U.S. Treasury Notes, 6.875%, 03/31/00 UBS Securities, Inc., (Maturity Value $3,375,203) Collateral: U.S. Treasury Notes, 5.125% - 8.50%, 11/15/95 - 01/31/00 .......... 12,979,426 Total Receivables from Repurchase Agreements (Cost $16,107,426) .......... 16,107,426 Total Investments (Cost $196,972,376) 104.4% ........................ 205,055,007 Liabilities in Excess of Other Assets, Net (4.4)% ................... (8,671,722) Net Assets 100.0% ................................................... $196,383,285 At October 31, 1995, the net unrealized appreciation based on the cost of investments for income tax purposes of $197,154,626 was as follows: Aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost ............................................ $ 20,322,597 Aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value ............................................ (12,422,216) Net unrealized appreciation .................................................. $ 7,900,381
aNon-income producing. dFace amount for repurchase agreements is for the underlying collateral. eSee Note 1(H) regarding Joint Repurchase Agreement. The accompanying notes are an integral part of these financial statements. FRANKLIN STRATEGIC SERIES
Statement of Investments in Securities and Net Assets, October 31, 1995 (unaudited) Shares/ Value Country* Warrants Franklin Global Health Care Fund (Note 1) Common Stocks & Warrants 80.3% Biotechnology 9.2% US 4,000 aBiogen, Inc. ......................................................... $ 245,000 GB 20,000 aBritish Bio-Technology Group ......................................... 281,084 GB 3,750 aBritish Bio-Technology Group, warrants ............................... 21,816 US 20,000 aCytoTherapeutics, Inc. ............................................... 205,000 US 10,000 aMyriad Genetics, Inc. ................................................ 270,000 US 10,000 aNeurogen Corp. ....................................................... 222,500 US 42,000 aSerologicals, Corp. .................................................. 661,500 US 25,000 aUnivax Biologics, Inc. ............................................... 157,813 2,064,713 Homecare/Alternate Site 1.1% US 17,000 aProfessional Sports Care Management, Inc. ............................ 93,500 US 15,000 aQuantum Health Resources, Inc. ....................................... 159,375 252,875 Hospitals 2.2% US 6,300 Columbia/HCA Healthcare Corp. ........................................ 309,488 US 10,000 aTenet Healthcare Corp. ............................................... 178,750 488,238 Managed Care/HMOs 14.1% US 12,000 aCompdent Corp. ....................................................... 373,500 US 5,000 aFoundation Health Corp. .............................................. 211,875 US 17,100 aOrNda HealthCorp. .................................................... 301,388 US 5,000 aOxford Health Plans, Inc. ............................................ 391,250 US 10,000 aPacifiCare Health Systems, Inc., Class B ............................. 727,500 US 14,000 aSierra Health Services, Inc. ......................................... 400,750 US 10,000 United Healthcare Corp. .............................................. 531,250 US 10,000 aValue Health, Inc. ................................................... 228,750 3,166,263 Medical Technology & Supplies 8.5% US 40,000 aAbaxis, Inc. ......................................................... 275,000 US 10,000 Bard (C.R.), Inc. .................................................... 282,500 US 10,000 aCygnus, Inc. ......................................................... 163,750 US 19,666 aHealthdyne Technologies, Inc. ........................................ 211,410 US 20,000 aMediSense, Inc. ...................................................... 427,500 US 16,000 Mentor Corp. ......................................................... 352,000 US 10,000 aVentritex, Inc. ...................................................... 196,250 1,908,410 Nursing Homes/Subacute 1.2% US 25,000 aAdvocat, Inc. ........................................................ $ 268,750 Pharmaceutical Distributors .8% US 14,000 Grupo Casa Autrey, SA de C.V., ADR ................................... 178,500 Pharmaceuticals 14.6% SE 7,500 aAstra AB, Series B ................................................... 271,144 CH 500 Ciba-Geiby, AG ....................................................... 432,697 US 20,000 Medeva, Plc., ADR .................................................... 342,500 DD 15,000 aMerck KGaA ........................................................... 626,888 US 2,000 Pfizer, Inc. ......................................................... 114,750 CH 50 Roche Holding ........................................................ 363,148 CH 500 Sandoz, AG-R ......................................................... 412,448 FR 3,300 Sanofi, SA ........................................................... 210,765 US 4,400 Schering-Plough Corp. ................................................ 235,950 US 6,000 aWatson Pharmaceuticals, Inc. ......................................... 268,500 3,278,790 Physician Practice Management 3.6% US 19,500 aAHI Healthcare Systems, Inc. ......................................... 273,000 US 25,000 aPediatrix Medical Group, Inc. ........................................ 540,625 813,625 Software/Information Systems 4.8% US 8,300 aDendrite International, Inc. ......................................... 144,212 US 16,000 aImnet Systems, Inc. .................................................. 406,000 US 15,000 aOwen Healthcare, Inc. ................................................ 273,750 US 20,000 aPyxis Corp. .......................................................... 252,500 1,076,462 Specialty Pharmaceuticals 19% US 7,000 aAllergan, Inc. ....................................................... 205,625 US 15,000 aAlza Corp. ........................................................... 330,000 US 40,000 aAnesta Corp. ......................................................... 425,000 CH 100 aAres Serono, Inc., Series B .......................................... 65,587 US 50,000 aEthical Holdings, Plc., ADR .......................................... 450,000 US 25,000 aGensia, Inc. ......................................................... 106,250 US 36,000 aKV Pharmaceutical Co., Class B ....................................... 297,000 US 25,000 aMatrix Pharmaceutical, Inc. .......................................... 362,500 US 82,100 aNoven Pharmaceuticals, Inc. .......................................... 841,525 US 95,000 aPenederm, Inc. ....................................................... 938,124 US 12,500 aRoberts Pharmaceutical Corp. ......................................... 242,187 4,263,798 Temporary Staffing 1.2% US 15,000 aRomac International, Inc. ............................................ $ 277,500 Total Common Stocks & Warrants (Cost $ 14,935,862) ............. 18,037,924 Face Amount dReceivables from Repurchase Agreements 20.9% US $2,040,000 Citicorp Securities Inc., 5.85%, 11/01/95 (Maturity Value $2,000,325) Collateral: U.S. Treasury Notes, 4.625%, 02/29/96..................... 2,000,000 US 2,653,330 eJoint Repurchase Agreement, 5.887%, 11/01/95 Daiwa Securities America, Inc., (Maturity Value $592,944) Collateral: U.S. Treasury Bills, 04/25/96 U.S. Treasury Notes, 6.125%, 09/30/00 Donaldson, Lufkin & Jenrette, (Maturity Value $700,751) Collateral: U.S. Treasury Notes, 5.125% - 8.25%, 07/31/96 - 03/31/00| Swiss Bank Corp., (Maturity Value $700,751) Collateral: U.S. Treasury Notes, 6.875%, 03/31/00 UBS Securities, Inc., (Maturity Value $700,751) Collateral: U.S. Treasury Notes, 5.125% - 8.50%, 11/15/95 - 01/31/00 .. 2,694,757 Total Receivables from Repurchase Agreement (Cost $4,694,757) .. 4,694,757 Total Investments (Cost $19,630,619) 101.2% ............... 22,732,681 Liabilities in Excess of Other Assets, Net (1.2)% ......... (266,349) Net Assets 100.0% ......................................... $22,466,332 At October 31, 1995, the net unrealized appreciation based on the cost of investments for income tax purposes of $19,633,800 was as follows: Aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost ................. $ 3,798,504 Aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value ................. (699,623) Net unrealized appreciation ........................................ $ 3,098,881 COUNTRY LEGEND: CH - Switzerland DD - Germany FR - France GB - United Kingdom SE - Sweden US - United States of America
*Securities traded in currency of country indicated. aNon-income producing. dFace amount for repurchase agreements is for the underlying collateral. eSee Note 1(H) regarding Joint Repurchase Agreement. The accompanying notes are an integral part of these financial statements. FRANKLIN STRATEGIC SERIES
Statement of Investments in Securities and Net Assets, October 31, 1995 (unaudited) Value Shares Franklin Institutional MidCap Growth Fund (Note 1) Common Stocks 99.1% Advertising .2% 200 Omnicom Group, Inc. ................................................................ $ 12,775 Aerospace/Defense .5% 1,200 GenCorp, Inc. ...................................................................... 12,600 200 General Motors, Class H ............................................................ 8,400 400 Thiokol Corp. ...................................................................... 13,850 34,850 Chemical & Materials 5.6% 300 Albemarle Corp. .................................................................... 5,588 800 ARCO Chemical Co. .................................................................. 39,200 1,300 Cabot Corp. ........................................................................ 61,750 2,300 Granite Construction, Inc. ......................................................... 65,263 400 Hanna (M.A.) Co. ................................................................... 10,250 1,200 IMC Global, Inc. ................................................................... 84,000 200 Olin Corp. ......................................................................... 12,800 800 aSouthdown, Inc. .................................................................... 13,000 800 aSterling Chemicals, Inc. ........................................................... 6,400 1,000 The Geon Co. ....................................................................... 24,875 600 TriMas Corp. ....................................................................... 12,450 1,500 Wellman, Inc. ...................................................................... 35,250 370,826 Commercial Services 1.5% 1,700 CPI Corp. .......................................................................... 31,025 700 Kelly Services, Inc., Class A ...................................................... 17,588 1,200 Manpower, Inc. ..................................................................... 32,550 400 PHH Corp. .......................................................................... 17,500 98,663 Communications Equipment 1.1% 1,100 aBay Networks, Inc. ................................................................. 72,875 Computer Hardware 4.5% 1,200 aCirrus Logic, Inc. ................................................................. 50,550 2,600 aDell Computer Corp. ................................................................ 121,225 800 aLSI Logic Corp. .................................................................... 37,700 700 aQuantum Corp. ...................................................................... 