Table of Contents
Franklin California Growth Fund 3
Franklin Global Utilities Fund 8
Franklin Small Cap Growth Fund 16
Franklin Global Health Care Fund 24
Franklin Strategic Income Fund 30
Franklin Natural Resources Fund 34
Statement of Investments 40
Financial Statements 69
Report of Independent Auditors 86
To reduce the volume of mail shareholders receive and to reduce expenses, only
one copy of most Fund reports, such as the Fund's annual and semi-annual
reports, may be mailed to a household. Additional copies may be obtained,
without charge, by calling Fund Information at 1-800/DIAL BEN (1-800/342-5236).
June 7, 1996
Dear Shareholder:
We are pleased to bring you the fifth annual report for the Franklin Strategic
Series which covers the period ended April 30, 1996.
The 12 months covered by this report demonstrated how volatile the financial
markets can be. On April 30, 1995, the Dow Jones Industrial Average(R) (the Dow)
stood at 4321.27. By April 30, 1996, it had risen 36.87% to 5569.08. During the
same period, long-term bond prices, as measured by 30-year Treasuries, rose
3.81% from 111.50 to 115.75.* As you might expect, the markets experienced
considerable turbulence along the way. For example, on March 8, an unexpectedly
optimistic employment report temporarily caused the Dow to tumble 171.24 points
(-3.04%) in one day.
Although the funds comprising the Franklin Strategic Series delivered strong
returns during the reporting period, there can be no guarantee that stock and
bond prices will continue to rise in the months to come. Since volatility is a
normal part of investing, I would like to suggest several ways to deal with the
ups and downs of financial markets. First, develop a long-term investment plan
based on reasonable financial goals. Stay focused upon it and periodically
consult with your investment representative to make sure you are invested in
funds that match these goals. If you concentrate on the long term, you need not
be unduly concerned about the market volatility of the short term.
*Source: Dow Jones Industrial Average total return calculated by Wilshire
Associates, Inc. includes reinvested dividends. Merrill Lynch Long-Term Bond
Index. Indices are unmanaged.
Next, consider using an investment technique called Dollar Cost Averaging. By
investing a fixed dollar amount at regular intervals, you automatically buy more
shares when prices are low and fewer when prices are high. As a result, you may
significantly reduce your average cost per share. Although no investment
technique can assure a profit or completely protect against loss, Dollar Cost
Averaging may minimize the effects of market volatility and help you make the
most of your investment dollars.**
Finally, diversify your investments.Mutual funds offer a level of
diversification that would be almost impossible for individual investors to
achieve on their own. On the pages that follow, you will find detailed
discussions of the six funds that compose the Franklin Strategic Series. While
the funds have different objectives and strategies, their management teams all
pursue long-term investment goals and follow the fundamental principles of
careful selection and constant professional supervision.
We welcome your questions, thank you for your support, and look forward to
serving you in the years to come.
Sincerely,
Rupert H. Johnson, Jr.
President
Franklin Strategic Series
**When using this strategy, you should consider your financial ability to
continue purchases through periods of low price levels or changing economic
conditions. For more information on Dollar Cost Averaging, contact your
investment representative, or call Franklin Templeton Fund Information, toll
free, at 1-800/DIAL BEN (1-800/342-5236).
FRANKLIN CALIFORNIA GROWTH FUND
Your Fund's Objective:
The Franklin California Growth Fund seeks capital appreciation through a policy
of investing at least 65% of its assets in the securities of companies either
headquartered or conducting a majority of their operations in the state of
California.
During the 12 months ended April 30, 1996, falling interest rates, moderate
growth and subdued inflation drove domestic equity markets higher, and
California's economy continued on its path to recovery. In 1995, real personal
income in the state increased 5.7%, its strongest gain since 1984. During the
same period, exports of goods by California producers rose 18.9%. And, on April
30, 1996, unemployment had fallen to 7.5% from 7.9% at the beginning of the
fiscal year.
We are pleased to report that within this environment, the fund delivered a
one-year total return of +47.50%, as discussed in the Performance Summary on
page 6. This was significantly higher than the performance of the Standard &
Poor's 500 Stock Index(R) (S&P 500(R)), which posted a total return of +30.13%.
The fund also outperformed the Franklin California 250 Growth Index(R), which
provided a total return of +42.07% for the 12 months ended April 30, 1996.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
During the reporting period, we remained heavily weighted in the separate
industry sectors of technology services, electronic technology, and
semiconductors (29.9% of total net assets) despite the over 15% correction
technology stocks experienced between November 1995 and January 1996.* We did,
however, shift our emphasis to software and technology services, which have high
operating margins, strong asset utilization, and relative product price
stability, while reducing our exposure to semiconductors and electronics, which
tend to have lower operating margins, greater price product volatility, and less
efficient asset utilization. In our opinion, technology will continue to grow as
computers and communications products revolutionize the way we work and play.
Because we expect global demand for oil to increase, particularly in developing
countries, we also focused on the energy sector (6.2% of total net assets). On
April 30, 1996, our holdings in this area included shares in several major oil
companies such as Atlantic Richfield Co., Chevron Corp., and Unocal Corp.
The utilities sector was another area in which we maintained a significant
position (5.2% of total net assets). Searching for companies with attractive
valuations, high dividend yields, and strong prospects for future earnings
growth, we added to our holdings of Enova Corp. and Edison International. We
believe that they have the ability to adapt to an increasingly competitive
environment through efficient low-cost operations and strong management.
*Source: The Hambrecht & Quist Technology Index, which is an index of
approximately 200 communications, health care, and computer hardware and
software stocks, declined 15.38% from its November 3, 1995 peak, through January
9, 1996.
Franklin California Growth Fund
Top 10 Holdings on April 30, 1996
Based on Total Net Assets
Company % of Total
Industry Net Assets
Intel Corp. 1.67%
Semiconductors/Equipment
Silicon Graphics, Inc. 1.64%
Electronic Technology
Uniphase Corp. 1.63%
Semiconductors/Equipment
Mecon, Inc. 1.55%
Health Technology
Access Health Marketing 1.54%
Health Services
Cisco Systems, Inc. 1.54%
Electronic Technology
Symantec Corp. 1.49%
Technology Services
Atlantic Richfield Co. 1.45%
Energy/Minerals
Adaptec, Inc. 1.42%
Semiconductors/Equipment
Systemsoft Corp. 1.41%
Technology Services
For a complete list of portfolio holdings, please see page 40 of this report.
The initial public offerings market continued to interest us, although on a much
more selective basis. For example, we invested in Red Brick Systems, Inc., a
provider of relational database products and service for data warehouse
applications, and also purchased shares of Netscape Communications Corp., Forte
Software, Inc. and Oakley, Inc., which were subsequently sold when, in our
opinion, they became overvalued.
Looking forward, we are optimistic about long-term opportunities for the
Franklin California Growth Fund. With over 800,000 companies, California's
economy ranks as the fourth-largest in the world. A host of successful high-tech
corporations are headquartered in Northern California, particularly the San
Francisco Bay Area, because it is home to many venture capitalists, as well as
many fine Bay Area universities which foster a plethora of innovative ideas.
However, the performance of the fund's equity investments are not wholly tied to
California's economy. We invest in many companies that do a significant amount
of business overseas. In fact, nine of California's top ten trading partners are
Pacific Rim countries, whose annual gross domestic products are growing at high
single-digit rates. We, therefore, do not foresee any shortage of potential
opportunities and feel confident of our ability to take advantage of them.
It should be remembered, of course, that there are risks involved with investing
in a non-diversified fund concentrating in securities associated with a single
state, such as increased susceptibility to adverse economic or regulatory
developments. The fund also invests a portion of its assets in small or
relatively new or unseasoned companies, which involves the additional risks
related to relatively small revenues, limited product lines and small market
share. These and other risks are described in the prospectus.
This discussion reflects the strategies we employed for the fund during the 12
months under review, and includes our opinions as of the close of the period.
Since economic and market conditions are constantly changing, our strategies,
and our evaluations, conclusions and decisions regarding portfolio holdings, may
change as new circumstances arise. Although past performance of a specific
investment or sector cannot guarantee future performance, such information can
be useful in analyzing securities we purchase or sell for the fund.
We appreciate your participation in the Franklin California Growth Fund, welcome
any suggestions you may have, and look forward to serving you in the years to
come.
Performance Summary
The Franklin California Growth Fund provided a total return of +47.50% for the
12-month period ended April 30, 1996. Total return measures the change in value
of an investment, assuming reinvestment of dividends and capital gains, and does
not include the initial sales charge.
Of course, we maintain a long-term perspective when managing the fund, and
encourage shareholders to view their investments in a similar manner. As you can
see from the table on the following page, the fund delivered a cumulative total
return of more than 149% since inception on October 30, 1991.
The fund's share price, as measured by net asset value, increased $4.24 per
share, from $14.03 on April 30, 1995, to $18.27 on April 30, 1996. During the
reporting period, shareholders received distributions totaling 22.7 cents
($0.227) per share in dividend income and $1.775 per share in capital gains, of
which $1.4505 represented short-term gains and 32.45 cents ($0.3245) represented
long-term gains. Of course, past performance is not predictive of future
results, and distributions will vary depending on income earned by the fund and
any profits realized from the sale of portfolio securities.
The graph on the following page shows how an investment made in the fund at its
inception has outperformed the unmanaged Standard & Poor's 500 Stock Index(R)
(S&P 500(R)) and the unmanaged Franklin California 250 Growth Index(R) as of
April 30, 1996. The S&P 500 is a broad market index, whereas the Franklin
California 250 Growth Index is an equally-weighted index representing 250 of the
largest corporations headquartered in California.
Of course, such unmanaged market indices have inherent performance differentials
in comparison with any fund. They don't include management fees to cover
salaries of security analysts or portfolio managers, or take into account
commissions or market spreads involved with buying and selling stocks. And,
unlike unmanaged indices, mutual funds are never 100% invested because of the
need to have cash on hand to redeem shares. In addition, the performance shown
for the fund includes the maximum initial sales charge, all fund expenses and
account fees. If operating expenses such as the Franklin California Growth
Fund's had been applied to this index, its performance would have been lower.
Please remember that an index is simply a measure of performance, and one cannot
invest in an index directly. Past performance is not predictive of future
results.
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin California Growth Fund
Periods ended April 30, 1996
Since
Inception
1-Year 3-Year (10/30/91)
- --------------------------------------------------------------------------------
Cumulative
Total Return1 47.50% 139.05% 149.46%
Average Annual
Total Return2 40.87% 31.68% 21.24%
Value of $10,000
Investment3 $14,087 $22,831 $23,824
- --------------------------------------------------------------------------------
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the maximum 4.5% initial sales
charge.
2. Average annual total return represents the average annual change in value of
an investment over the specified periods and includes the maximum 4.5% initial
sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the specified periods and include the maximum 4.5% initial sales
charge. All total return calculations assume reinvestment of dividends and
capital gains. Investment return and principal value will fluctuate with market
conditions, and you may have a gain or loss when you sell your shares. Past
performance is not predictive of future results.
Past expense reductions by the fund's manager increased the fund's total return
to shareholders. Without this waiver, the fund's total return would have been
lower.
FRANKLIN GLOBAL UTILITIES FUND
Your Fund's Objective:
The Franklin Global Utilities Fund seeks to provide total return by investing in
the equity and debt securities of utility companies located in the United States
and around the world.
We are pleased to welcome the former shareholders of Templeton Global Utilities,
Inc., who joined the Franklin Global Utilities Fund following the combination of
the two funds on March 29, 1996.
During the past fiscal year, utility stocks in many global markets performed
well due to declining interest rates, continuing regulatory reforms within the
industry, and privatizations in developing markets. These factors, combined with
our overweighting in markets that performed exceptionally well, benefited the
fund and enabled its Class I shares to deliver a total return of +23.27% for the
12 months ended April 30, 1996, as discussed in the Performance Summary on page
12.
United States
The U.S. utility market was particularly dynamic during the reporting period as
regulatory changes in the telephone and electric utility industries positively
impacted stocks of many domestic utility companies in which the fund invests. In
February 1996, Congress approved the Telecommunications Bill, which
significantly increases the opportunities for telecommunications companies.
Telephone companies will now be allowed to offer customers new kinds of services
they were previously prohibited from offering. These services range from
competitive local and long-distance services to cable television. In April, the
Federal Energy Regulatory Commission promoted competition in the electric
utility industry by mandating that competing companies have open access to
transmission lines. This bill also protects the industry by allowing for
recovery of all prudently incurred past investments. We believe that competition
within this industry will continue to develop, although a fully deregulated
environment will most likely not be seen for many more years.
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Since the value of utility stocks tend to appreciate when interest rates fall,
declining long-term interest rates in the U.S. benefited the fund's domestic
holdings during most of the fiscal year. The yield on 30-year Treasuries began
the period at 7.34% on April 30, 1995, then declined significantly to a low of
5.96% on December 29, 1995, before ending the period at 6.89% on April 30,
1996.* Seeking to take advantage of these lower rates, we maintained a large
weighting (approximately 65% of the fund's total net assets) in the domestic
utility sector until about the end of December. At that time, we began to reduce
this weighting, and by the end of the reporting period, it stood at 43% of total
net assets.
Europe
Several of the fund's European holdings performed well during the period, as
moderate economic growth, combined with more responsible fiscal and monetary
policies, paved the way for lower interest rates in countries such as Germany,
Spain, Finland, Portugal, Greece and the United Kingdom. In the developed
European markets, demand for utility services is reaching peak levels. Many
companies in these countries have improved their earnings by containing costs,
repurchasing their own shares, taking advantage of foreign investment
opportunities, and lowering interest expenses through debt repayment. We believe
this could potentially enhance the earnings of several of the fund's holdings
such as Telefonica de Espana (Spain), EVN Energie-Versorgung Niederoesterreich,
Ag (Austria), Veba, Ag (Germany), Espoon Sahko Oy (Finland), and Tele Danmark
(Denmark).
In Europe's developing markets, privatization of utility companies continued to
be prevalent. Our holdings of Portugal Telecom, SA (Portugal) and Hellenic
Telecommunications (Greece) appreciated significantly since their
privatizations, and we believe these companies should benefit further from large
amounts of pent-up demand for telecommunication services, which is often typical
in developing markets.
*Source: Micropal.
Latin America
Continued concerns about Latin America's economic stability, highlighted by
Mexico's December 1994 currency devaluation, created several attractive
investment opportunities during the reporting period. As a result, we initiated
positions in Enersis, SA and Endesa Nacional Electricidad, SA, two Chilean
electric companies that are taking advantage of the rapidly growing demand for
electricity in Latin America. We also added a position in Telecomunicacoes
Brasileiras, SA (Telebras), Brazil's largest telecommunications company. Brazil
is expected to deregulate its telephone industry over the next few years, which
we believe will provide Telebras with significant growth potential.
In our opinion, Latin American utilities markets should continue to grow rapidly
due to regulatory changes expected to occur in the next several years. Although
these markets can be volatile at times, we focus on companies that have the
potential to prosper in a deregulated en-vironment due to their strong earnings
growth, competitive positioning, and entrepreneurial management.
Asia
Although Asia's utilities markets continued to exhibit some of the world's most
rapid growth rates, we maintained a below-average exposure to this region
because we believe stock valuations there remain relatively high. We continued
to be very selective concerning our Asian investments, but were able to find a
few attractive investment opportunities during the fiscal year. For example, we
initiated positions in Consolidated Electric Power Asia, Ltd. (CEPA) in Hong
Kong, Bombay Suburban Electric Supply Co. (BSES) in India, and Nippon Telegraph
& Telephone Corp. (NTT) in Japan. We believe that CEPA and BSES have the
potential to benefit from rapidly growing demand for electricity throughout
Asia, while NTT should be well-positioned to take advantage of impending
regulatory changes in Japan.
Looking forward, we are optimistic about growth prospects for utility companies
around the world. We believe attractive investment opportunities exist in the
U.S., where many high-quality utility companies with aggressive, entrepreneurial
management have continued to expand their operations and generate strong
earnings growth. Outside the U.S., ongoing privatizations and further
deregulation of utility companies should continue to promote growth, which may
lead to excellent total return potential for the fund.
In our opinion, global utilities provide services that are essential to peoples'
lives and we will continue to emphasize our long-term objective of maximizing
total return by investing in a portfolio of utility stocks from around the
globe. There are, of course, special risks involved with investing globally in a
non-diversified fund concentrating its investments in a single industry. These
risks, which include currency fluctuations and increased susceptibility to
adverse economic, political, social and regulatory developments, are further
discussed in the fund's prospectus.
This discussion reflects the strategies we employed for the fund during the
fiscal year, and includes our opinions as of the close of the period. Since
economic and market conditions are constantly changing, our strategies and our
evaluations, conclusions and decisions regarding portfolio holdings may change
as new circumstances arise. Although past performance of a specific investment
or sector cannot guarantee future performance, such information can be useful in
analyzing securities we purchase or sell for the fund.
Franklin Global Utilities Fund
Top 10 Holdings on April 30, 1996
Based on Total Net Assets
Company % of Total
Industry, Country Net Assets
Hellenic Telecommunications
Organization, SA 3.95%
Telecommunications Services, Greece
Enron Corp. 3.01%
Electrical & Gas Utilities, United States
Texas Utilities Co. 2.87%
Electric & Gas Utilities, United States
Enron Global Power & Pipelines, L.L.C. 2.70%
Electric & Gas Utilities, Argentina
Hong Kong Electric Holdings, Ltd. 2.57%
Electric & Gas Utilities, Hong Kong
National Fuel Gas Co. 2.25%
Electric & Gas Utilities, United States
AES Corp. 2.22%
Electric & Gas Utilities, United States
Telefonica de Espana, ADR 2.12%
Telecommunications Services, Spain
PacifiCorp 2.08%
Electric & Gas Utilities, United States
Espoon Sahko Oy, ADS 2.07%
Electric & Gas Utilities, Finland
For a complete list of portfolio holdings, please see page 52 of this report.
Performance Summary
Class I
The Franklin Global Utilities Fund Class I shares provided a total return of
+23.27% for the one-year period ended April 30, 1996. Total return measures the
change in value of an investment, assuming reinvestment of dividends and capital
gains distributions, and does not include the maximum initial sales charge.
As measured by net asset value, the price of the fund's Class I shares increased
$2.05 per share, from $12.23 on April 30, 1995 to $14.28 on April 30, 1996.
During the reporting period, Class I shareholders received distributions
totaling 39.1 cents ($0.391) per share in income dividends and 32.4 cents
($0.324) per share in capital gains, of which 8.52 cents ($0.0852) represented
short-term gains and 23.88 cents ($0.2388) represented long-term gains. Of
course, past performance is not predictive of future results, and distributions
will vary depending on income earned by the fund and any profits realized from
the sale of securities in the portfolio.
The graph on the following page compares the performance of the fund's Class I
shares since inception, with that of the Standard & Poor's 500 Stock Index(R)
(S&P 500(R)). The S&P 500 is a broad market index consisting of companies of
various sizes. Of course, such unmanaged market indices have inherent
performance differentials in comparison with any fund. They don't include
management fees to cover salaries of security analysts or portfolio managers, or
take into account commissions or market spreads involved with buying and selling
stocks. And, unlike indices, mutual funds are never 100% invested because of the
need to have cash on hand to redeem shares. In addition, the performance shown
for the fund includes the maximum initial sales charge, all fund expenses and
account fees. If operating expenses such as the Franklin Global Utilities Fund's
had been applied to this index, its performance would have been lower. Please
remember that an index is simply a measure of performance, and one cannot invest
in an index directly. Past performance is not predictive of future results.
GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Global Utilities Fund
Class I
Periods ended April 30, 1996
Since
Inception
1-Year 3-Year (7/2/92)
- --------------------------------------------------------------------------------
Total Return1 23.27% 45.04% 66.81%
Average Annual
Total Return2 17.69% 11.46% 12.92%
Value of $10,000
Investment3 $11,769 $13,845 $15,932
- --------------------------------------------------------------------------------
1. Cumulative total return measures the change in value of an investment over
the specified periods and does not include the maximum 4.5% initial sales
charge.
2. Average annual total return measures the average annual change in value of an
investment over the specified periods and includes the maximum 4.5% initial
sales charge
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the specified periods and include the maximum 4.5% initial sales
charge.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Investment return and principal value will fluctuate with market
conditions and you may have a gain or loss when you sell your shares. Past
performance is not predictive of future results. Past expense reductions by the
fund's manager increased the fund's total returns.
Performance Summary
Class II
The Franklin Global Utilities Fund Class II shares provided a total return of
+23.13% for the one-year period ended April 30, 1996. Total return measures the
change in value of an investment, assuming reinvestment of dividends and capital
gains distributions, and does not include sales charges.
As measured by net asset value, the price of the fund's Class II shares
increased $2.06 per share, from $12.18 at inception on May 1, 1995 to $14.24 on
April 30, 1996. During the reporting period, Class II shareholders received
distributions totaling 35.8 cents ($0.358) per share in income dividends and
32.4 cents ($0.324) per share in capital gains, of which 8.52 cents ($0.0852)
represented short-term gains and 23.88 cents ($0.2388) represented long-term
gains. Of course, past performance does not guarantee future results, and
distributions will vary depending on income earned by the fund and any profits
realized from the sale of securities in the portfolio.
The graph on the following page compares the performance of the fund's Class II
shares since inception, with that of the Standard & Poor's 500 Stock Index(R)
(S&P 500(R)). The S&P 500 is a broad market index consisting of companies of
various sizes. Of course, such unmanaged market indices have inherent
performance differentials in comparison with any fund. They don't include
management fees to cover salaries of security analysts or portfolio managers, or
take into account commissions or market spreads involved with buying and selling
stocks. And, unlike indices, mutual funds are never 100% invested because of the
need to have cash on hand to redeem shares. In addition, the performance shown
for the fund includes sales charge, all fund expenses and account fees. If
operating expenses such as the Franklin Global Utilities Fund's had been applied
to this index, its performance would have been lower. Please remember that an
index is simply a measure of performance, and one cannot invest in an index
directly. Past performance is not predictive of future results.
GRAPHIC MATERIAL 5 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Global Utilities Fund
Class II
Period ended April 30, 1996
One-Year
- --------------------------------------------------------------------------------
Cumulative Total Return1 23.13%
Average Annual Total Return2 20.94%
Value of $10,000 Investment3 $12,094
- --------------------------------------------------------------------------------
1. Cumulative total return measures the change in value of an investment over
the specified period and does not include the 1.0% initial sales charge or the
1.0% contingent deferred sales charge (CDSC), applicable to shares redeemed
within the first 18 months of investment.
2. Average annual total return measures the change in value of an investment
over the specified period and includes the maximum 1.0% initial sales charge and
the 1.0% CDSC, applicable to shares redeemed within the first 18 months of
investment.
3. This figure represents the value of a hypothetical $10,000 investment in the
fund over the specified period and includes the 1.0% initial sales charge and
the 1.0% CDSC, applicable to shares redeemed within the first 18 months of
investment.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Investment return and principal value will fluctuate with market
conditions and you may have a gain or loss when you sell your shares. Past
performance is not predictive of future results.
FRANKLIN SMALL CAP GROWTH FUND
Your Fund's Objective:
The Franklin Small Cap Growth Fund seeks long-term capital growth by investing
in equity securities of small-capitalization companies -- those with a market
capitalization of less than $1 billion at the time of investment.