12,163 1,100 aSeagate Technology, Inc. ........................................................... 49,225 900 aSilicon Graphics, Inc. ............................................................. 29,925 300,788 Computer Software 3.2% 800 Adobe Systems, Inc. ................................................................ $ 45,600 400 aBMC Software, Inc. ................................................................. 14,250 1,650 aCadence Design Systems, Inc. ....................................................... 53,212 1,400 aInformix Corp. ..................................................................... 40,775 600 aParametric Technology Corp. ........................................................ 40,125 800 aSymantec Corp. ..................................................................... 19,450 213,412 Containers & Packaging 1.1% 1,600 Chesapeake Corp. ................................................................... 49,000 900 Sonoco Products Co. ................................................................ 22,275 71,275 Electronic Components/Technology 12.1% 1,200 aAltera Corp. ....................................................................... 72,600 1,400 aAmphenol Corp., Class A ............................................................ 30,275 1,000 aAnalog Devices, Inc. ............................................................... 36,125 1,000 Arrow Electronics, Inc. ............................................................ 50,750 2,300 Comdisco, Inc. ..................................................................... 70,150 1,300 Cypress Semiconductor Corp. ........................................................ 45,825 200 Diebold, Inc. ...................................................................... 10,600 1,000 aKLA Instruments Corp. .............................................................. 42,750 800 aLam Research Corp. ................................................................. 48,700 800 Linear Technology Corp. ............................................................ 35,000 600 aLitton Industries, Inc. ............................................................ 23,775 1,000 aSolectron Corp. .................................................................... 40,250 400 Sundstrand Corp. ................................................................... 24,500 1,500 aSymbol Technologies, Inc. .......................................................... 52,312 2,600 aTeradyne, Inc. ..................................................................... 86,775 900 Varian Associates, Inc. ............................................................ 46,238 800 aVishay Intertechnology, Inc. ....................................................... 28,200 1,200 aXilinx, Inc. ....................................................................... 55,200 800,025 Environmental Control 1.2% 1,200 aAir & Water Technologies Corp., Class A ............................................ 6,000 14,600 aAmerican Waste Services, Inc., Class A ............................................. 38,325 12,600 aInternational Technology Corp. ..................................................... 34,650 78,975 Finance 7.8% 1,800 AT&T Capital Corp. ................................................................. $ 72,000 1,300 Bank of New York Co., Inc. ......................................................... 54,600 600 BanPonce Corp. ..................................................................... 23,175 800 BayBanks, Inc. ..................................................................... 64,800 200 Bear Stearns Cos., Inc. ............................................................ 3,975 700 Comerica, Inc. ..................................................................... 23,537 700 First Bank System, Inc. ............................................................ 34,825 2,000 Green Tree Financial Corp. ......................................................... 53,250 1,400 Hibernia Corp., Class A............................................................. 13,825 700 Midlantic Corp., Inc. .............................................................. 37,100 400 Old National Bancorp ............................................................... 13,500 1,200 Signet Banking Corp. ............................................................... 28,500 300 SunAmerica, Inc. ................................................................... 18,675 700 Union Bank of San Francisco ........................................................ 35,088 1,000 West One Bancorp ................................................................... 42,500 519,350 Food/Beverages 2.7% 2,100 Coca-Cola Enterprises, Inc. ........................................................ 55,912 800 Hormel Foods Corp. ................................................................. 18,400 1,800 IBP, Inc. .......................................................................... 107,775 182,087 Healthcare Products 5.9% 800 Beckman Instruments, Inc. .......................................................... 26,500 1,600 Cardinal Health, Inc. .............................................................. 82,200 600 aCordis Corp. ....................................................................... 66,300 1,900 McKesson Corp. ..................................................................... 90,725 3,750 Mylan Laboratories Corp. ........................................................... 71,250 900 aNellcor, Inc. ...................................................................... 51,750 388,725 Healthcare Services 3.1% 1,300 aCoram Healthcare Corp. ............................................................. 5,200 500 aHealth Care and Retirement Corp. ................................................... 14,688 3,200 aHEALTHSOUTH Rehabilitation Corp. ................................................... 83,600 700 aHealth Systems International, Inc., Class A ........................................ 21,262 1,441 aHorizon/CMS Healthcare Corp. ....................................................... 29,180 1,100 aOrNda Healthcorp ................................................................... 19,388 400 aPacifiCare Health Systems, Inc., Class B ........................................... 29,100 202,418 Insurance 10.1% 2,500 AFLAC, Inc. ........................................................................ $ 101,875 2,500 Allmerica Property & Casualty Cos., Inc. ........................................... 56,875 700 American Re Corp. .................................................................. 26,775 1,800 Aon Corp. .......................................................................... 74,025 600 Bankers Life Holdings Corp. ........................................................ 10,875 300 aCNA Financial Corp. ................................................................ 34,200 600 Equitable of Iowa Cos. ............................................................. 21,000 200 GEICO Corp. ........................................................................ 13,800 2,600 Horace Mann Educators Corp. ........................................................ 69,225 1,400 aHumana, Inc. ....................................................................... 29,575 200 MBIA, Inc. ......................................................................... 13,925 1,100 MGIC Investment Corp. .............................................................. 62,562 700 Progressive Corp. .................................................................. 29,050 1,500 Reliastar Financial Corp. .......................................................... 62,625 900 Transatlantic Holdings, Inc. ....................................................... 60,638 667,025 Leisure 2.6% 900 aBoyd Gaming Corp. .................................................................. 12,263 4,400 Callaway Golf Co. .................................................................. 72,050 2,600 aMirage Resorts, Inc. ............................................................... 85,150 169,463 Manufacturing - Diversified .5% 600 Pentair, Inc. ...................................................................... 30,300 Manufacturing - Specialized Industrial 2.2% 1,400 Breed Technologies, Inc. ........................................................... 26,075 1,600 Lancaster Colony Corp. ............................................................. 53,200 500 aLear Seating Corp. ................................................................. 13,875 400 Leggett & Platt, Inc. .............................................................. 9,600 1,500 Modine Manufacturing Co. ........................................................... 41,250 144,000 Metals & Mining 1.4% 1,000 aAlumax, Inc. ....................................................................... 29,500 500 Lukens, Inc. ....................................................................... 15,375 1,400 aMagma Copper Co. ................................................................... 23,450 600 Newmont Gold Co. ................................................................... 21,600 89,925 Office Supplies 1.6% 3,700 aOffice Depot ....................................................................... $ 105,912 Oil & Gas 3.7% 1,600 Apache Corp. ....................................................................... 40,800 1,500 El Paso Natural Gas Co. ............................................................ 40,500 700 Equitable Resources, Inc. .......................................................... 20,475 1,600 Murphy Oil Corp. ................................................................... 60,600 900 Parker & Parsley Petroleum Co. ..................................................... 16,650 6,000 Ranger Oil, Ltd. ................................................................... 34,500 1,400 Valero Energy Corp. ................................................................ 33,075 246,600 Paper & Forest Products 2.5% 1,700 Bowater, Inc. ...................................................................... 75,225 800 Consolidated Papers, Inc. .......................................................... 45,800 1,400 Longview Fibre Co. ................................................................. 20,300 500 aManville Corp. ..................................................................... 5,813 300 Willamette Industries, Inc. ........................................................ 17,400 164,538 Publishing .4% 100 Washington Post Co. ................................................................ 29,000 Restaurants .6% 1,700 aBuffets, Inc. ...................................................................... 21,250 3,000 aNPC International, Inc., Class A ................................................... 19,500 40,750 Retail 4.6% 100 aBest Buy Co., Inc. ................................................................. 2,075 2,500 Dollar General Corp. ............................................................... 61,250 2,800 Fingerhut Cos., Inc. ............................................................... 38,150 2,600 Ruddick Corp. ...................................................................... 33,150 1,400 aSafeway, Inc. ...................................................................... 66,150 4,000 aSouthland Corp. .................................................................... 15,250 600 aStop & Shop Cos., Inc. ............................................................. 12,450 1,000 aVons Cos., Inc. .................................................................... 