During the 12 months under review, the U.S. economy experienced moderate growth
and subdued inflation. As a result, domestic equity markets rose appreciably,
and almost every major U.S. stock index reached record levels. We are pleased to
report that within this environment, the fund's Class I shares delivered a total
return of +44.06% for the period ended April 30, 1996, as discussed in the
Performance Summary on page 20. This was significantly higher than the
performance of Standard & Poor's 500 Stock Index(R) (S&P 500(R)), which provided
a total return of +30.13%. The fund also outperformed the Russell 2500 Index(R),
which posted a total return of +33.46% for the same period.
GRAPHIC MATERIAL 6 OMITTED - SEE APPENDIX AT END OF DOCUMENT
The expanding economy has provided excellent opportunities for smaller firms.
Targeting companies that were poised for rapid growth in revenues, earnings, or
cash flow, we found attractive investments in a broad range of sectors. On April
30, 1996, our holdings included health services, producer manufacturing,
transportation, financials, consumer durables, and technology.
Despite the volatility which technology stocks experienced during the period, we
remain confident that new developments will lead to substantial future growth of
companies in this sector. We sought to take advantage of this volatility by
using price declines to purchase shares of what we believed to be high-quality
corporations with significant competitive advantages. For example, we initiated
positions in Shiva Corp., a leading provider of remote access servers used for
telecommuting and internet access, and Cognex Corp., a rapidly growing developer
of machine vision systems usually employed in product inspection. We reduced our
exposure to chip manufacturers, such as Integrated Device Technology, Inc. and
SGS-Thomson Microelectronics, Inc., because supply had started to outpace demand
in many of the markets that these companies serve, resulting in dramatic pricing
pressure.
Franklin Small Cap Growth Fund
Top 10 Holdings on April 30, 1996
Based on Total Net Assets
Company % of Total
Industry Net Assets
Linear Technology Corp. 1.83%
Semiconductors
Synopsis, Inc. 1.67%
Technology Services
Sterling Software, Inc. 1.66%
Technology Services
Sierra Health Services, Inc. 1.57%
Health Services
Uniphase Corp. 1.57%
Semiconductors
Newbridge Networks Corp. 1.51%
Electronic Technology
Air Express International Corp. 1.49%
Transportation
Transition Systems, Inc. 1.42%
Health Services
Global Marine, Inc. 1.35%
Energy/Minerals
UCAR International, Inc. 1.33%
Producer Manufacturing
For a complete list of portfolio holdings, please see page 56 of this report.
Believing that the health care sector will con-tinue to show strong growth over
the next few years, we increased our exposure to this area from 5.2% on April
30, 1995 to 6.1% at the end of the reporting period. We initiated positions in
several companies providing health care information systems, including Access
Health, Inc. and Transition Systems, Inc., because we feel these companies will
grow, as managed care plans and cost-conscious hospitals turn to technology to
increase their efficiency. We also added to our holdings of Sierra Health
Services, Inc., a Las Vegas-based health maintenance organization which we feel
is benefiting from rapid enrollment growth in its market.
During the period, we also discovered attrac- tive growth opportunities in the
transporta- tion sector, particularly in the freight industry, which is
characterized by steady growth and limited competition. For example, we
initiated positions in Expeditors International of Washington, Inc. and Harper
Group, Inc., and added to our holdings of Air Express International Corp. Given
the risks of volatile earnings and an extremely competitive market associated
with small airline operators, we felt that better opportunities existed in
companies with more reasonable valuations. We, therefore, took profits and sold
our shares of Atlantic Coast Airlines, Inc. and Mesa Airlines, Inc.
In our opinion, the U.S. economy shows signs of expansion, with little evidence
of impending inflationary pressure, and we are optimistic about the prospects
for small-capitalization companies. In addition, we believe that the fund's
diversity will enable it to perform well in a variety of market conditions. Of
course, there are risks involved in investing in a fund seeking long-term
capital growth from small or relatively new or unseasoned companies, such as
relatively small revenues, limited production lines and small market share.
These and other risks are further discussed in the fund's prospectus.
This discussion reflects the strategies we employed for the fund during the 12
months under review, and includes our opinions as of the close of the period.
Since economic and market conditions are constantly changing, our strategies,
and our evaluations, conclusions and decisions regarding portfolio holdings, may
change as new circumstances arise. Although past performance of a specific
investment or sector cannot guarantee future performance, such information can
be useful in analyzing securities we purchase or sell for the fund.
We thank you for your participation in the Franklin Small Cap Growth Fund and
look forward to serving your investment needs in the years to come.
Performance Summary
Class I
The Franklin Small Cap Growth Fund Class I shares provided a total return of
+44.06% for the fiscal year ended April 30, 1996. Total return measures the
change in value of an investment, assuming reinvestment of dividends and capital
gains distributions, and does not include the initial sales charge.
The price of the fund's Class I shares, as measured by net asset value,
increased $4.85 per share, from $14.90 on April 30, 1995 to $19.75 on April 30,
1996. During the reporting period, Class I shareholders received distributions
totaling 1.4 cents ($0.014) per share in income dividends and $1.376 per share
in capital gains, of which $1.257 represented short-term gains and 11.9 cents
($0.119) represented long-term gains. Of course, past performance is not
predictive of future results, and distributions will vary depending on income
earned by the fund, as well as any profits realized from the sale of securities
in the portfolio.
As you can see from the graph on the follow- ing page, the fund's Class I
shares, since inception, have outperformed both the unmanaged Standard & Poor's
500 Stock Index(R) (S&P 500(R)) and unmanaged Russell 2500 Index(R). The S&P 500
is an index of widely held common stocks covering a variety of industries,
whereas the Russell 2500 is an index of 2,500 companies with small market
capitalizations.
Of course, such unmanaged market indices have inherent performance differentials
in comparison with any fund. They don't include management fees to cover
salaries of security analysts or portfolio managers, or take into account
commissions or market spreads involved with buying and selling stocks. And,
unlike unmanaged indices, mutual funds are never 100% invested because of the
need to have cash on hand to redeem shares. In addition, the performance shown
for the fund includes the maximum initial sales charge, all fund expenses and
account fees. If operating expenses such as the Franklin Small Cap Growth Fund's
had been applied to this index, its performance would have been lower. Please
remember that an index is simply a measure of performance, and one cannot invest
in an index directly. Past performance is not predictive of future results.
GRAPHIC MATERIAL 7 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Small Cap Growth Fund
Class I
Periods ended April 30, 1996
Since
Inception
1-Year 3-Year (2/14/92)
- --------------------------------------------------------------------------------
Cumulative
Total Return1 44.06% 136.57% 143.99%
Average Annual
Total Return2 37.59% 31.22% 22.24%
Value of $10,000
Investment3 $13,759 $22,596 $23,304
- --------------------------------------------------------------------------------
1. Cumulative total return measures the change in value of an investment over
the specified periods and does not include the maximum 4.5% initial sales
charge.
2. Average annual total return measures the average annual change in value of an
investment over the specified periods and includes the maximum 4.5% initial
sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the specified periods and include the maximum 4.5% initial sales
charge.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Investment return and principal value will fluctuate with market
conditions and you may have a gain or loss when you sell your shares. Past
performance is not predictive of future results.
Performance Summary
Class II
The Franklin Small Cap Growth Fund Class II shares provided a total return of
+17.62% for the seven-month period ended April 30, 1996. Total return measures
the change in value of an investment, assuming reinvestment of dividends and
capital gains distributions, and does not include sales charges.
The price of the fund's Class II shares, as measured by net asset value,
increased $1.97 per share from $17.69 at inception on October 2, 1995 to $19.66
on April 30, 1996. During the reporting period, Class II shareholders received
distributions totaling 96.4 cents ($0.964) per share in capital gains, of which
84.5 cents ($0.845) represented short-term gains and 11.9 cents ($0.119)
represented long-term gains. Of course, past performance is not predictive of
future results, and distributions will vary depending on income earned by the
fund.
As you can see from the graph on the following page, the fund's Class II shares,
since inception, have outperformed both the unmanaged Standard & Poor's 500
Stock Index(R) (S&P 500(R)) and unmanaged Russell 2500 Index(R) for the period
ended April 30, 1996. The S&P 500 is an index of widely held common stocks
covering a variety of industries, whereas the Russell 2500 is an index of 2,500
companies with small market capitalizations.
Of course, such unmanaged market indices have inherent performance differentials
in comparison with any fund. They don't include management fees to cover
salaries of security analysts or portfolio managers, or take into account
commissions or market spreads involved with buying and selling stocks. And,
unlike unmanaged indices, mutual funds are never 100% invested because of the
need to have cash on hand to redeem shares. In addition, the performance shown
for the fund includes the maximum initial sales charge, all fund expenses and
account fees. If operating expenses such as the Franklin Small Cap Growth Fund's
had been applied to this index, its performance would have been lower. Please
remember that an index is simply a measure of performance, and one cannot invest
in an index directly. Past performance is not predictive of future results.
GRAPHIC MATERIAL 8 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Small Cap Growth Fund
Class II
Period ended April 30, 1996
Since
Inception
(10/2/95)
- --------------------------------------------------------------------------------
Cumulative Total Return1 17.62%
Aggregate Total Return2 15.44%
Value of $10,000 Investment3 $11,536
- --------------------------------------------------------------------------------
1. Cumulative total return measures the change in value of an investment over
the specified period and does not include the 1.0% initial sales charge or the
1.0% contingent deferred sales charge (CDSC), applicable to shares redeemed
within the first 18 months of investment.
2. Aggregate total return measures the change in value of an investment over the
specified period, and includes the maximum 1.0% initial sales charge and the
1.0% CDSC, applicable to shares redeemed within the first 18 months of
investment. Since Class II shares have been in existence for less than one year,
average annual total returns are not provided.
3. This figure represents the value of a hypothetical $10,000 investment in the
fund over the specified period and includes the 1.0% initial sales charge and
the 1.0% CDSC, applicable to shares redeemed within the first 18 months of
investment.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Investment return and principal value will fluctuate with market
conditions and you may have a gain or loss when you sell your shares. Past
performance is not predictive of future results.
FRANKLIN GLOBAL HEALTH CARE FUND
Your Fund's Objective:
The Franklin Global Health Care Fund seeks capital appreciation by investing
primarily in the equity securities of health care companies located throughout
the world.
The fiscal year ended April 30, 1996 was an excellent one for investors in
health care companies. Although stock prices in the HMO (health maintenance
organization) sector declined sharply due to lower-than-expected earnings at the
beginning of the period, they rebounded strongly after Medicare increased its
reimbursement rate in September 1995. Their prices were also driven upward by
the possibility of Medicare and Medicaid reform, which would boost HMO
enrollment. Even though legislation was not enacted, prices of these stocks
continued to rise as a result of solid earnings reports. The pharmaceutical
sector also performed exceptionally well, as investors who were uncertain about
the direction of the economy purchased these stocks because they are generally
more stable than average and tend to perform well in a declining market.
GRAPHIC MATERIAL 9 OMITTED - SEE APPENDIX AT END OF DOCUMENT
The Franklin Global Health Care Fund delivered a total return of +82.68% for the
12 months ended April 30, 1996, as discussed in the Performance Summary on page
28, significantly outperforming the Standard & Poor's 500 Stock Index(R) (S&P
500(R)), which posted a total return of +30.13% for the period. The fund also
outperformed the Lipper health care sector average, which provided a total
return of +48.14%, and Lipper Analytical Services, Inc. ranked the Franklin
Global Health Care Fund 1 out of 18 health care funds for the year ended April
30, 1996.* We attribute the fund's strong performance in part to our focus on
rapidly growing, small capitalization companies and a thorough due diligence
process that entails frequent discussions with management and facility visits
when possible.
At the end of the reporting period, our investment portfolio continued to be
allocated globally across several health care sectors. The fund's heaviest
exposure throughout most of the fiscal year was specialty pharmaceuticals
(companies specializing in specific products or treatments), because many of
these businesses are introducing innovative products, which we believe have the
potential for strong earnings growth. Our largest holdings in this sector were
Penederm, Inc. and Noven Pharmaceuticals, Inc. Penederm, Inc. has developed a
compound that facilitates the absorption of various drugs into the outer skin
layers. Noven Pharmaceuticals, Inc. produces a transdermal patch, which
time-releases a specified substance, such as estrogen, into the bloodstream
through the skin.
GRAPHIC MATERIAL 10 OMITTED - SEE APPENDIX AT END OF DOCUMENT
*Lipper Analytical Services, Inc. is a nationally recognized mutual fund
research organization. Lipper rankings do not include sales charges; past and
present expense limitations increased the fund's total returns. Rankings may
have been different if such factors had been considered. Past performance is not
predictive of future results.
Following the relative underperformance of HMOs from April to July 1995, we
added to our holdings in this sector, and benefited substantially from Oxford
Health Plans' and PacifiCare's rebounding stock prices in the fall. Although we
pared back our weighting in the sector following their rebound, we anticipate
that future budget negotiations in Washington may include measures that
encourage Medicare and Medicaid beneficiaries to enroll in managed care
programs, which may benefit HMOs.
During the period, we also increased our exposure to companies that develop
information systems designed to help hospitals and physicians reduce costs and
improve the quality of care. We feel that these themes are likely to be very
important in the future, as HMOs place increased pressure on hospitals and
doctors to lower expenses and patients demand higher quality service from their
plans. For example, we initiated positions in Transition Systems, Inc. and HBO &
Company, leading providers of software to acute-care hospitals, and IDX Systems
Corp., a major supplier of information systems to large and mid-sized physician
groups and most U.S. academic medical centers.
Franklin Global Health Care Fund
Top 10 Holdings on April 30, 1996
Based on Total Net Assets
Company % of Total
Industry, Country Net Assets
Astra AB, Series B 2.84%
Pharmaceuticals, Sweden
Penederm, Inc. 2.73%
Specialty Pharmaceuticals,
United States
Sanofi, SA 2.10%
Pharmaceuticals, France
MediSense, Inc. 2.07%
Medical Technology & Supplies,
United States
Access Health, Inc. 2.03%
Software/Information Systems,
United States
PacifiCare Health Systems, Inc.,
Class B 1.93%
Managed Care/HMOs, United States
Renal Care Group, Inc. 1.90%
Post-Acute Providers, United States
HealthSource, Inc. 1.88%
Managed Care/HMOs, United States
Oxford Health Plans, Inc. 1.85%
Managed Care/HMOs, United States
CNS, Inc. 1.81%
Miscellaneous, United States
For a complete list of portfolio holdings, please see page 61 of this report.
Looking forward, we are optimistic about prospects for the health care industry
and the Franklin Global Health Care Fund. In our opinion, an aging population
will require greater health care expenditures, and advances in technology will
widen the range of treatable conditions and increase life expectancy.
Additionally, demand for health care services and products is generally not
affected by the ups and downs of the business cycle. Our goal, as always, is to
seize upon investment opportunities that present themselves in the health care
sector in a timely and disciplined fashion, providing our shareholders unique
opportunities to invest in some of today's newest and fastest-growing companies.
This discussion reflects the strategies we employed for the fund during the 12
months under review, and includes our opinions as of the close of the period.
Since economic and market conditions are constantly changing, our strategies,
and our evaluations, conclusions and decisions regarding portfolio holdings, may
change as new circumstances arise. Although past performance of a specific
investment or sector cannot guarantee future performance, such information can
be useful in analyzing securities we purchase or sell for the fund.
There are, of course, special risks involved with investing globally in a
non-diversified fund concentrating its investments in a single industry. These
risks, which include currency fluctuations and increased susceptibility to
adverse economic, political, social and regulatory developments, are further
discussed in the fund's prospectus.
We appreciate your participation in the Franklin Global Health Care Fund and
look forward to serving your investment needs in the years to come.
Performance Summary
The Franklin Global Health Care Fund provided a total return of +82.68% for the
fiscal year ended April 30, 1996. Total return measures the change in value of
an investment, assuming reinvestment of dividends and capital gains
distributions, and does not include the fund's initial sales charge.
Of course, we maintain a long-term perspective when managing the fund, and
encourage shareholders to view their investments in a similar manner. As you can
see from the table on the following page, the fund delivered a cumulative total
return of more than 132% since inception on February 14, 1992.
The fund's share price, as measured by net asset value, increased $7.88 per
share, from $11.45 on April 30, 1995 to $19.33 on April 30, 1996. During the
reporting period, shareholders received distributions totaling 12.4 cents
($0.124) per share in income dividends and $1.051 per share in capital gains, of
which 70.8 cents ($0.708) represented short-term gains and 34.3 cents ($0.343)
represented long-term gains. Of course, past performance is not predictive of
future results, and distributions will vary depending on income earned by the
fund.
As you can see in the graph on the following page, the fund has outperformed the
broad-based Standard & Poor's 500 Stock Index(R) (S&P 500(R)) since the fund's
inception on February 14, 1992. The index includes a variety of securities
issued by companies not associated with the health care industry. Of course,
such unmanaged market indices have inherent performance differentials in
comparison with any fund. They don't include management fees to cover salaries
of security analysts or portfolio managers, or take into account commissions or
market spreads involved with buying and selling stocks. And, unlike unmanaged
indices, mutual funds are never 100% invested because of the need to have cash
on hand to redeem shares. In addition, the performance shown for the fund
includes the maximum initial sales charge, all fund expenses and account fees.
If operating expenses such as the Franklin Global Health Care Fund's had been
applied to this index, its performance would have been lower. Please remember
that an index is simply a measure of performance, and one cannot invest in an
index directly. Past performance is not predictive of future results.
GRAPHIC MATERIAL 11 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Global Health Care Fund
Periods ended April 30, 1996
Since
Inception
1-Year 3-Year (2/14/92)
Cumulative
Total Return1 82.68% 159.13% 132.20%
Average Annual
Total Return2 74.75% 35.25% 20.82%
Value of $10,000
Investment3 $17,445 $24,743 $22,187
- --------------------------------------------------------------------------------
1. Cumulative total return measures the change in value of an investment over
the specified periods and does not include the maximum 4.5% initial sales
charge.
2. Average annual total return measures the average annual change in value of an
investment over the specified periods and includes the maximum 4.5% initial
sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the specified periods and include the maximum 4.5% initial sales
charge.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Investment return and principal value will fluctuate with
market conditions and you may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
Past expense reductions by the fund's manager increased the fund's total return
to shareholders. Without this waiver, the fund's total return would have been
lower.
FRANKLIN STRATEGIC INCOME FUND
Your Fund's Objective:
The Franklin Strategic Income Fund seeks a high level of current income, with
capital appreciation over the long term as a secondary objective. The fund uses
an active asset allocation process and invests in securities of foreign
governments, U.S. and foreign high-yield fixed-income securities, asset-backed
securities, preferred stock, common stock that pays dividends, and
income-producing securities convertible into common stock of such companies.
We are pleased to inform you that the Franklin Strategic Income Fund closed its
second fiscal year, ended April 30, 1996, with another strong performance. As
you know, this relatively new fund seeks to capitalize on worldwide investment
opportunities, and is free to allocate assets across a wide variety of market
sectors. During this reporting period, we exercised this freedom to capitalize
on declining U.S. interest rates, low worldwide inflation and moderate worldwide
economic growth. In the end, we achieved an attractive total return of +15.59%
during the reporting period, as discussed in the Performance Summary on page 32
of this report.
GRAPHIC MATERIAL 12 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Domestically, low inflation and an improving economy proved fertile ground for
our U.S. investment selections. We focused on high-yield corporate bonds and
convertible securities. Our corporate bond positions in the healthcare and media
sectors performed exceptionally well. Tenent Health (healthcare) and Sullivan
Broadcasting (media) are two notable examples.
The fund's substantial allocation in convertible securities also performed well,
following gains in the strong U.S. equity market. Our convertible security
investments in the technology and media industries faired particularly well.
In March 1996, the year-long U.S. interest rate decline reversed its direction.
Rates began to creep upwards in response to signs of a stronger U.S. economy.
Near the end of this reporting period -- as rates continued to climb -- we began
to gradually increase our position in U.S. Treasury and mortgage securities,
seeing an opportunity to profit should rates move back down. Inflation currently
remains in check and we anticipate a slowing in U.S. economic growth over the
long term -- generally a good environment for these types of investments.
An increased focus abroad enabled us to benefit from a favorable inflation and
low interest rate environment worldwide. By proactively managing currency risk,
the fund was able to realize strong gains from international bond holdings in
countries such as Australia, Canada and New Zealand. Finding emerging market
securities undervalued in the beginning of last year, the fund also dramatically
increased its allocation in this sector. This enabled the fund to take advantage
of major appreciation in bond values this past year and to position the fund for
long-term growth potential.
Overall, the Franklin Strategic Income Fund created new opportunities by moving
between, and leveraging the strengths of, various domestic and international
sectors. By diversifying across six distinct asset classes -- foreign government
bonds, emerging market debt securities, high yield corporate bonds, U.S.
government bonds, convertible securities, and mortgage-backed securities -- we
also tried to reduce fund volatility.
The fund should continue to perform well, as we anticipate low inflation,
ongoing slow to moderate economic growth, and a stable interest rate environment
in the U.S. and abroad.
Performance Summary
The Franklin Strategic Income Fund's share price, as measured by net asset
value, increased $0.59, from $10.18 on April 30, 1995, to $10.77 on April 30,
1996.
For the fiscal year ended April 30, 1996, your fund paid monthly income
distributions totaling 82.3 cents ($0.823) per share. This figure includes a
special year-end income distribution of 1.9 cents ($0.019) to meet excise tax
requirements. Dividends will vary based on the earnings of the fund's portfolio,
and past distributions are not necessarily predictive of future trends.
Based on an annualization of the monthly dividend of 6.70 cents ($0.067) per
share and the maximum offering price of $11.25 on April 30, 1996, your fund's
distribution rate was 7.15%.
The fund posted a total return of +15.59% for the one-year period ended April
30, 1996. Cumulative total return measures the change in value of an investment
during the period indicated, assuming reinvestment of dividends and capital
gains, if any. This calculation does not include the maximum initial sales
charge, and past performance is not predictive of future results.
The graph on the next page compares the fund's performance to a number of
indices, including the Lehman Brothers Aggregate Bond Index, Salomon Brothers
Non-U.S. World Government Bond Index, Salomon Brothers High Yield Bond Index,
and a composite index. Given the fund's allocation across six distinct asset
classes, management has added the two Salomon Brothers indices and the narrow
composite index this year because we believe the composition of these indices
provides for a more appropriate comparison to the fund's performance. As such,
the Lehman Brothers Aggregate Bond Index may be excluded from the Index
Comparison graph in next year's report. None of these indices include sales
charges or management fees and, thus, their performance will not always reflect
that of the fund. Despite these differences, the fund followed the indices
closely during the reporting period. Please remember that an index is simply a
measure of performance, and cannot be invested in directly.
We manage this fund with a long-term perspective and encourage shareholders to
view their investment in a similar manner. While the fund is bound to encounter
volatility from time to time, short-term fluctuations should not unduly concern
long-term investors.
GRAPHIC MATERIAL 13 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Strategic Income Fund
Periods ended April 30, 1996
Since
One Inception
Year (06/01/94)
- --------------------------------------------------------------------------------
Cumulative Total Return1 15.59% 25.93%
Average Annual
Total Return2 10.70% 10.27%
Value of a $10,000
Investment3 $11,070 $12,062
Distribution Rate4 7.15%
30-Day Standardized Yield5 7.55%
- --------------------------------------------------------------------------------
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the maximum 4.25% initial sales
charge.