25,375 3,100 aWaban, Inc. ........................................................................ 48,437 302,287 Telecommunications 2.2% 2,200 Cincinnati Bell, Inc. .............................................................. 64,625 500 aGlenayre Technologies, Inc. ........................................................ 32,125 1,500 aWorldCom, Inc. ..................................................................... 48,937 145,687 Textiles 2.2% 5,400 aBurlington Industries, Inc. ........................................................ 60,075 1,900 aJones Apparel Group, Inc. .......................................................... 65,075 2,200 Phillips-Van Heusen Corp. .......................................................... 22,275 147,425 Transportation 1.6% 400 American President Cos., Ltd. ...................................................... 9,700 300 GATX Corp. ......................................................................... 14,250 700 Illinois Central Corp. ............................................................. 26,775 1,400 aNorthwest Airlines Corp., Class A .................................................. 56,175 106,900 Utilities 12.4% 4,400 Central Maine Power Co. ............................................................ 61,050 2,200 Delmarva Power & Lighting Co. ...................................................... 48,400 200 Florida Progress Corp. ............................................................. 6,625 1,000 General Public Utilities Corp. ..................................................... 31,250 3,100 Illinova Corp. ..................................................................... 87,962 3,100 Long Island Light Co. .............................................................. 52,700 200 New England Electric System ........................................................ 7,800 1,600 New York State Electric & Gas Corp. ................................................ 40,400 2,200 NIPSCO Industries, Inc. ............................................................ 80,300 1,500 Northeast Utilities ................................................................ 37,125 3,500 Pinnacle West Capital Corp. ........................................................ 96,250 3,000 Portland General Corp. ............................................................. 81,375 1,000 Public Service Co. of Colorado ..................................................... 34,125 4,100 aPublic Service Co. of New Mexico ................................................... 68,675 1,500 Rochester Gas & Electric Corp. ..................................................... 35,250 2,200 Scana Corp. ........................................................................ 55,825 825,112 Total Common Stocks (Cost $5,263,725) ........................................ 6,561,968 d,eReceivables from Repurchase Agreements .8% $51,318 Joint Repurchase Agreement, 5.887%, 11/01/95 (Cost $51,630) Daiwa Securities America, Inc., (Maturity Value $11,360) Collateral: U.S. Treasury Bills, 04/25/96 U.S. Treasury Notes, 6.125%, 09/30/00 Donaldson, Lufkin & Jenrette, (Maturity Value $13,426) Collateral: U.S. Treasury Notes, 5.125% - 8.25%, 07/31/96 - 03/31/00 Swiss Bank Corp., (Maturity Value $13,426) Collateral: U.S. Treasury Notes, 6.875%, 03/31/00 USB Securities, Inc., (Maturity Value $13,426) Collateral: U.S. Treasury Notes, 5.125% - 8.50%, 11/15/95 - 01/31/00 ............... $ 51,630 Total Investments (Cost $5,315,355) 99.9% ............................... 6,613,598 Other Assets & Liabilities, Net .1% ..................................... 9,203 Net Assets 100.0% ....................................................... $6,622,801 At October 31, 1995, the net unrealized appreciation based on the cost of investments for income tax purposes of $5,319,459 was as follows: Aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost ................................................ $1,433,547 Aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value ................................................ (139,408) Net unrealized appreciation ...................................................... $1,294,139
aNon-income producing. dFace amount for repurchase agreements is for the underlying collateral. eSee Note 1(H) regarding Joint Repurchase Agreement. The accompanying notes are an integral part of these financial statements. FRANKLIN STRATEGIC SERIES
Statement of Investments in Securities and Net Assets, October 31, 1995 (unaudited) Value Shares Franklin Natural Resources Fund (Note 1) Common Stocks 92.9% Chemicals 12.1% 2,000 Arcadian Corp. ..................................................................... $ 41,250 2,400 Avery-Dennison Corp. ............................................................... 107,400 1,000 Loctite Corp. ...................................................................... 47,250 2,900 Lubrizol Corp. ..................................................................... 83,375 1,000 Potash Corp. of Saskatchewan, Inc. ................................................. 69,625 3,100 Praxair, Inc. ...................................................................... 83,700 432,600 Environmental Control/Construction 5.2% 10,400 aAllwaste, Inc. ..................................................................... 50,700 2,300 Browning-Ferris Industries, Inc. ................................................... 66,988 4,400 Hanson, Plc. ....................................................................... 68,200 185,888 Forest Products and Paper 1.0% 5,500 a,cPortucel Industrial, SA ............................................................ 38,520 Iron/Steel 10.2% 5,400 aGibraltar Steel Corp. .............................................................. 63,450 200 Huntco Inc., Class A ............................................................... 2,600 1,700 J&L Specialty Steel, Inc. .......................................................... 27,838 2,500 Nucor Corp. ........................................................................ 120,313 700 Pohang Iron & Steel Co., Ltd., ADR ................................................. 17,669 1,300 aUCAR International, Inc. ........................................................... 37,050 5,700 Worthington Industries, Inc. ....................................................... 94,763 363,683 Machine - Diversified/Construction and Mining 2.9% 1,000 Caterpillar, Inc. .................................................................. 56,125 1,500 Harnischfeger Industries, Inc. ..................................................... 47,250 103,375 Metal - Diversified 6.5% 800 Alcan Aluminum Ltd. ................................................................ 25,300 300 Aluminum Co. of America (ALCOA) .................................................... 15,300 2,100 aCastech Aluminum Group, Inc. ....................................................... 29,400 1,800 Commonwealth Aluminum Corp. ........................................................ 29,025 2,700 Freeport-McMoran Copper & Gold, Inc. ............................................... 61,763 400 Phelps Dodge Corp. ................................................................. 25,350 4,000 a,cPT Tambang Timah, GDR .............................................................. 48,100 234,238 Mining - Precious Metals 14.0% 23,000 aAcacia Resources, Ltd. ............................................................. $ 37,668 4,400 cAshanti Goldfields Co. Ltd., ADR ................................................... 78,100 5,900 Compania de Minas Buenaventure, SA ................................................. 32,388 500 De Beers Consolidated Mines, Ltd., ADR ............................................. 13,750 4,500 Driefontein Consolidated, Ltd., ADR ................................................ 49,500 13,350 aGoldfields, Ltd. ................................................................... 33,050 2,200 Newmont Mining Corp. ............................................................... 83,050 2,600 Rustenburg Platinum Holdings, Ltd., ADR ............................................ 45,623 8,100 Santa Fe Pacific Gold Corp. ........................................................ 79,988 6,700 Sons of Gwalia, Ltd. ............................................................... 33,174 1,000 a,cStillwater Mining Co. .............................................................. 15,188 501,479 Oil/Gas - Domestic 7.0% 2,900 Phillips Petroleum Co. ............................................................. 93,525 1,600 Tosco Corp. ........................................................................ 55,200 5,100 Total Petroleum (North America), Ltd. .............................................. 51,638 2,100 Ultramar Corp. ..................................................................... 51,188 251,551 Oil/Gas - Equipment & Services 5.7% 1,411 Coflexip, Sponsored ADR ............................................................ 19,754 3,000 aENSCO International, Inc. .......................................................... 50,625 4,500 aSmith International, Inc. .......................................................... 72,000 2,600 aWeatherford Enterra, Inc. .......................................................... 62,725 205,104 Oil/Gas - Exploration 11.0% 19,000 aAbacan Resource Corp. .............................................................. 46,809 2,400 aBarrett Resources Corp. ............................................................ 55,800 3,700 Enron Oil & Gas Co. ................................................................ 74,000 6,400 aForcenergy Gas Exploration, Inc .................................................... 62,400 3,700 Noble Affiliates, Inc. ............................................................. 91,575 2,700 aUnion Pacific Resources Group, Inc.................................................. 61,425 392,009 Oil/Gas - International 10.5% 4,300 Repsol, SA ......................................................................... 127,925 500 Royal Dutch Petroleum Co. .......................................................... 61,437 3,700 Total, SA, ADR ..................................................................... 114,237 4,300 YPF, SA, ADR ....................................................................... 73,637 377,236 Real Estate Investment Trusts 3.8% 500 Equity Residential Properties Trust ................................................ $ 14,000 300 Felcor Suite Hotels, Inc. .......................................................... 8,662 800 Oasis Residential, Inc. ............................................................ 17,400 900 OMEGA Healthcare Investors, Inc. ................................................... 22,837 1,100 Storage Trust Realty ............................................................... 21,587 700 The Macerich Company ............................................................... 14,087 3,200 Winston Hotels, Inc. ............................................................... 35,600 134,173 Utilities 3.0% 1,800 aAES Corp. .......................................................................... 35,550 900 Enron Global Power & Pipelines ..................................................... 21,712 1,000 Pacific Enterprises ................................................................ 24,750 800 Wicor, Inc. ........................................................................ 23,700 105,712 Total Common Stocks (Cost $3,501,184) ........................................ 3,325,568 Face Amount Convertible Bonds .5% Mining - Precious Metals $ 15,000 Bema Gold Corp., cvt. sub. notes, 7.50%, 02/28/00 (Cost $16,600) ................... 16,050 Total Investments before Repurchase Agreements (Cost $3,517,784) ............. 3,341,618 d,eReceivables from Repurchase Agreements 8.4% 296,504 Joint Repurchase Agreement, 5.887%, 11/01/95 (Cost $301,232) Daiwa Securities America, Inc., (Maturity Value $66,282) Collateral: U.S. Treasury Bills, 04/25/96 U.S. Treasury Notes, 6.125%, 09/30/00 Donaldson, Lufkin & Jenrette, (Maturity Value $78,333) Collateral: U.S. Treasury Notes, 5.125% - 8.25%, 07/31/96 - 03/31/00 Swiss Bank Corp., (Maturity Value $78,333) Collateral: U.S. Treasury Notes, 6.875%, 03/31/00 UBS Securities, Inc., (Maturity Value $78,333) Collateral: U.S. Treasury Notes, 5.125% - 8.50%, 11/15/95 - 01/31/00 ............... 301,232 Total Investments (Cost $3,819,016) 101.8% .............................. 3,642,850 Liabilities in Excess of Other Assets, Net (1.8)% ....................... (64,860) Net Assets 100.0% ....................................................... $3,577,990 At October 31, 1995, the net unrealized depreciation based on the cost of investments for income tax purposes of $3,825,001 was as follows: an excess of value over tax cost ................................................. $ 72,271 an excess of tax cost over value ................................................. (254,422) Net unrealized depreciation ...................................................... $(182,151)
aNon-income producing. cSee Note 8 regarding Rule 144A securities. dFace amount for repurchase agreements is for the underlying collateral. eSee Note 1(H) regarding Joint Repurchase Agreement. The accompanying notes are an integral part of these financial statements. FRANKLIN STRATEGIC SERIES Financial Statements Statements of Assets and Liabilities October 31, 1995 (unaudited)
Franklin Franklin Franklin California Strategic Global Growth Fund Income Fund Utilities Fund -------- -------- -------- Assets: Investments in securities: At identified cost........................................................ $28,955,184 $7,167,982$109,638,643 ======== ======== ======== At value.................................................................. 32,043,862 7,466,102 113,584,753 Receivables from repurchase agreements, at value and cost.................. 5,432,330 1,047,641 5,798,095 Cash....................................................................... 259,761 28,207 -- Foreign currencies (Cost $48,155, $3,660 , and $4,920, respectively)....... -- 48,270 -- Receivables: Dividends and interest.................................................... 40,122 174,094 321,769 Investment securities sold................................................ -- 474,131 3,391,238 Capital shares sold....................................................... 96,175 87,501 104,190 Unamortized organization costs (Note 2).................................... 5,547 -- 5,284 Prepaid Expenses........................................................... 36,690 15,689 -- -------- -------- -------- Total assets.......................................................... 37,914,487 9,341,635 123,205,329 -------- -------- -------- Liabilities: Payables: Investment securities purchased: Regular delivery......................................................... 722,750 202,050 189,750 When-issued basis (Note 1)............................................... -- 164,913 -- Payable upon return of securities loaned (Note 8)......................... 425,920 -- -- Capital shares repurchased................................................ -- -- 90,865 Management fees........................................................... 2,691 -- 61,851 Distribution fees......................................................... 14,726 7,686 75,825 Shareholder servicing costs............................................... 271 -- -- Bank Overdraft............................................................ -- -- -- Payables to Manager for organization costs................................ 5,547 -- 5,284 Accrued expenses and other liabilities..................................... -- -- 34,269 Unrealized loss on forward foreign currency contracts (Note 1)............. -- 3,242 -- -------- -------- -------- Total liabilities..................................................... 1,171,905 377,891 457,844 -------- -------- -------- Net assets, at value........................................................ $36,742,582 $8,963,744$122,747,485 ======== ======== ======== Net assets consist of: Undistributed net investment income........................................ $ 197,286 $ 49,885 $ 1,423,871 Unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies.......................................... 3,088,678 295,692 3,941,683 Net realized gain from investments and foreign currency transactions....... 3,371,526 70,448 1,737,539 Class I Capital shares..................................................... 21,461 8,473 91,949 Class II Capital shares.................................................... -- -- 737 Additional paid-in capital................................................. 30,063,631 8,539,246 115,551,706 -------- -------- -------- Net assets, at value........................................................ $36,742,582 $8,963,744$122,747,485 ======== ======== ======== Class I Shares: Net assets, at value....................................................... $36,742,582 $8,963,744$121,774,956 ======== ======== ======== Shares outstanding......................................................... 2,146,147 847,268 9,194,912 ======== ======== ======== Net asset value per share.................................................. $17.12 $10.58 $13.24 ======== ======== ======== Class II Shares: Net assets, at value....................................................... $ 972,529 ======== Shares outstanding......................................................... $ 73,657 ======== Net asset value per share.................................................. $13.20 ======== The accompanying notes are an integral part of these financial statements. FRANKLIN STRATEGIC SERIES Financial Statements (cont.) Statements of Assets and Liabilities (cont.) October 31, 1995 (unaudited) Franklin Franklin Franklin Franklin Institutional Natural Small Cap Global Health MidCap Resources Growth Fund Care Fund Growth Fund Fund -------- -------- -------- ------- Assets: Investments in securities: At identified cost.............................................$180,864,950 $14,935,862 $5,263,725$3,517,784 ======== ======== ======== ======= At value....................................................... 188,947,581 18,037,924 6,561,967 3,341,619 Receivables from repurchase agreements, at value and cost....... 16,107,426 4,694,757 51,630 301,232 Cash............................................................ 699,600 23,942 -- -- Foreign currencies (Cost $3,660 , and $4,920, respectively) -- 3,686 -- 4,928 Receivables: Dividends and interest......................................... 127,850 1,789 9,204 2,522 Investment securities sold..................................... 273,904 174,327 -- -- Capital shares sold............................................ 1,204,807 278,357 -- 301 Unamortized organization costs (Note 2)......................... 4,848 4,775 -- 23,585 Prepaid Expenses................................................ 29,277 20,702 -- 6,948 -------- -------- -------- ------- Total assets............................................... 207,395,293 23,240,259 6,622,801 3,675,135 -------- -------- -------- ------- Liabilities: Payables: Investment securities purchased: Regular delivery.............................................. 7,668,824 759,513 -- 28,258 Payable upon return of securities loaned (Note 8).............. 3,132,452 -- -- -- Capital shares repurchased..................................... 14,255 -- -- 4,945 Management fees................................................ 89,953 -- -- -- Distribution fees.............................................. 101,676 9,639 -- 1,776 Shareholder servicing costs.................................... -- -- -- -- Bank Overdraft................................................. -- -- -- 38,581 Payables to Manager for organization costs..................... 4,848 4,775 -- 23,585 -------- -------- -------- ------- Total liabilities.......................................... 11,012,008 773,927 -- 102,525 -------- -------- -------- ------- Net assets, at value.............................................$196,383,285 $22,466,332 $6,622,801$3,577,990 ======== ======== ======== ======= Net assets consist of: Undistributed net investment income............................. 52,530 12,108 35,372 12,731 Unrealized appreciation (depreciation) oninvestments and translation of assets and liabilities denominated in foreign currencies................... 8,082,631 3,102,088 1,298,242 (176,085) Net realized gain from investments and foreign currency transactions 12,520,779 1,846,308 63,889 28,163 Class I Capital shares.......................................... 113,248 15,287 5,224 3,619 Class II Capital shares......................................... 638 -- -- -- Additional paid-in capital...................................... 175,613,459 17,490,541 5,220,074 3,709,562 -------- -------- -------- ------- Net assets, at value.............................................$196,383,285 $22,466,332 $6,622,801$3,577,990 ======== ======== ======== ======= Class I Shares: Net assets, at value............................................$195,283,821 $22,466,332 $6,622,801$3,577,990 ======== ======== ======== ======= Shares outstanding.............................................. 11,324,756 1,528,711 522,378 361,934 ======== ======== ======== ======= Net asset value per share....................................... $17.24 $14.70 $12.68 $9.89 ======== ======== ======== ======= Class II Shares: Net assets, at value............................................ $ 1,099,464 ======== Shares outstanding.............................................. $ 63,836 ======== Net asset value per share....................................... $17.22 ======== The accompanying notes are an integral part of these financial statements. FRANKLIN STRATEGIC SERIES Financial Statements (cont.) Statements of Operations for the six months ended October 31, 1995 (unaudited) Franklin Franklin Franklin California Strategic Global Growth Fund Income FundUtilities Fund -------- -------- --------- Investment income: Dividends................................................................ $ 126,814 $ 16,921 $ 2,183,113 Interest................................................................. 152,441 321,067 260,700 -------- -------- --------- Total Income........................................................ 279,255 337,988 2,443,813 -------- -------- --------- Expenses: Management fees, net (Note 6)............................................ -- -- 368,765 Distribution fees Class I (Note 6)....................................... 19,960 8,856 148,281 Distribution fees Class II (Note 6)...................................... -- -- 2,664 Shareholder servicing costs (Note 6)..................................... 6,432 507 45,441 Reports to shareholders.................................................. 5,916 261 41,239 Registration and filing fees............................................. 5,445 79 38,980 Custodian fees........................................................... 627 32 17,168 Professional fees........................................................ 1,635 30 10,619 Amortization of organization costs (Note 2).............................. 