2. Average annual total return represents the change in value of an investment
over the stated periods and includes the maximum 4.25% initial sales charges.
3. The Value of a $10,000 Investment is based on a hypothetical, lump sum
$10,000 investment for the periods shown, and includes reinvestment of dividends
and capital gain distributions and the maximum 4.25% initial sales charge.
4. Distribution rate is based on an annualization of the fund's current 6.70
cents per share monthly dividend and the maximum offering price of $11.25 on
April 30, 1996. 5. Yield, calculated as required by the SEC, is based on the
earnings of the fund's portfolio for the 30 days ended April 30, 1996.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Investment return and principal value will fluctuate with
market conditions, and you may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
The fund's manager has agreed to waive a portion of its management fees and to
assume responsibility for certain other costs, which reduces operating expenses
and increases the distribution rate, yield and total return to shareholders. If
the manager had not taken this action, the fund's distribution rate and total
return would have been lower and yield for the period would have been 6.57%. The
fee waiver may be discontinued at any time upon notice to the fund's Board of
Trustee's.
FRANKLIN NATURAL RESOURCES FUND
Your Fund's Objective:
The Franklin Natural Resources Fund seeks long-term capital appreciation by
investing at least 65% of its total assets in securities of companies that own,
produce, refine, process or market natural resources, as well as those that
provide support services for natural resources companies.
We are pleased to bring you the first annual report of the Franklin Natural
Resources Fund, which covers the 11 months from the fund's inception on June 5,
1995 through April 30, 1996. As discussed in the Performance Summary on page 38,
the fund delivered a total return of +33.36% for this period, significantly
outperforming the Standard & Poor's 500 Stock Index(R) (S&P 500(R)), which
posted a total return of +24.66% for the same 11-month period.*
During the abbreviated fiscal year, slower-than-expected global economic growth,
plus concerns about excessive supplies of steel and base metals, adversely
affected the stock prices of many companies producing these commodities. At the
same time, strong worldwide demand for oil, rising natural gas prices, and a
recovery in profit margins benefited many energy corporations. And in January,
prices of gold were buoyed by strong supply and demand fundamentals.
GRAPHIC MATERIAL 14 OMITTED - SEE APPENDIX AT END OF DOCUMENT
*Source: Standard & Poor's Corporation. The index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
In response to these developments, we overweighted energy, chemicals, and gold
and precious metals relative to steel, base metals, and service-related
industries. In addition, we searched for companies whose market dominance,
low-cost production, and skilled management gave them the ability to maximize
profitability regardless of industry segment or market volatility.
Because we found attractive valuations in the energy sector, we increased our
weighting in this area from 37.2% on October 31, 1995 to 54.4% on April 30,
1996. One of our strongest performing positions was Falcon Drilling Co., Inc., a
Texas-based company which supplies the primary equipment used for oil and gas
exploration in southern Louisiana. Due to the abundant reserves of natural gas
and proximity to major pipelines, many exploration and production companies are
increasing their budgets there. We purchased Falcon's stock in December, and by
the end of the period, these shares appreciated 82%. In our opinion, the company
has the potential to continue to reap profits because it controls 100% of the
excess capacity in the region and its fleet dominates the industry, with four
times more vessels than its nearest competitor.
GRAPHIC MATERIAL 15 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Two other companies which we feel have good upside potential are Cairn Energy
and Total SA. Cairn Energy is a highly profitable, well-managed exploration and
production company with the potential to drill 16 wells in the Gulf of Mexico
before the end of 1996. Total SA is a leading international refiner and marketer
of petroleum products, with exposure to exploration in the Middle East,
Indonesia, and Central America.
We maintained our overall weighting in the chemical sector throughout the
period, but increased our exposure to fertilizer companies from 1.6% of total
net assets on October 31, 1995 to approximately 8% on April 30, 1996. In our
opinion, low worldwide grain inventories and the subsequent need for higher crop
yields will benefit fertilizer companies in the future.
In January 1996, gold prices surged to their highest levels in more than five
years, which prompted us to realize profits. This reduced our exposure to gold
and precious metals from 14% on October 31, 1995 to 7.7% at the end of the
reporting period. Gold prices have subsequently retreated, and we believe they
may remain in a narrow trading band for the rest of 1996.
Franklin Natural Resources Fund
Top 10 Holdings on April 30, 1996
Based on Total Net Assets
Company % of Total
Industry, Country Net Assets
Cairn Energy USA, Inc. 4.16%
Energy, United States
Total SA, ADR 3.70%
Energy, France
Arcadian Corp. 3.05%
Chemicals, United States
United Meridian Corp. 2.97%
Energy, United States
Weatherford Enterra, Inc. 2.53%
Energy, United States
Potash Corp. of Saskatchewan, Inc. 2.49%
Chemicals, Canada
Noble Affiliates, Inc. 2.45%
Energy, United States
Grant Geophysical, Inc. 2.42%
Energy, United States
IMC Global, Inc. 2.31%
Chemicals, United States
Varco International, Inc. 2.30%
Energy, United States
For a complete list of portfolio holdings, please see
page 65 of this report.
Looking forward, we are optimistic about the prospects for natural resources
companies. With low worldwide inventories of natural resources and numerous
emerging-market countries on a path towards industrialization, many experts
anticipate significantly increased demand for these resources over the long
term. Such demand could present tremendous opportunities for companies in this
field and for investors who purchase their securities. Of course, it should be
remembered that the rewards the fund may offer also involve the special risks of
investing in a non-diversified, sector fund, as well as the currency volatility
and political, economic or regulatory uncertainty associated with foreign
investing. Developing markets are represented in the fund's portfolio, and
involve heightened risks related to the same factors, in addition to risks
associated with the relatively small size and lesser liquidity of these markets.
This discussion reflects the strategies we employed for the fund during the
period under review, and includes our opinions as of the close of the period.
Since economic and market conditions are constantly changing, our strategies,
and our evaluations, conclusions and decisions regarding portfolio holdings, may
change as new circumstances arise. Although past performance of a specific
investment or sector cannot guarantee future performance, such information can
be useful in analyzing securities we purchase or sell for the fund.
Thank you for investing in the Franklin Natural Resources Fund. We appreciate
your support and welcome your comments and suggestions.
Performance Summary
The Franklin Natural Resources Fund provided a total return of +33.36% for the
period from its inception on June 5, 1995, through April 30, 1996. Total return
measures the change in value of an investment, assuming reinvestment of
dividends and capital gains, and does not include the fund's initial sales
charge. However, we believe it is important to maintain a long-term perspective
when managing the fund, and encourage shareholders to view their investments in
a similar manner.
The fund's share price, as measured by net asset value, increased $3.14 per
share, from $10.00 on June 5, 1995 to $13.14 on April 30, 1996. During the
reporting period, shareholders received distributions totaling 6.3 cents
($0.063) per share in dividend income and 9.4 cents ($0.094) per share in
short-term capital gains. Of course, past performance is not predictive of
future results, and distributions will vary depending on income earned by the
fund and any profits realized from the sale of portfolio securities.
The graph on the following page shows how an investment made in the fund at its
inception on June 5, 1995 has outperformed the unmanaged Standard & Poor's 500
Stock Index(R) (S&P 500(R)). The S&P 500 is an broad market index consisting of
500 widely held common stocks within four sectors (industrials, utilities,
financial, and transportation).
Of course, such unmanaged market indices have inherent performance differentials
in comparison with any fund. They don't include management fees to cover
salaries of security analysts or portfolio managers, or take into account
commissions or market spreads involved with buying and selling stocks. And,
unlike unmanaged indices, mutual funds are never 100% invested because of the
need to have cash on hand to redeem shares. In addition, the performance shown
for the fund includes the maximum initial sales charge, all fund expenses and
account fees. If operating expenses such as the Franklin Natural Resources
Fund's had been applied to this index, its performance would have been lower.
Please remember that an index is simply a measure of performance, and one cannot
invest in an index directly. Past performance is not predictive of future
results.
GRAPHIC MATERIAL 16 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Natural Resources Fund
Period ended April 30, 1996
Since
Inception
(6/5/95)
- --------------------------------------------------------------------------------
Cumulative Total Return1 33.36%
Aggregate Total Return2 27.37%
Value of $10,000 Investment3 12,737
- --------------------------------------------------------------------------------
1. Cumulative total return measures the change in value of an investment over
the period indicated and does not include the maximum 4.5% initial sales charge.
2. Aggregate total return represents the change in value of an investment over
the period indicated and includes the deduction of the maximum 4.5% initial
sales charge. Since the fund has been in existence for less than one year,
average annual total returns are not provided.
3. This figure represents the value of a hypothetical $10,000 investment in the
fund over the specified period and includes the maximum 4.5% initial sales
charge.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Investment return and principal value will fluctuate with
market conditions, and you may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
The fund's manager has agreed in advance to waive a portion of its management
fees, which reduces operating expenses and increases total return to
shareholders. Without this waiver, the fund's total return would have been
lower. The waiver may be discontinued at any time, upon notice to the fund's
Board of Trustees.