4,434 -- 1,584 Other.................................................................... 1,272 26 2,487 Payments from Manager (Note 6)........................................... (15,147) -- -- -------- -------- --------- Total expenses...................................................... 30,574 9,791 677,228 -------- -------- --------- Net investment income.............................................. 248,681 328,197 1,766,585 -------- -------- --------- Realized and unrealized gain (loss) from investments and foreign currency: Net realized gain (loss) on: Investments............................................................. 3,374,800 88,283 1,773,797 Foreign currency transactions........................................... 0 (2,053) (34,971) Net unrealized appreciation (depreciation) on: Investments............................................................. 1,471,292 173,109 9,358,369 Translation of assets and liabilities denominated in foreign currencies. -- 718 (5,698) -------- -------- --------- Net realized and unrealized gain (loss) on investments and foreign currency 4,846,092 260,057 11,091,497 -------- -------- --------- Net increase in net assets resulting from operations...................... $5,094,773 $588,254 $12,858,082 ======== ======== ========= The accompanying notes are an integral part of these financial statements. FRANKLIN STRATEGIC SERIES Financial Statements (cont.) Statements of Operations (cont.) for the six months ended October 31, 1995 (unaudited) Franklin Franklin Franklin Franklin Institutional Natural Small Cap Global Health MidCap Resources Growth Fund Care Fund Growth Fund Fund* --------- -------- -------- -------- Investment income: Dividends.................................................... $ 312,850 $ 26,240 $ 48,469 $ 11,208 Interest..................................................... 382,597 66,560 2,021 9,430 --------- -------- -------- -------- Total Income............................................ 695,447 92,800 50,490 20,638 --------- -------- -------- -------- Expenses: Management fees, net (Note 6)................................ 337,662 -- -- -- Distribution fees Class I (Note 6)........................... 153,245 16,851 -- 1,776 Distribution fees Class II (Note 6).......................... 413 -- -- -- Shareholder servicing costs (Note 6)......................... 31,656 5,124 -- 567 Reports to shareholders...................................... 44,289 8,124 660 810 Registration and filing fees................................. 25,972 6,174 5,583 810 Custodian fees............................................... 6,655 1,209 189 324 Professional fees............................................ 10,205 1,530 1,047 876 Amortization of organization costs (Note 2).................. 1,878 1,620 -- 2,145 Other........................................................ 4,479 877 1,209 648 Payments from Manager (Note 6)............................... -- (20,701) (8,688) (49) --------- -------- -------- -------- Total expenses.......................................... 616,454 20,808 -- 7,907 --------- -------- -------- -------- Net investment income.................................. 78,993 71,992 50,490 12,731 --------- -------- -------- -------- Realized and unrealized gain (loss) from investments and foreign currency: Net realized gain (loss) on: Investments................................................ 12,532,694 1,291,147 139,178 28,587 Foreign currency transactions.............................. 4,680 (842) -- (424) Net unrealized appreciation (depreciation) on: Investments................................................ 1,310,816 2,510,080 841,991 (176,165) Translation of assets and liabilities denominated in foreign currencies................................................... -- 26 -- 80 --------- -------- -------- -------- Net realized and unrealized gain (loss) on investments and foreign currency............................................. 13,848,190 3,800,411 981,169 (147,922) --------- -------- -------- -------- Net increase in net assets resulting from operations.......... $13,927,183 $3,872,403 $1,031,659 $(135,191) ========= ======== ======== ======== *For the period June 5, 1995 (effective date) to October 31, 1995. The accompanying notes are an integral part of these financial statements. FRANKLIN STRATEGIC SERIES Financial Statements (cont.) Statements of Changes in Net Assets for the six months ended October 31, 1995 (unaudited) and the year ended April 30, 1994 Franklin California Franklin Strategic Franklin Global Growth Fund Income Fund Utilities Fund ------------------- ------------------ --------------------- Six months Year ended Six months Year ended Six months Year ended ended 10/31/95 4/30/85 ended 10/31/95 ended 4/30/95* ended 10/31/95 4/30/85 --------- --------- --------- -------- ---------- ---------- Increase (decrease) in net assets: Operations: Net investment income......... $ 248,681 123,528 $ 328,197 $ 406,443 $ 1,766,585 $ 4,243,241 Net realized gain (loss) from investments and foreign currency transactions.......... 3,374,800 836,699 86,230 (15,782) 1,738,826 1,602,848 Net unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies.............. 1,471,292 1,235,649 173,827 121,865 9,352,671 (2,364,729) --------- --------- --------- -------- ---------- ---------- Net increase in net assets resulting from operations..................... 5,094,773 2,195,876 588,254 512,526 12,858,082 3,481,360 Distributions to shareholders: From undistributed net investment income: Class I...................... (122,907) (64,537) (294,856) (389,899) (1,813,634) (3,707,193) Class II..................... -- -- -- -- (4,181) -- From net realized capital gains: Class I....................... (533,836) (549,224) -- -- (1,314,584) (3,611,890) Class II...................... -- -- -- -- (3,131) -- Increase (decrease) in net assets from capital share transactions (Note 4)....................... 18,460,285 7,616,445 1,934,640 6,613,079 (6,225,549) (1,099,874) --------- --------- --------- -------- ---------- ---------- Net increase (decrease) in net assets.................. 22,898,315 9,198,560 2,228,038 6,735,706 3,497,003 (4,937,597) Net assets: Beginning of Period............ 13,844,267 4,645,707 6,735,706 -- 119,250,482 124,188,079 --------- --------- --------- -------- ---------- ---------- End of Period.................. $36,742,582 $13,844,267 $8,963,744 $6,735,706 $122,747,485 $119,250,482 ========= ========= ========= ======== ========== ========== Undistributed net investment income included in net assets: Beginning of Period........... $ 71,512 $ 12,521 $ 16,544 $ -- $ 1,475,101 $ 939,053 ========= ========= ========= ======== ========== ========== End of Period................. $ 197,286 $ 71,512 $ 49,885 $ 16,544 $ 1,423,871 $ 1,475,101 ========= ========= ========= ======== ========== ========== The accompanying notes are an integral part of these financial statements. FRANKLIN STRATEGIC SERIES Financial Statements (cont.) Statements of Changes in Net Assets (cont.) for the six months ended October 31, 1995 (unaudited) and the year ended April 30, 1994 Franklin Small Cap Franklin Global Growth Fund Health Care Fund -------------------- ------------------- Six months Year ended Six months Yearended ended 10/31/95 4/30/95 ended 10/31/95 4/30/95 ------------ ----------- ----------- ----------- Increase (decrease) in net assets: Operations: Net investment income................................... $ 78,993 $ 91,732 $ 71,992 $ 74,674 Net realized gain (loss) from investments and foreign currency transactions.................................... 12,537,374 3,405,075 1,290,305 943,505 Net unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies........................ 1,310,816 6,619,781 2,510,106 189,307 ------------ ----------- ----------- ----------- Net increase in net assets resulting from operations............................................... 13,927,183 10,116,588 3,872,403 1,207,486 Distributions to shareholders: From undistributed net investment income: Class I................................................. (75,705) (50,170) (91,767) (49,631) Class II................................................ -- -- -- -- From net realized capital gains: Class I................................................. (2,227,891) (2,378,735) -- (469,438) Class II................................................ -- -- -- -- Increase (decrease) in net assets from capital share transactions (Note 4).................................... 121,750,063 31,406,861 5,779,767 6,422,416 ------------ ----------- ----------- ----------- Net increase (decrease) in net assets............... 133,373,650 39,094,544 9,560,403 7,110,833 Net assets: Beginning of Period...................................... 63,009,635 23,915,091 12,905,929 5,795,096 ------------ ----------- ----------- ----------- End of Period............................................ $196,383,285 $63,009,635 $22,466,332 $12,905,929 ============ =========== =========== =========== Undistributed net investment income included in net assets: Beginning of Period..................................... $ 49,242 $ 7,680 $ 31,883 $ 6,840 ============ =========== =========== =========== End of Period........................................... $ 52,530 $ 49,242 $ 12,108 $ 31,883 ============ =========== =========== =========== The accompanying notes are an integral part of these financial statements. FRANKLIN STRATEGIC SERIES Financial Statements (cont.) Statements of Changes in Net Assets (cont.) for the six months ended October 31, 1995 (unaudited) and the year ended April 30, 1994 Franklin Institutional Franklin Natural MidCap Growth Fund Resources Fund ------------------ ------------ Six months Year ended For the period ended 10/31/95 4/30/95 ended 10/31/95** ----------- ---------- ------------ Increase (decrease) in net assets: Operations: Net investment income................................................. $ 50,490 $ 109,010 $ 12,731 Net realized gain (loss) from investments and foreign currency transactions........................................................... 139,178 (75,022) 28,163 Net unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies............ 841,991 478,214 (176,085) ----------- ---------- ------------ Net increase in net assets resulting from operations.............. 1,031,659 512,202 (135,191) Distributions to shareholders: From undistributed net investment income: Class I............................................................... (56,910) (103,704) -- From net realized capital gains: Class II.............................................................. -- -- -- Increase (decrease) in net assets from capital share transactions (Note 4) 56,910 111,288 3,713,181 ----------- ---------- ------------ Net increase (decrease) in net assets............................. 1,031,659 512,202 3,577,990 Net assets: Beginning of Period.................................................... 5,591,142 5,078,940 -- ----------- ---------- ------------ End of Period.......................................................... $6,622,801 $5,591,142 $3,577,990 =========== ========== ============ Undistributed net investment income included in net assets: Beginning of Period.................................................... $ 41,792 $ 36,486 $-- =========== ========== ============ End of Period.......................................................... $ 35,372 $ 41,792 $ 12,731 =========== ========== ============ **For the period June 5, 1995 (effective date) to October 31, 1995. The accompanying notes are an integral part of these financial statements.