FRANKLIN STRATEGIC SERIES
<TABLE>
<CAPTION>
Statement of Investments in Securities and Net Assets, April 30, 1996
<S> <C> <C>
Value
Shares Franklin California Growth Fund (Note 1)
Common Stocks 78.6%
Business Servicess 2.2%
15,000 Avery-Dennison Corp. .......................................................... $ 855,000
16,500 a Robert Half International, Inc. ............................................... 948,750
----------
1,803,750
----------
Consumer Durables 3.7%
60,000 a Aldila, Inc. .................................................................. 315,000
30,000 Anthony Industries, Inc. ...................................................... 855,000
30,000 Callaway Golf Co. ............................................................. 802,500
40,000 Mattel, Inc. .................................................................. 1,040,000
----------
3,012,500
----------
Consumer Non-Durables 1.0%
10,000 Clorox Co. .................................................................... 826,250
----------
Consumer Services 2.9%
5,000 Disney (Walt) Co. ............................................................. 310,000
34,000 McClatchy Newspapers, Inc., Series A........................................... 824,500
21,000 a Silver King Communications..................................................... 614,250
7,000 United Television, Inc. ....................................................... 624,750
----------
2,373,500
----------
Electronic Technology 9.0%
24,000 a Cisco Systems, Inc. ........................................................... 1,245,000
30,000 a Cognex Corp. .................................................................. 802,500
13,000 a Computer Sciences Corp. ....................................................... 962,000
7,000 Hewlett-Packard Co. ........................................................... 741,125
20,000 a Komag, Inc. ................................................................... 670,000
20,000 Logicon, Inc. ................................................................. 595,000
11,800 a Seagate Technology, Inc. ...................................................... 684,400
45,000 a Silicon Graphics, Inc. ........................................................ 1,333,125
7,000 a VeriFone, Inc. ................................................................ 294,000
----------
7,327,150
----------
Energy/Minerals 6.2%
10,000 Atlantic Richfield Co. (ARCO).................................................. 1,177,500
16,000 Chevron Corp. ................................................................. 926,000
40,000 Occidental Petroleum Corp. .................................................... 1,030,000
29,000 Ultramar Corp. ............................................................... 909,875
30,000 Unocal Corp. .................................................................. 963,750
----------
5,007,125
----------
Finance 2.6%
30,000 Countrywide Credit Industries, Inc. ........................................... $ 648,750
25,000 a Silicon Valley Bancshares...................................................... 581,250
20,000 The PMI Group, Inc. ........................................................... 850,000
----------
2,080,000
----------
Health Services 4.4%
22,500 a Access Health, Inc. ........................................................... 1,245,938
45,000 a Mecon, Inc. ................................................................... 1,260,000
5,000 a PacifiCare Health Systems, Inc., Class A....................................... 405,000
8,000 a PacifiCare Health Systems, Inc., Class B....................................... 671,000
----------
3,581,938
----------
Health Technology 4.5%
12,000 a Amgen, Inc. ................................................................... 690,000
9,800 a Arterial Vascular Engineering, Inc. ........................................... 431,200
13,000 a Genentech, Inc. ............................................................... 687,375
14,300 a Heartport, Inc. ............................................................... 511,225
42,000 Mentor Corp. .................................................................. 992,250
20,000 a Penederm, Inc. ................................................................ 340,000
----------
3,652,050
----------
Industrial Services 2.0%
49,500 Granite Construction, Inc. .................................................... 977,625
10,000 a Western Atlas, Inc. ........................................................... 600,000
----------
1,577,625
----------
Non-Energy/Minerals 1.1%
45,000 Homestake Mining Co. .......................................................... 905,625
----------
Other
486 b Lynx Therapeutics, Inc. ....................................................... --
----------
Producer/Manufacturing .9%
27,000 Superior Industries International, Inc. ....................................... 739,125
----------
Real Estate Investment Trusts 2.5%
35,000 Bay Apartment Communities, Inc. ............................................... 879,375
35,000 Irvine Apartment Communities, Inc. ............................................ 700,000
24,000 Nationwide Health Property, Inc. .............................................. 477,000
----------
2,056,375
----------
Retail 2.7%
12,800 a Cost Plus, Inc. ............................................................... 304,000
35,000 a Price/Costco, Inc. ........................................................... 665,000
100,000 a Strouds, Inc. ................................................................. $ 450,000
25,000 a Vons Companies, Inc. .......................................................... 800,000
----------
2,219,000
----------
Semiconductors/Equipment 7.6%
20,000 a Adaptec, Inc. ................................................................. 1,150,000
50,000 a Exar Corp. .................................................................... 825,000
20,000 Intel Corp. ................................................................... 1,355,000
18,000 Linear Technology Corp. ....................................................... 618,750
20,000 a Maxim Integrated Products, Inc. ............................................... 685,000
25,000 a Uniphase Corp. ............................................................... 1,318,750
5,000 a Xilinx, Inc. .................................................................. 184,375
----------
6,136,875
----------
Technology Services 13.3%
23,000 Adobe Systems, Inc. ........................................................... 989,000
8,000 a Advent Software, Inc. ........................................................ 212,000
5,000 a Business Objects SA, ADR....................................................... 432,500
30,000 a Fractal Design Corp. .......................................................... 382,500
30,000 a Informix Corp. ................................................................ 791,250
14,000 a Integrated Systems, Inc. ...................................................... 409,500
25,000 a Mercury Interactive Corp. ..................................................... 343,750
6,000 a Microsoft Corp. ............................................................... 680,250
27,000 a Oracle Systems Corp. .......................................................... 911,250
2,600 a Red Brick Systems, Inc. ....................................................... 154,050
12,000 Remedy Corp. .................................................................. 942,000
16,000 a Scopus Technology, Inc. ....................................................... 312,000
30,000 a Software Artistry, Inc. ....................................................... 217,500
6,600 a Sterling Commerce, Inc. ....................................................... 231,000
10,000 a Sterling Software, Inc. ....................................................... 777,500
75,000 a Symantec Corp. ................................................................ 1,209,375
15,000 a Synopsys, Inc. ................................................................ 618,750
41,000 a Systemsoft Corp. .............................................................. 1,142,875
----------
10,757,050
----------
Telecommunications 2.2%
15,000 a Newbridge Networks Corp. ...................................................... 965,625
5,000 a Polycom, Inc. ................................................................. 44,375
54,000 a Tekelec ....................................................................... 756,000
----------
1,766,000
----------
Textiles .7%
14,800 a Mossimo, Inc. ................................................................. $ 562,400
----------
Transportation 3.9%
30,000 Air Express International Corp. ............................................... 840,000
30,000 Expeditors International of Washington, Inc. .................................. 892,500
39,000 Harper Group, Inc. ............................................................ 755,625
55,000 a Mesa Airlines, Inc. ........................................................... 673,750
----------
3,161,875
----------
Utilities 5.2%
25,000 a AirTouch Communications, Inc. ................................................. 781,250
45,000 Edison International........................................................... 720,000
35,000 Enova Corp. ................................................................... 752,500
30,000 Pacific Enterprises............................................................ 772,500
20,000 Pacific Gas & Electric Co. .................................................... 455,000
34,000 Southern California Water...................................................... 731,000
----------
4,212,250
----------
Total Common Stocks (Cost $52,620,925)......................................... 63,758,463
----------
Preferred Stocks .8%
Real Estate
13,000 c Catellus Development Corp., $3.625 cvt. pfd., Series B (Cost $560,500)......... 676,000
----------
Face
Amount
- -----------
Convertible Securities 2.0%
$ 200,000 c Altera Corp., cvt. sub. notes, 5.75%, 06/15/02 ................................ 243,500
500,000 Mercury Air Group, Inc., cvt. sub. deb., 7.75%, 02/01/06 ...................... 572,500
750,000 c Quantum Corp., cvt. sub. notes, 5.00%, 03/01/03 ............................... 832,500
----------
Total Convertible Securities (Cost $1,470,750)................................. 1,648,500
----------
Total Long Term Investments (Cost $54,652,175)................................. 66,082,963
----------
d Receivables from Repurchase Agreements 18.4%
14,895,041 Joint Repurchase Agreement, 5.326%, 05/01/96, (Maturity Value $14,947,907)
(Cost $14,945,696)
Bear Stearns & Co., Inc., (Maturity Value $2,995,206)
Collateral: U.S. Treasury Notes, 5.625% - 8.75%, 04/30/97 - 10/31/00
B.T. Securities Corp., (Maturity Value $2,995,206)
Collateral: U.S. Treasury Notes, 6.125% - 7.25%, 11/30/96 - 05/15/98
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $2,995,206)
Collateral: U.S. Treasury Notes, 5.625% - 8.875%, 02/28/97 - 11/15/99
Fuji Securities, Inc., (Maturity Value $2,995,206)
Collateral: U.S. Treasury Bills, 09/26/96 - 01/09/97
U.S. Treasury Notes, 6.25% - 9.125%, 05/15/99 - 08/31/00
SBC Capital Markets, Inc., (Maturity Value $2,967,083)
Collateral: U.S. Treasury Notes, 6.875% - 8.25%, 07/15/98 - 07/31/99 ......... $14,945,696
----------
Total Investments (Cost $69,597,871 99.8%..................................... 81,028,659
Other Assets and Liabilities, Net .2%......................................... 146,107
----------
Net Assets 100.0%............................................................. 81,174,766
==========
At April 30, 1996, the net unrealized appreciation based on the cost of
investments for income tax purposes of $69,597,871 was as follows:
Aggregate gross unrealized appreciation for all investments in which
there was an excess of value over tax cost .................................... $12,489,013
Aggregate gross unrealized depreciation for all investments in which
there was an excess of tax cost over value .................................... (1,058,225)
----------
Net unrealized appreciation..................................................... $11,430,788
==========
aNon-income producing.
bSee Note 7 regarding restricted securities.
cPurchased in a private placement transaction; resale may only be to qualified institutional buyers.
dFace amount for repurchase agreements is for the underlying collateral. See Note 1(h) regarding joint repurchase
agreement.
FRANKLIN STRATEGIC SERIES
Statement of Investments in Securities and Net Assets, April 30, 1996
Value
Country* Shares Franklin Strategic Income Fund (Note 1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks .1%
Media & Broadcasting
US 1,600 Sullivan Broadcast Holdings (Cost $15,591)........................... $ 16,000
----------
Preferred Stocks 4.2%
Cable Television .8%
US 1,014 cCablevision Systems, 11.125%, pfd., PIK.............................. 99,119
----------
Financial Services .9%
US 1,000 First Nationwide Bank, 11.50% pfd. .................................. 112,250
----------
Media & Broadcasting2.5%
US 111 PanAmSat Corp., L.P., 12.75% pfd., PIK............................... 129,273
US 200 cTime Warner, Inc. ................................................... 200,000
----------
329,273
----------
Total Preferred Stocks (Cost $514,074)............................... 540,642
----------
Convertible Preferred Stocks 3.8%
Cable Television .3%
US 1,500 Cablevision Systems, 8.50%, cvt. pfd. ............................... 38,813
----------
Financial Services 1.0%
US 2,500 cParker & Parsley Capital, 6.25% cvt. pfd. ........................... 127,500
----------
Media/Broadcasting 1.6%
US 19,000 Triathlon Broadcasting, 9.00% cvt. pfd. ............................. 204,250
----------
Telecommunications .9%
US 2,200 cCoIntel, 7.00% cvt. pfd. ............................................ 125,950
----------
Total Convertible Preferred Stocks (Cost $477,950)................... 496,513
----------
Face
Amount
======
High Yield Corporate Bonds 27.3%
Cable Television 2.3%
US 150,000 Bell Cablemedia, Plc., senior disc. notes, zero coupon to 07/15/99,
(original accretion rate 11.95%), 11.95% thereafter, 07/15/04 ...... 109,500
US 150,000 Diamond Cable Communications, senior notes, zero coupon to 12/15/00,
(original accretion rate 11.75%), 11.75% thereafter, 12/15/05 ...... 91,500
US 100,000 Rogers Cablesystems, Inc., guaranteed notes, 9.625%, 08/01/02 ....... 101,250
----------