FRANKLIN STRATEGIC SERIES Notes to Financial Statements (unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES Franklin Strategic Series (the Series) is an open-end, management investment company (mutual fund), registered under the Investment Company Act of 1940, as amended. The Series currently consists of eight separate funds (the Funds). There are three separate diversified funds Franklin Small Cap Growth Fund (the Small Cap Fund), Franklin Institutional MidCap Growth Fund (the Institutional MidCap Growth Fund) and Franklin MidCap Growth Fund (the MidCap Growth Fund); and five separate non-diversified funds: Franklin California Growth Fund (the California Growth Fund), Franklin Strategic Income Fund (the Strategic Income Fund), Franklin Global Health Care Fund (the Global Health Fund) Franklin Global Utilities Fund (the Global Utilities Fund) and Franklin Natural Resources Fund (the Natural Resources Fund). Each of the Funds issues a separate series of shares and maintains a totally separate investment portfolio. The Natural Resources Fund was effective on June 6, 1995. The MidCap Growth Fund has been effective since June 15, 1993, but has not commenced operations. The Global Utilities fund and the Small Cap Growth Fund offer two classes of shares, Class I and Class II. Class I shares are sold with a higher front-end sales charge than Class II shares. Each class of shares may be subject to a contingent deferred charges and has the same rights, except with respect to the effect of the respective sales charges, the distribution fees borne by each class, voting rights on matters affecting a single class and the exchange privilege of each class. The offering of Class II shares for the Global Utilities Fund began May 1, 1995 and for the Small Cap Growth Fund began October 1, 1995. At the time of the offering, all previously outstanding shares became Class I shares. Realized and unrealized gains or losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. The following is a summary of significant accounting policies consistently followed by the Series in the preparation of its financial statements. The policies are in conformity with generally accepted accounting principles for investment companies. A. Security Valuations: Portfolio securities listed on a securities listed on a securities exchange or on the NASDAQ National Market System for which market quotations are readily available are valued at the last quoted sale price of the day or, if there is no such reported sale, within the range of the most recent quoted bid and asked prices. Other securities for which market quotations are readily available are valued at current market values, obtained from pricing services, which are based on a variety of factors, including recent trades, institutional size trading in similar types of securities (considering yield, risk and maturity) and/or developments related to specific securities. Portfolio securities which are traded both in the over-the-counter market and on a securities exchange are valued according to the broadest and most representative market as determined by the Manager. Other securities for which market quotations are not available, if any, are valued in accordance with procedures established by the Board of Directors. The value of a foreign security is determined as of the close of trading on the foreign exchange on which it is traded or as of the close of trading on the New York Stock Exchange, if that is earlier, and that value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at noon, New York time, on the day the value of the foreign security is determined. If no sale is reported at that time, the mean between the current bid and asked price is used. Occasionally, events which affect the values of foreign securities and foreign exchange rates may occur between the times at which they are determined and the close of the exchange and will, therefore, not be reflected in the computation of the Fund's net asset value, unless material. If events materially affect the value of these foreign securities occur during such period, then these securities will be valued in accordance with procedures established by the Board of Directors. The fair values of securities restricted as to resale, if any, are determined following procedures established by the Board of Trustees -- see Note 7. 1. SIGNIFICANT ACCOUNTING POLICIES (cont.) B. Income Taxes: The Funds intend to continue to qualify for the tax treatment applicable to regulated investment companies under the Internal Revenue Code and to make the requisite distributions to its shareholders which will be sufficient to relieve it from income and excise taxes. Therefore, no income tax provision is required. Each Fund is treated as a separate entity in the determination of compliance with the Internal Revenue Code. C. Security Transactions: Security transactions are accounted for on the date the securities are purchased or sold (trade date). Realized gains and losses on security transactions are determined on the basis of specific identification for both financial statement and income tax purposes. D. Investment Income, Expenses and Distributions: Dividend income and distributions to shareholders are recorded on the ex-dividend date. Interest income and estimated expenses are accrued daily. Bond discount is amortized as required by the Internal Revenue Code. Net realized capital gains and losses differ for financial statement and tax purposes primarily due to differing treatment of wash sale and net realized gain (loss) from foreign currency transactions. E. Securities Purchased on a When-Issued or Delayed Delivery Basis: The Funds may trade securities on a when-issued or delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Funds will generally purchase these securities with the intention of acquiring such securities, they may sell such securities before the settlement date. These securities are identified on the accompanying statement of investments in securities and net assets. The Funds have set aside sufficient investment securities as collateral for these purchase commitments. F. Expense Allocation: Common expenses incurred by the Series are allocated among the Funds based on the ratio of net assets of each Fund to the combined net assets. In all other respects, expenses are charged to each Fund as incurred on a specific identification basis. G. Foreign Currency Translation: The accounting records of the Series are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the rate of exchange of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expenses are translated at the rate of exchange quoted on the respective date that such transactions are recorded. Differences between income and expense amounts recorded and collected or paid are recognized when reported by the custodian bank. The Series does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. 1. SIGNIFICANT ACCOUNTING POLICIES (cont.) G. Foreign Currency Translation (cont.): Reported net realized foreign exchange gains or losses arise from sales and maturities of short-term securities, sales of foreign currencies, currency gains or losses realized between the trade date and settlement dates on securities transactions and the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Series' books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized appreciation (depreciation) on translation of assets and liabilities denominated in foreign currencies arise from changes in the value of assets and liabilities other than investments in securities at semi-fiscal year end, resulting from changes in exchange rates. H. Repurchase Agreements: The Series may enter into a Joint Repurchase Agreement whereby each fund's uninvested cash balance is deposited into a joint cash account to be used to invest in one or more repurchase agreements with government securities dealers recognized by the Federal Reserve Board and/or member banks of the Federal Reserve System. The value and face amount of the Joint Repurchase Agreement are allocated to the Funds based on their pro-rata interest. In a repurchase agreement, the Fund purchase a U.S. government security from a dealer or bank subject to an agreement to resell it at a mutually agreed upon price and date. Such a transaction is accounted for as a loan by the Fund to the seller, collaterized by the underlying security. The transaction requires the initial collateralization of the seller's obligation by U.S. government securities with market value, including accrued interest, of at least 102% of the dollar amount invested by the Fund, with the value of the underlying security marked to market daily to maintain coverage of at least 100%. The collateral is delivered to the Fund's custodian and held until resold to the dealer or bank. At October 31, 1995, all outstanding joint repurchase agreements held by the Funds had been entered into on that date. I. Forward Foreign Currency Contracts: A forward currency contract, which is individually negotiated and privately traded by currency traders and their customers, is a commitment to purchase or sell a specific currency for an agreed-upon price at a future date. The Strategic Income Fund may enter into forward contracts with the objective of minimizing the risk to the Fund from adverse changes in the relationship between currencies or to enhance income. The Fund may also enter into a forward contract in relation to a security denominated in a foreign currency or when it anticipates receipt in a foreign currency of dividends or interest payments in order to "lock in" the U.S. dollar price of a security or the U.S. dollar equivalent of such dividend or interest payments. Any gain or loss realized from a forward currency contract is recorded as a realized gain or loss from investments. See the accompanying Statement of Operations for the fund's total realized gains or losses from investments during the period. The Fund segregates in its custodian bank sufficient cash, cash equivalents or readily marketable debt securities as collateral for commitments created by open forward contracts. The Fund could be exposed to risk if counterparties to the contracts are unable to meet the terms of their contracts or if the value of the foreign currency changes unfavorably.
As of October 31, 1995, the Strategic Income Fund had the following forward foreign currency contracts outstanding: Unrealized Contracts to Sell In Exchange for Settlement Date Gain (Loss) - --------------------------------------------- ---------- ---------- ------- 190,000 Canadian Dollars ................................. U.S. $139,291 11/07/95 U.S. $(2,547) 105,000 Canadian Dollars ................................. U.S. $ 76,819 11/08/95 (1,565) 85,000 Canadian Dollars ................................. U.S. $ 62,362 11/07/95 (1,092) ---------- ------- U.S. $278,472 (5,204) ---------- ------- Contracts to Buy - --------------------------------------------- 105,000Canadian Dollars ..................................... U.S. $ 76,422 11/08/95 1,962 ---------- ------- Net unrealized depreciation ...................................................................... U.S. $(3,242) =======
2. UNAMORTIZED ORGANIZATION COSTS The organization costs of the Series are amortized on a straight-line basis over a period of five years from the effective date of registration under the Securities Act of 1933. In the event that Franklin Resources, Inc. (which was the sole shareholder prior to the effective date of registration) redeems its shares within the five-year period, the pro rata share of the then-unamortized deferred organization costs will be deducted from the redemption price paid to Franklin Resources, Inc. New investors purchasing shares of the Series subsequent to that date bear such costs during the amortization period only as such charges are accrued daily against investment income. The Series' Manager advanced all of the organization costs of the Funds, except for the Global Utilities Fund, which amounted to $33,267, $18,775, $16,816, and $25,730 for the California Growth Fund, the Small Cap Fund, and the Global Health Fund, and the Natural Resources Fund, respectively. In an effort to reduce the Funds' expenses, the manager has agreed in advance to waive repayment of the current period's amortization of $4,434, $1,878, $1,620 and $2,145, for the California Growth Fund, the Small Cap Fund, the Global Health Fund, and the Natural Resources Fund, respectively. 3. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS At October 31, 1995, for tax purposes, the Funds had accumulated net realized gains or capital loss carryovers as follows:
Franklin Franklin Franklin Franklin California Global Small Cap Global Health Growth FundUtilities FundGrowth Fund Care Fund -------- -------- -------- -------- Accumulated net realized gains ................................ $532,804 $1,315,465 $2,220,904 $528,260 ======== ======== ======== ======== Franklin Institutional Midcap Growth Fund -------- Capital loss carryovers Expiring in: 2003............................................. $67,804 ========
The Strategic Income Fund has a deferred foreign currency loss of $15,782 deemed to be incurred on the first day of the following fiscal year for federal income tax purposes. For tax purposes, the aggregate cost of securities is higher (and unrealized appreciation is lower) than for financial reporting purposes at October 31, 1995 by $1,818 in the Global Utilities Fund, $182,250 in the Small Cap Growth Fund, $3,181 in the Global Health Fund, and $4,104 in the Institutional MidCap Growth Fund. 4. TRUST SHARES At October 31, 1995, there were an unlimited number of $.01 par value shares authorized. Transactions in each of the Funds' shares for the six months ended October 31, 1995 and for the year ended April 30, 1995 were as follows:
Franklin California Franklin Strategic Franklin Global Growth Fund Income Fund* Utilities Fund ------------------ ---------------- ------------------- Class I Shares: Shares Amount Shares Amount Shares Amount -------- --------- ------ -------- -------- ---------- Six months ended October 31, 1995 - Shares sold ......................... 514,779 $ 8,286,105 114,710 $1,196,390 260,234 $ 3,326,163 Shares issued in reinvestment of distributions ....................... 38,862 570,497 26,727 277,274 215,040 2,677,243 Shares redeemed ..................... (49,571) (810,523) (9,793) (102,473) (822,451) (10,521,922) Changes from exercise of exchange privilege: Shares sold ....................... 1,053,263 16,955,173 57,118 597,149 1,559,854 20,050,460 Shares redeemed ................... (397,698) (6,540,967) (3,238) (33,700) (1,770,537) (22,696,993) -------- --------- ------ -------- -------- ---------- Net increase (decrease) .............. 1,159,635 $18,460,285 185,524 $1,934,640 (557,860) $ (7,165,049) ======== ========= ====== ======== ======== ========== Year ended April 30, 1995 - Shares sold.......................... 177,789 $ 2,286,030 591,961 $5,923,336 1,300,280 $15,677,001 Shares issued in reinvestment of distributions........................ 49,674 577,174 37,975 374,342 525,655 6,120,700 Shares redeemed...................... (51,488) (652,107) (4,853) (49,419) (1,571,981) (18,781,605) Changes from exercise of exchange privilege: Shares sold........................ 517,956 6,624,501 51,246 509,787 1,108,116 13,411,365 Shares redeemed.................... (92,961) (1,219,153) (14,585) (144,967) (1,468,342) (17,527,335) -------- --------- ------ -------- -------- ---------- Net increase (decrease) .............. 600,970 $ 7,616,445 661,744 $6,613,079 (106,272) $ (1,099,874) ======== ========= ====== ======== ======== ========== Class II Shares: Six months ended October 31, 1995 - Shares sold ......................... 74,073 $ 945,198 Shares issued in reinvestment of distributions ....................... 416 5,182 Shares redeemed ..................... -- -- Changes from exercise of exchange privilege: Shares sold ....................... 3,389 44,047 Shares redeemed ................... (4,229) (54,927) -------- ---------- Net increase.......................... 73,649 $ 939,500 ======== ========== *For the period ended October 31, 1995 and the year ended April 30, 1995. 4. TRUST SHARES (cont.) Franklin Small Cap Franklin Global Institutional MidCap Growth Fund Health Care Fund Growth Fund -------------------- ----------------- ------------- Class I Shares: Shares Amount Shares Amount Shares Amount -------- ---------- ------- --------- ----- ------- Six months ended October 31, 1995 - Shares sold ............................... 4,504,214 $ 76,872,271 292,308 $4,072,412 -- $ -- Shares issued in reinvestment of distributions ............................. 123,747 1,949,021 6,734 81,346 5,019 56,910 Shares redeemed............................ (329,636) (5,617,678) (49,518) (646,492) -- -- Changes from exercise of exchange privilege: Shares sold .............................. 5,124,993 87,332,240 509,577 7,171,316 -- -- Shares redeemed .......................... (2,326,852) (39,887,692) (357,545) (4,898,815) -- -- -------- ---------- ------- --------- ----- ------- Net increase ............................... 7,096,466 $120,648,162 401,556 $5,779,767 5,019 $ 56,910 ======== ========== ======= ========= ===== ======= Year ended April 30, 1995 Shares sold................................ 1,050,774 $ 14,073,399 295,333 $ 3,331,812 -- $ -- Shares issued in reinvestment of distributions............................. 165,206 1,980,868 43,569 460,121 11,755 111,288 Shares redeemed............................ (377,504) (4,925,437) (99,454) (1,111,831) -- -- Changes from exercise of exchange privilege: Shares sold............................... 3,300,526 43,456,084 737,966 8,349,736 -- -- Shares redeemed........................... (1,785,818) (23,178,053) (405,973) (4,607,422) -- -- -------- ---------- ------- --------- ----- ------- Net increase................................ 2,353,184 $ 31,406,861 571,441 $ 6,422,416 11,755 $111,288 ======== ========== ======= ========= ===== ======= Class II Shares: Six months ended October 31, 1995 -** Shares sold ............................... 53,790 $ 927,904 Shares issued in reinvestment of distributions ............................. -- -- Shares redeemed ........................... (60) (1,035) Changes from exercise of exchange privilege: Shares sold .............................. 10,106 175,032 Shares redeemed .......................... -- -- -------- ---------- Net increase................................ 63,836 $ 1,101,901 ======== ========== **For the period October 1, 1995 (effective date for Class II shares) to October 31, 1995. 4. TRUST SHARES (cont.) Franklin Natural Resources Fund ---------------- Class I Shares: Shares Amount ------ --------- Six months ended October 31, 1995 -*** Shares sold ............................................................................ 300,397 $3,075,939 Shares issued in reinvestment of distributions ......................................... -- -- Shares redeemed ........................................................................ (517) (5,116) Changes from exercise of exchange privilege: Shares sold ............................................................................ 83,652 867,624 Shares redeemed ........................................................................ (21,598) (225,266) ------ --------- Net increase ............................................................................ 361,934 $3,713,181 ====== ========= ***For the period June 6, 1995 (effective date) to October 31, 1995. 5. PURCHASES AND SALES OF SECURITIES Purchases and sales of securities (excluding purchases and sales of short-term securities) for the six months ended October 31, 1995, were as follows: Franklin Franklin Franklin Franklin Franklin Franklin Franklin Institutional Natural California Strategic Global Small Cap Global Health MidCap Resources Growth Fund Income FundUtilities Fund Growth Fund Care Fund Growth Fund Fund --------- -------- --------- ---------- -------- -------- -------- Purchases ............ $26,466,454 $4,351,645 $21,183,866 $188,155,267 $9,249,030 $1,527,691 $3,794,802 ========= ======== ========= ========== ======== ======== ======== Sales ................ $10,788,643 $3,071,491 $33,876,342 $ 70,173,862 $6,429,021 $1,445,293 $ 305,605 ========= ======== ========= ========== ======== ======== ========
6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES Franklin Advisors, Inc., under the terms of a management agreement, provides investment advice, administrative services, office space and facilities to each Fund, except for the Institutional MidCap Growth Fund and Strategic Income Fund, and receives fees computed monthly based on the net assets of each Fund, at an annualized rate of .625 of 1% of the average daily net assets up to and including $100 million; .50 of 1% of the average daily net assets over $100 million, up to and including $250 million; .45 of 1% of the average daily net assets over $250 million, up to and including $10 billion; .44 of 1% of the average daily net assets over $10 billion, up to and including $12.5 billion; .42 of 1% of the average daily net assets over $12.5 billion, up to and including $15 billion; and .40 of 1% of the average net assets over $15 billion. For the Strategic Income Fund, Franklin Advisers, Inc. receives fees computed monthly based on the net assets of this fund, at an annual rate of .625 of 1% of the average daily net assets up to and including $100 million; .50 of 1% of the daily average net assets over $100 million, up to and including $250 million; .45 of 1% of the average daily net assets over $250 million. Franklin Institutional Services Corporation (FISCO) serves as the investment advisor for the Institutional MidCap Growth Fund, and receives fees computed monthly at the annual rate of .65 of 1% the Fund's average daily net assets . 6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (cont.) The terms of the management agreement provide that aggregate annual expenses of the Series' be limited to the extent necessary to comply with the limitations set forth in the laws, regulations and administrative interpretations of the states in which the Series' shares are registered. The Series' expenses did not exceed these limitations; however, for the period ended October 31, 1995, Franklin Advisors, Inc. and FISCO agreed in advance to waive a the management fees, as indicated below, in an effort to minimize the Series' expenses. Additionally Franklin Advisors, Inc. made payments, including waiver of repayment of organization costs advances, of $15,147, $20,701, and $531, for other expenses as shown in the Statement of Operations for the California Growth Fund, the Global Health Fund and the Natural Resources Fund, respectively.