302,250
----------
Consumer Goods 2.3%
US 100,000 Herff Jones, Inc., senior sub. notes, 11.00%, 08/15/05 .............. 108,000
US 100,000 Playtex Family Products Corp., senior sub. deb., 9.00%, 12/15/03 .... 93,000
US 100,000 Sealy Corp., senior sub. notes, 9.50%, 05/01/03 ..................... 99,000
----------
300,000
----------
Containers & Packaging 1.6%
US 100,000 Owens Illinois, Inc., senior sub. deb., 10.50%, 06/15/02 ............ $ 104,000
US 100,000 Riverwood International, senior notes, 10.25%, 04/01/06 ............. 100,125
----------
204,125
----------
Energy .8%
US 100,000 Gulf Canada Resources, Ltd., senior sub. deb., 9.25%, 01/15/04 ...... 100,250
----------
Food/Beverages 1.5%
US 100,000 Curtice-Burns Foods, Inc., senior sub. notes, 12.25%, 02/01/05 ...... 98,500
US 100,000 Doane Products Co., senior notes, 10.625%, 03/01/06 ................. 102,000
----------
200,500
----------
Food Retailing 1.6%
US 100,000 Bruno's, Inc., senior sub. notes, 10.50%, 08/01/05 .................. 99,000
US 100,000 Dominick's Finer Foods, senior sub. notes, 10.875%, 05/01/05 ........ 105,000
----------
204,000
----------
Forest & Paper Product 2.4%
US 100,000 Rapp International Finance, 13.25%, 12/15/05 ........................ 100,250
US 100,000 S.D. Warren Co., senior sub. notes, 12.00%, 12/15/04 ................ 104,000
US 100,000 Tjiwi Kimia International, 13.25%, 08/01/01 ......................... 109,500
----------
313,750
----------
Gaming & Hotels 4.2%
US 200,000 cAMF Group, Inc., senior disc. notes, zero coupon to 03/15/00,
(original accretion rate 12.25%), 12.25% thereafter, 03/15/06 ...... 110,500
US 100,000 Aztar Corp., senior sub. notes, 13.75%, 10/01/04 .................... 112,000
US 100,000 Grand Casinos, Inc., 10.125%, 12/01/03 .............................. 104,750
US 100,000 Players International, Inc., senior notes, 10.875%, 04/15/05 ........ 102,250
US 100,000 Showboat, Inc., senior sub. notes, 13.00%, 08/01/09 ................. 113,750
---------
543,250
----------
Health Care 2.5%
US 100,000 cHowmet Corp., senior sub. notes, 10.00%, 12/01/03 ................... 105,500
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
----------
325,000
----------
Industrial 2.5%
US 100,000 AAF-McQuay, Inc., senior notes, 8.875%, 02/15/03 .................... 96,750
US 150,000 American Standard, Inc., senior sub. deb., zero coupon to 06/01/98,
(original accretion rate 10.50%), 10.50% thereafter, 06/01/05 ...... 128,438
US 100,000 cExide Electronics Group, senior sub. notes, 11.50%, 03/15/06 ........ 104,000
----------
329,188
----------
Media & Broadcasting 2.2%
US 100,000 American Media Operation, senior sub. notes, 11.625%, 11/15/04 ...... $ 100,875
US 100,000 Hollinger International Publishing, senior sub. notes, 9.25%, 02/01/06 95,500
US 100,000 Sullivan Broadcast Holdings, senior deb., 13.25%, 12/15/06 .......... 97,000
----------
293,375
----------
Metals & Mining 1.1%
US 100,000 Acme Metals, Inc., guaranteed senior secured disc. notes, zero coupon to
08/01/97, (original accretion rate 13.50%), 13.50% thereafter, 08/01/04 88,000
US 50,000 Ucar Global Enterprises, Inc., senior sub. notes, 12.00%, 01/15/05 .. 57,500
----------
145,500
----------
Textiles .8%
US 100,000 WestPoint Stevens, Inc., senior notes, 8.75%, 12/15/01 .............. 100,500
----------
Utilities - Electric .8%
US 100,000 El Paso Electric Co., 9.40%, 05/01/11 .............................. 100,250
----------
Wireless Communications .6%
US 150,000 Arch Communications Group, senior disc. notes, zero coupon to 03/15/01,
(original accretion rate 10.875%), 10.875% thereafter, 03/15/08...... 84,563
----------
Total High Yield Corporate Bonds (Cost $3,406,511)............... 3,546,501
----------
Convertible Bonds 7.0%
Electronics 2.2%
US 125,000 cDovatron International, Inc., cvt. sub. notes, 6.00%, 10/15/02 ...... 140,625
US 125,000 cQuantum Corp., cvt. sub. notes, 5.00%, 03/01/03 ..................... 138,750
----------
279,375
----------
Health Car 2.4%
US 40,000 Integrated Health Services, Inc., cvt. senior sub. deb., 5.75%, 01/01/01 41,550
US 125,000 cUS Diagnostic Labs, Inc., cvt. sub. deb., 9.00%, 03/31/03 ........... 131,250
US 75,000 cYouth Services International, Inc., cvt. sub. deb., 7.00%, 02/01/06 . 141,000
----------
313,800
----------
Lodging 1.6%
US 200,000 HFS, Inc., cvt. senior notes, 4.75%, 03/01/03 ....................... 209,500
----------
Media/Broadcasting .8%
US 110,000 cAll American Communications, cvt. sub. deb., 6.50%, 10/01/03 ........ 105,600
----------
Total Convertible Bonds (Cost $810,375).............................. 908,275
----------
Emerging Market Bonds13.3%
US 30,000 Bancomer, SA, 8.00%, 07/07/98 ....................................... 29,288
US 100,000 Bridas Corp., senior notes, 12.50%, 11/15/99 ........................ 105,250
US 120,000 Centrais Eletricas Brasileiras, SA, 10.00%, 10/30/98 ................ $ 122,700
US 100,000 cIND Metalurgicas Pescarm, senior notes, 11.75%, 03/27/98 ............ 100,500
US 250,000 Poland PDI Bonds, 3.75%, 10/27/14 ................................... 192,500
US 108,900 Republic of Argentina, 6.813%, 03/31/05 ............................. 83,036
US 162,750 Republic of Brazil, 6.375%, 01/01/01 ................................ 149,628
US 90,000 Republic of Brazil, 5.00%, 04/15/24 ................................. 47,306
US 408,594 Republic of Ecuador, 3.00%, 02/28/15 ................................ 178,731
US 200,000 Republic of Ecuador, 3.25%, 02/28/25 ................................ 71,000
US 250,000 Republic of Philippines, 6.25%, 12/01/17 ............................ 197,813
US 125,000 SEI Holdings IX, Inc., senior notes, 11.00%, 11/30/00 ............... 130,000
US 165,000 United Mexican States, 9.75%, 02/06/01 .............................. 163,763
US 250,000 United Mexican States, 6.25%, 12/31/19 .............................. 165,156
----------
Total Emerging Market Bonds (Cost $1,599,278)...................... 1,736,671
----------
Foreign Government Bonds26.3%
ES 14,860,000 Bonos y Obligacion del Estado, 12.25%, 03/25/00 ..................... 131,544
ES 6,800,000 Bonos y Obligacion del Estado, 11.30%, 01/15/02 ..................... 59,447
ES 10,750,000 Bonos y Obligacion del Estado, 10.00%, 02/28/05 ..................... 89,034
IT 205,000,000 Buoni Poliennali del Tesoro, 7.438%, 08/01/99 ....................... 129,797
IT 325,000,000 Buoni Poliennali del Tesoro, 9.188%, 07/15/00 ....................... 218,321
IT 220,000,000 Buoni Poliennali del Tesoro, 9.188%, 09/01/05 ....................... 148,456
DD 75,000 Deutschland Bundesrepublik, 8.375%, 05/21/01 ........................ 55,604
DD 70,000 Deutschland Bundesrepublik, 8.250%, 09/20/01 ........................ 51,696
DD 75,000 Deutschland Bundesrepublik, 7.125%, 12/20/02 ........................ 52,453
DD 90,000 German Unity Fund, 8.00%, 01/21/02 .................................. 65,655
CA 100,000 Government of Canada, 10.25%, 12/01/98 .............................. 80,018
CA 100,000 Government of Canada, 5.75%, 03/01/99 ............................... 71,992
CA 53,000 Government of Canada, 6.50%, 06/01/04 ............................... 36,157
CA 100,000 Government of Canada, 10.50%, 10/01/04 .............................. 85,985
CA 20,000 Government of Canada, 9.00%, 12/01/04 ............................... 15,840
CA 140,000 Government of Canada, 8.75%, 12/01/05 ............................... 109,368
CA 125,000 Government of Canada, 9.50%, 06/01/10 ............................... 102,377
IE 35,000 Irish Government, 6.25%, 10/18/04 ................................... 50,957
DK 108,000 Kingdom of Denmark, 9.00%, 11/15/98 ................................. 20,059
DK 501,000 Kingdom of Denmark, 8.00%, 11/15/01 ................................. 91,677
DK 975,000 Kingdom of Denmark, 9.00%, 11/15/00 ................................. 184,659
DK 167,000 Kingdom of Denmark, 8.00%, 05/15/03 ................................. 30,245
AU 100,000 New South Wales Treasury Corp., 7.00%, 04/01/04 ..................... 70,332
NZ 165,000 New Zealand Government, 6.50%, 02/15/00 ............................. 104,670
NZ 180,000 New Zealand T-Bills, 0.00%, 09/18/96 ................................ 119,543
NZ 139,000 New Zealand T-Bills, 0.00%, 12/18/96 ................................ 90,246
AU 225,000 Queensland Treasury Corp., 8.875%, 11/08/96 ......................... $ 178,942
AU 140,000 Queensland Treasury Corp., 8.00%, 05/14/03 .......................... 105,430
SE 900,000 Swedish Government, 13.00%, 06/15/01 ................................ 161,491
SE 600,000 Swedish Government, 10.25%, 05/05/03 ................................ 99,626
AU 65,000 Treasury Corp. of Victoria, 8.25%, 10/15/03 ......................... 49,477
GB 175,000 United Kingdom Treasury, 12.00%, 11/20/98 ........................... 294,277
GB 55,000 United Kingdom Treasury, 9.50%, 01/15/99 ............................ 87,813
GB 135,000 United Kingdom Treasury, 6.75%, 11/26/04 ............................ 187,549
----------
Total International Government Bonds (Cost $3,391,175)............. 3,430,737
----------
U.S. Government Securities 5.0%
US 400,000 U.S. Treasury Bonds, 7.125%, 02/15/23 ............................... 402,750
US 250,000 U.S. Treasury Notes, 6.75%, 05/31/97 ................................ 252,656
----------
Total U.S. Government Securities (Cost $656,410)................... 655,406
----------
U.S. Government Agencies/Mortgages8.6%
US 26,486 FHLMC, 7.00%, 01/01/09 .............................................. 26,229
US 25,875 FHLMC, 6.00%, 04/01/09 .............................................. 24,557
US 24,716 FHLMC, 6.00%, 01/01/11 .............................................. 23,457
US 40,000 FHLMC, 6.50%, 04/01/11 .............................................. 38,850
US 49,515 FHLMC, 7.00%, 04/01/24 .............................................. 47,828
US 46,418 FHLMC, 7.50%, 04/01/24 .............................................. 45,954
US 30,650 FHLMC, 8.50%, 12/01/24 .............................................. 31,512
US 23,878 FHLMC, 9.00%, 12/01/24 .............................................. 24,952
US 29,911 FHLMC, 7.00%, 11/01/25 .............................................. 28,892
US 30,134 FHLMC, 8.00%, 11/01/25 .............................................. 30,482
US 39,760 FHLMC, 6.50%, 12/01/25 .............................................. 37,349
US 38,784 FHLMC, 7.50%, 01/01/26 .............................................. 38,397
US 28,261 FHLMC, 8.00%, 01/01/26 .............................................. 28,588
US 41,519 FNMA, 7.50%, 10/01/07 ............................................... 41,830
US 33,804 FNMA, 6.50%, 02/01/09 ............................................... 32,801
US 43,456 FNMA, 6.50%, 01/01/24 ............................................... 40,767
US 23,607 FNMA, 7.00%, 05/01/24 ............................................... 22,780
US 40,378 FNMA, 8.00%, 01/01/25 ............................................... 40,807
US 25,236 FNMA, 9.00%, 03/01/25 ............................................... 26,403
US 17,549 FNMA, 9.00%, 05/01/25 ............................................... 18,360
US 24,443 FNMA, 8.50%, 07/01/25 ............................................... 25,130
US 60,552 FNMA, 7.00%, 03/01/26 ............................................... 58,433
US 40,320 FNMA, 7.50%, 03/01/26 ............................................... 39,879
US 22,382 GNMA, SF, 7.50%, 09/15/23 ........................................... 22,130
US 49,359 GNMA, SF, 6.50%, 03/15/24 ........................................... 46,243
US 47,445 GNMA, SF, 8.00%, 06/15/24 ........................................... $ 48,098
US 21,684 GNMA, SF, 8.50%, 08/15/24 ........................................... 22,409
US 6,355 GNMA, SF, 9.00%, 01/15/25 ........................................... 6,685
US 24,750 GNMA, SF, 8.00%, 02/15/25 ........................................... 25,090
US 25,236 GNMA, SF, 9.50%, 06/15/25 ........................................... 27,058
US 58,768 GNMA, SF, 7.00%, 09/20/25 ........................................... 56,216
US 24,798 GNMA, SF, 7.50%, 01/15/26 ........................................... 24,519
US 25,127 GNMA, SF, 7.50%, 02/15/26 ........................................... 24,845
US 40,370 GNMA, SF, 9.00%, 03/15/26 ........................................... 42,464
----------
Total U.S. Government Agencies/Mortgages (Cost $1,119,227)......... 1,119,994
----------
Total Long Term Investments (Cost $11,990,591)..................... 12,450,739
----------
Short Term Investments 1.5%
Emerging Market Debt Securities
TH 5,000,000 Thailand Military Bank Notes, 11.00%, 06/05/96 (Cost $203,128)....... 195,489
----------
Total Investments before Repurchase Agreements
(Cost $12,193,719) ................................................. 12,646,228
----------
dReceivables from Repurchase Agreements 4.2%
US 543,128 Joint Repurchase Agreement, 5.326%, 05/01/96, (Maturity Value $545,003)
(Cost $544,922)
Bear Stearns & Co., Inc., (Maturity Value $109,206)
Collateral: U.S. Treasury Notes, 5.625% - 8.75%, 04/30/97 - 10/31/00
B.T. Securities Corp., (Maturity Value $109,206)
Collateral: U.S. Treasury Notes, 6.125% - 7.25%, 11/30/96 - 05/15/98
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $109,206)
Collateral: U.S. Treasury Notes, 5.625% - 8.875%, 02/28/97 - 11/15/99
Fuji Securities, Inc., (Maturity Value $109,206)
Collateral: U.S. Treasury Bills, 09/26/96 - 01/09/97
U.S. Treasury Notes, 6.25% - 9.125%, 05/15/99 - 08/31/00
SBC Capital Markets, Inc., (Maturity Value $108,179)
Collateral: U.S. Treasury Notes, 6.875% - 8.25%, 07/15/98 - 07/31/99.. 544,922
----------
Total Investments (Cost $12,738,641)101.3%............... 13,191,150
Liabilities in Excess of Other Assets (1.3)%............ (169,614)
----------
Net Assets100.0%..................................................... $13,021,53
============
At April 30, 1996, the net unrealized appreciation based on the cost
of investments for income tax purposes of $12,738,641 was as follows:
Aggregate gross unrealized appreciation for all investments in which
there was an excess of value over tax cost............. ......... $ 540,883
Aggregate gross unrealized depreciation for all investments in which
there was an excess of tax cost over value...................... .. (88,374)
----------
Net unrealized appreciation.......................................... $ 452,509
============
</TABLE>
PORTFOLIO ABBREVIATIONS:
FHLMC - Federal Home Loan Mortgage Corp.