Franklin Advisors, Inc. Franklin Franklin Franklin Franklin Franklin Franklin Natural California Strategic Global Small Cap Global Health Resources Growth Fund Income Fund Utilities Fund Growth Fund Care Fund Fund -------- --------- -------- -------- -------- -------- Management fees earned ........ $80,606 $24,543 $368,765 $393,791 $50,218 $5,075 Less reduction of fees ........ 80,606 24,543 -- 56,129 50,218 5,075 -------- --------- -------- -------- -------- -------- Management fees paid ......... $ -- $ -- $368,765 $337,662 $ -- $ -- ======== ========= ======== ======== ======== ======== FISCO -------- Franklin Institutional MidCap Growth Fund -------- Management fees earned ............................................................................ $20,539 Less reduction of fees ............................................................................ 20,539 -------- Management fees paid .............................................................................. $ -- ========
Pursuant to a shareholder service agreement with Franklin/Templeton Investor Services, Inc., the Series pays costs on a per shareholder account basis. Shareholder servicing costs of $90,406 were incurred for the period ended October 31, 1995, of which $108,920 was for services provided by Franklin/Templeton Investor Services, Inc. In an effort to minimize such costs, Franklin/Templeton Investor Services, Inc. agreed in advance to waive shareholder servicing costs of $2 in the Institutional MidCap Growth Fund for the six months ended October 31, 1995. Under the terms of a Distribution Plan pursuant to Rule 12b-1 of the Investment Company Act of 1940, the Funds, except for the Institutional MidCap Growth Fund, will reimburse Franklin/Templeton Distributors, Inc. in an amount up to .25% of the average daily net assets, while the Natural Resources Fund will reimburse up to a maximum of .35% per annum of the Fund's average daily net assets, for costs incurred in the promotion, offering and marketing of the Funds' shares. The Franklin Global Utilities Fund and the Franklin Small Cap Growth Fund will reimburse Franklin/Templeton Distributors, Inc., in an amount up to a maximum of 1.00% for Class II's average daily net assets for costs incurred in the promotion, offering and marketing of the Funds; Class II shares. Costs incurred by the Series under the agreement aggregated $357,464 for the six months ended October 31, 1995. 6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (cont.) In its capacity as underwriter for the shares of Funds, except for the Institutional MidCap Growth Fund, Franklin/Templeton Distributors, Inc., received commissions on sales of the Funds' capital shares. Commissions are deducted from the gross proceeds received from the sale of the shares of the Funds, and as such are not expenses of the Funds. Franklin/Templeton Distributors, Inc., may also make payments, out of its own resources, to the dealers for certain sales of Class I and Class IIshares. Commissions received by Franklin/Templeton Distributors, Inc., and the amounts which were subsequently paid to other dealers for the six months ended October 31, 1995, were as follows:
Franklin Franklin Franklin Franklin Franklin Franklin Natural California Strategic Global Small Cap Global Health Resources Class I Growth Fund Income Fund Utilities Fund Growth Fund Care Fund Fund - ----------------------- -------- --------- -------- -------- -------- -------- Total commissions received .... $341,922 $32,195 $135,857 $2,453,914 $99,612 $35,390 ======== ========= ======== ======== ======== ======== Paid to other dealers ......... $304,271 $30,101 $120,918 $2,182,717 $90,063 $36,294 ======== ========= ======== ======== ======== ======== Class II - ----------------------- Total commissions received .... $ 9,630 $ 8,296 ======== ======== Paid to other dealers ......... $ 11,522 $ 16,602 ======== ========
Certain officers and trustees of the Series are also officers and/or directors of Franklin/Templeton Distributors, Inc., Franklin Advisors, Inc., Franklin Institutional Services Corporation, and Franklin/Templeton Investors Services, Inc. all wholly-owned subsidiaries of Franklin Resources, Inc. At October 31, 1995, Franklin Resources owned 12% of the California Growth Fund, 66% of the Strategic Income Fund, 7% of the Global Health Fund, 28% of the Natural Resources Fund, and 100% of the Institutional MidCap Growth Fund. 7. RESTRICTED SECURITIES A restricted security is a security which has not been registered with the Securities Exchange Commission pursuant to the Securities Act of 1933. The Series may purchase restricted securities through a private offering and they cannot be sold without prior registration under the Securities Act of 1933 unless such sale is pursuant to an exemption therefrom. Subsequent costs of registration of such securities are borne by the issuer. A secondary market exists for certain privately placed securities. The Series values these restricted securities as disclosed in Note 1. At October 31, 1995, the California Growth Fund held the following restricted security:
Shares Security Acquisition Date Cost Value - ----- ----------------------------------------------------- ----------- ---- ---- 486 Lynx Therapeutics, Inc. ............................................... 10/19/92 $328 $-- 8. RULE 144A SECURITIES Rule 144A provides a non-exclusive safe harbor exemption from the registration requirements of the Securities Act of 1933 for specified resales of restricted securities to qualified institutional investors. The Series values these securities as disclosed in Note 1. At October 31, 1995, 144A securities were as follows: Franklin Franklin Franklin Natural Strategic Global Resources Income Fund Utilities Fund Fund -------- -------- ------- Value.................................................................... $1,044,538 $2,618,070 $179,908 ======== ======== ======= Ratio of value to net assets............................................. 11.65% 2.13% 5.03% ======== ======== =======
See the accompanying statement of investments in securities and net assets for specific information of such securities. 9. LOANS OF PORTFOLIO SECURITIES During the period ended October 31, 1995, the Small Cap Growth Fund loaned securities to certain brokers for which it received cash collateral against the loaned securities in an amount equal to at least 102% of the market value of the loaned securities The cash collateral received is invested by the Fund in short-term instruments and any interest income in excess of a predetermined rebate to the brokers is kept by the fund as interest income. Interest income from this source amounted to $19,198 for the period ended October 31, 1995. 10. FINANCIAL HIGHLIGHTS Selected data for each share of capital stock outstanding throughout each year by Fund are as follows: 10. FINANCIAL HIGHLIGHTS (cont.)
Per Share Operating Performance Ratios/Supplemental Data ------------------------------------------------ ------------------------ Net Distri- Ratio of Net Realized & Distri- butions Net Net Ratio of Investment Net Asset Net Unrealized butions From Asset Assets Expenses Income to Value at Invest- Gain Total From From Net Realized Total Value at End to Average Average Portfolio Year Beginning ment (Loss)on Investment Investment Capital Distri- at End Total of Year Net Net Assets Turnover Ended of Year Income Securities Operations Income Gains butions of Year Return*(in 000's) Assets***(See Note 6 Rate Franklin Small Cap Growth Fund: Class I Shares: 19923 $10.00 $.04 $(.460) $(.420) -- -- -- $9.58 (19.96)** $ 1,268 -- 2.45** 2.41 1993 9.58 .07 .657 .727 (.087) -- (.087) 10.22 7.66 6,026 -- 0.84 63.15 1994 10.22 .03 2.944 2.974 (.043) (.401) (.444) 12.75 29.26 23,915 .30 0.24 89.60 1995 12.75 .03 3.138 3.168 (.021) (.997) (1.018) 14.9 27.05 63,010 .69 0.25 104.84 19957 14.90 .01 2.756 2.766 (.014) (.412) (.426) 17.24 18.83 195,284 .92** 0.12** 57.10 Class II Shares: 1995+ 17.69 -- (.470) (.470) -- -- -- 17.22 (2.66) 1,099 1.70** (.36)** 57.10 Franklin Global Health Care Fund: Class I Shares: 19923 10.00 .02 (1.180) (1.160) -- -- -- 8.84 (55.14)** 1,368 -- 1.68** 41.01 1993 8.84 .09 .037 .127 (.087) -- (.087) 8.88 1.41 3,422 -- 1.13 62.74 1994 8.88 .07 1.856 1.926 (.078) (.298) (.376) 10.43 21.93 5,795 .10 .68 110.82 1995 10.43 .08 1.560 1.640 (.061) (.559) (.620) 11.45 16.33 12,906 .25 .80 93.79 19957 11.45 .06 3.272 3.332 (.082) -- (.082) 14.7 29.26 22,466 .25** .90** 46.09 Franklin Institutional MidCap Growth Fund: Class I Shares: 19944 10.00 .15 .014 .164 (.079) (.035) (.114) 10.05 1.62 5,079 -- 2.21** 70.53 1995 10.05 .21 .769 .979 (.204) (.015) (.219) 10.81 10.06 5,591 -- 2.12 163.54 19957 10.81 .10 1.880 1.980 (.110) -- (.110) 12.68 18.44 6,623 -- 1.61** 23.46 Franklin Natural Resources Fund: Class I Shares: 19956 10.00 .04 (.150) (.110) -- -- -- 9.89 (1.10) 3,578 .98** 1.59** 16.54
1For the period October 18, 1991 (effective date) to April 30, 1992. 2For the period July 2, 1992 (effective date) to April 30, 1993. 3For the period February 14, 1992 (effective date) to April 30, 1992. 4For the period August 17, 1993 (effective date) to April 30, 1994. 5For the period May 24, 1994 (effective date) to April 30, 1995. 6For the period June 5, 1995 (effective date) to October 31, 1995. 7For the six months ended October 31, 1995. +For the period October 1, 1995 to October 31, 1995. *Total return measures the change in value of an investment over the periods indicated. It is not annualized. It does not include the maximum initial sales charge or the deferred contingent sales charge. The total return for the Funds also assumes reinvestment of dividends and capital gains, if any, at net asset value. **Annualized ***During the periods indicated, Franklin Advisers, Inc. and FISCO agreed to waive in advance a portion of their management fees and made payments of other expenses incurred by the Funds in the Series. Had such action not been taken, the ratios of operating expenses to average net assets would of been as follows: Ratio of expenses to average net assets Franklin California Growth Fund 19921............................. 1.61%** 1993.............................. 1.99 1994.............................. 1.89 1995.............................. 1.27 19957............................. .98** Franklin Strategic Income Fund 1995.............................. 1.38** 19957............................. .87 Franklin Global Utilities Fund 19932............................. 1.51%** 1994.............................. 1.28 Franklin Natural Resources Fund 19956............................. 1.62%** Ratio of expenses to average net assets Franklin Small Cap Growth Fund 19923............................. 1.74%** 1993.............................. 1.95 1994.............................. 1.58 1995.............................. 1.16 19957............................. 1.00** Franklin Global Health Care Fund 19923............................. 1.62%** 1993.............................. 2.16 1994.............................. 1.74 1995.............................. 1.37 19957............................. 1.14** Franklin Institutional MidCap Growth Fund 19944............................. 0.91%** 1995.............................. 0.98 19957............................. 0.66** EX-99.B11(I) 4 CONSENT OF INDEPENDENT AUDITORS To the Board of Trustees of Franklin Strategic Series: We consent to the inclusion in Post-Effective Amendment No. 17 to the Registration Statement of Franklin Strategic Series on Form N-1A (File No. 33-39088) of our report dated May 30, 1995 on our audit of the statement of assets and liabilities of the Franklin Natural Resources Fund as of May 26, 1995. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. San Francisco, California December 1, 1995 EX-99.B13(III) 5 June 5, 1995 Franklin Strategic Series 777 Mariners Island Blvd. San Mateo, CA 94404 Gentlemen: We propose to acquire 100,000 shares of beneficial interest (the "Shares") of the Franklin Natural Resources Fund (the "Fund"), a series of Franklin Strategic Series (the "Trust") at a purchase price of $10.00 per share for a total of $1,000,000.00. We will purchase the Shares in a private offering prior to the effective date of the Form N-1A registration statement filed by the Trust on behalf of the Fund under the Securities Act of 1933. The Shares are being purchased pursuant to Section 14 of the Investment Company Act of 1940 to serve as the seed money for the Fund prior to the commencement of the public offering of its shares. In connection with such purchase, we understand that we, the purchaser, intend to acquire the Shares for our own account as the sole beneficial owner thereof and have no present intention of redeeming or reselling the Shares so acquired. We consent to the filing of this Investment Letter as an exhibit to the form N-1A registration statement of the Trust. Sincerely, FRANKLIN RESOURCES, INC. By: /s/ Harmon E. Burns Harmon E. Burns Executive Vice President -----END PRIVACY-ENHANCED MESSAGE-----