FNMA - Federal National Mortgage Association
GNMA - Government National Mortgage Association
L.P. - Limited Partnership
PIK - Payment-in-Kind
SF - Single Family
COUNTRY LEGEND:
AU - Australia
CA - Canada
DD - Germany
DK - Denmark
ES - Spain
GB - United Kingdom
IE - Ireland
IT - Italy
NZ - New Zealand
SE - Sweden
TH - Thailand
US - United States
*Securities are traded in the currency of country indicated.
Face amount of the bonds is stated in the currency of the
country indicated. Value is stated in U.S. dollars.
cPurchased in a private placement transaction; resale may only be to qualified
institutional buyers.
dFace amount for repurchase agreements is for the underlying collateral.
See Note 1(h) regarding joint repurchase agreement.
FRANKLIN STRATEGIC SERIES
<TABLE>
<CAPTION>
Statement of Investments in Securities and Net Assets, April 30, 1996
Shares/ Value
Country* Warrants Franklin Global Utilities Fund (Note 1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks & Warrants 4.0%
Electric & Gas Utilities 59.6%
US 160,000 aAES China Generating Co., Ltd., Class A........................... $ 1,560,000
US 166,000 aAES Corp. ........................................................ 3,776,500
US 18,000 American Electric Power Co., Inc. ................................ 731,250
AU 278,873 Australian Gas & Light Co., Ltd. ................................. 1,161,359
CH 500 BBC Brown Boveri, Ag ............................................. 602,473
GB 150,000 British Gas, Plc. ................................................ 533,285
US 21,400 cBSES, Ltd. ....................................................... 425,325
US 20,000 CEMIG, SA, Sponsored ADR ......................................... 504,006
US 17,000 cCentral Costanera, Sponsored ADR ................................. 573,750
HK 227,400 China Light & Power, Ltd. ........................................ 1,072,988
US 6,000 Cia de Telecomunicaciones de Chile, SA, Sponsored ADR............. 547,500
US 67,000 CINergy Corp. .................................................... 1,943,000
US 18,000 Coastal Corp. .................................................... 713,250
US 48,500 Compania Boliviana de Energia Electrica .......................... 1,794,500
HK 790,000 Consolidated Electric Power Asia, Ltd. ........................... 1,307,220
US 49,700 Dominion Resources, Inc. ......................................... 1,913,450
US 38,050 Duke Power Co..................................................... 1,788,350
BE 3,200 Electrabel, SA.................................................... 717,662
US 44,900 Empresa Nacional de Electricidad, SA, ADR ........................ 2,811,863
US 70,000 Endesa Nacional Electricidad, SA, ADR ............................ 1,365,000
US 38,200 Enersis, SA, Sponsored ADR........................................ 1,126,900
US 127,000 Enron Corp. ...................................................... 5,111,750
US 185,700 Enron Global Power & Pipelines, L.L.C. ........................... 4,596,075
US 91,000 Entergy Corp. .................................................... 2,411,500
US 34,700 Ericsson (L.M.), Sponsored ADR.................................... 707,013
US 195,000 cEspoon Sahko Oy................................................... 3,525,639
AT 3,360 EVN Energie-Versorgung Niederoesterreich, Ag...................... 491,502
US 39,000 FPL Group, Inc. .................................................. 1,681,875
HK 815,000 aGuangdong Electric Power Development Co., Ltd. ................... 466,211
HK 1,375,000 Hong Kong Electric Holdings, Ltd.................................. 4,372,697
US 62,000 aHuaneng Power International, Inc., ADR............................ 968,750
US 40,500 Illinova Corp. ................................................... 1,032,750
US 14,600 Kansas City Power & Light Co. .................................... 383,250
KR 33,700 Korea Electric Power Corp. ....................................... 1,595,602
US 109,000 National Fuel Gas Co. ............................................ 3,828,625
US 46,100 New Jersey Resources Corp. ....................................... 1,308,088
US 16,800 NIPSCO Industries, Inc. .......................................... 602,700
US 9,700 Northwest Natural Gas Co. ........................................ 315,250
US 126,000 Pacific Enterprises............................................... 3,244,500
US 100,000 Pacific Gas & Electric Co. ....................................... 2,275,000
US 176,700 PacifiCorp ....................................................... $ 3,534,000
US 93,500 Panhandle Eastern Corp. .......................................... 3,050,438
US 60,300 PECO Energy Co. .................................................. 1,499,963
US 60,000 Pinnacle West Capital Corp. ...................................... 1,597,500
GB 102,000 PowerGen, Plc. ................................................... 857,414
US 50,000 Public Service Co. of Colorado.................................... 1,656,250
GB 360,000 Scottish Power, Plc. ............................................. 2,020,156
US 45,600 Shandong Huaneng Power Co., Ltd., ADR............................. 421,800
US 41,200 SIG Corp., Inc. .................................................. 1,375,050
US 146,500 Southern Co. ..................................................... 3,223,000
US 126,900 TECO Energy, Inc. ................................................ 2,950,425
US 121,100 Texas Utilities Co. .............................................. 4,874,275
GB 50,500 Thames Water, Plc. ............................................... 436,676
US 146,000 TransCanada Pipelines, Ltd. ...................................... 2,062,250
US 190,000 Transportadora Gas Sur, ADR....................................... 2,446,250
US 11,000 Unicom Corp. ..................................................... 302,500
DD 25,000 Veba, Ag ......................................................... 1,235,707
DD 1,848 aVeba International Finance BV, warrants........................... 440,719
US 25,400 Williams Cos., Inc. .............................................. 1,298,575
HK 340,000 Wing Shan International, Ltd. .................................... 35,602
----------
101,206,958
------------
Engineering & Construction .3%
IT 457,000,000 Autostrade Concessioni E Costruzioni Autostrade, S.p.A ........... 588,221
--------
Telecommunications Services34.1%
US 95,150 aAirTouch Communications, Inc. .................................... 2,973,438
FR 5,000 Alcatel Alsthom................................................... 470,247
US 10,000 Ameritech Corp. .................................................. 583,750
US 20,300 AT&T Corp. ....................................................... 1,243,375
GB 349,332 Cable & Wireless, Plc. ........................................... 2,741,778
US 19,700 aComcast UK Cable Partners, Ltd. .................................. 261,025
US 6,900 Compania Inversiones Tel.......................................... 395,025
MX 44,400 aGrupo Iusacell, SA, Series D...................................... 39,440
US 100,560 aGrupo Iusacell, SA, Series L, ADR................................. 1,395,270
US 55,300 GTE Corp. ........................................................ 2,398,638
GR 400,000 Hellenic Telecommunications Organization, SA ..................... 6,713,447
US 10,700 aIntelCom Group, Inc. ............................................. 215,338
US 38,500 MCI Communications Corp. ......................................... 1,133,344
NO 91,800 Netcom, ASA....................................................... 1,321,846
JP 300 Nippon Telegraph & Telephone Corp. ............................... 2,326,004
US 124,000 aNynex Cablecomms Group, ADR....................................... $ 2,309,500
US 3,127 aPakistan Telecommunications Corp. ................................ 322,081
US 130,000 Portugal Telecom SA, ADR.......................................... 2,811,250
US 21,200 P.T. Indosat, ADR................................................. 739,350
US 71,200 aRural Cellular Corp., Class A..................................... 872,200
US 32,900 SBC Communications, Inc. ......................................... 1,645,000
IT 550,000,000 STET-Societa Finanziaria Telefonica .............................. 1,858,082
IT 160,000,000 STET-Societa Finanziaria Telefonica, Class D...................... 419,162
NZ 105,000 Telecom Corp. of New Zealand, Ltd. ............................... 445,762
US 62,750 Telecom de Argentina, SA, ADR .................................... 2,839,438
IT 1,365,000,000 Telecom Italia, S.p.A. ........................................... 2,278,163
US 43,600 Telecomunicacoes Brasileiras, SA (Telebras), ADR ................. 2,359,850
US 133,540 Tele Danmark, A/S, ADS............................................ 3,371,885
DK 7,830 Tele Danmark, A/S, Class B........................................ 394,021
US 20,400 Telefonica de Argentina, ADS...................................... 596,700
US 68,450 Telefonica de Espana, ADR......................................... 3,602,181
US 58,100 Telefonos de Mexico, ADR.......................................... 1,975,400
US 57,500 aTelewest Communications, Plc., ADR ............................... 1,444,688
US 103,500 US West Communications Group...................................... 3,389,625
-----------
57,886,303
-----------
Total Common Stocks & Warrants (Cost $141,068,257)........... 159,681,482
-----------
Convertible Preferred Stocks .2%
Telecommunications
US 9,400 cPhilippine Long Distance Telephone, 5.75%, cvt. pfd., Series II
(Cost $238,000) .................................................. 279,650
--------
Face
Amount
--------
Bonds 1.0%
Electric & Gas Utilities .6%
GB 333,000 National Power Co., Plc., cvt. sub. notes, 6.25%, 09/23/08 ....... 632,077
US 400,000 New York State Electric & Gas Corp., first mortgage, 9.875%, 05/01/20 444,975
--------
1,077,052
----------
Telecommunications .4%
IT 725,000,000 Softe, SA, cvt. co. guaranteed, 4.25%, 07/30/98 .................. 687,454
--------
Total Bonds (Cost $1,500,701)..................................... 1,764,506
-----------
Total Long Term Investments (Cost $142,806,958)................... 161,725,638
------------
dReceivables from Repurchase Agreements 5.6%
US $ 9,576,356 Joint Repurchase Agreement, 5.326%, 05/01/96,
(Maturity Value $9,610,690) (Cost $9,609,268)
Bear Stearns & Co., Inc., (Maturity Value $1,925,754)
Collateral: U.S. Treasury Notes, 5.625% - 8.75%, 04/30/97 - 10/31/00
B.T. Securities Corp., (Maturity Value $1,925,754)
Collateral: U.S. Treasury Notes, 6.125% - 7.25%, 11/30/96 - 05/15/98
Donaldson, Lufkin & Jenrette Securities Corp.,
(Maturity Value $1,925,754)
Collateral: U.S. Treasury Notes, 5.625% - 8.875%, 02/28/97 - 11/15/99
Fuji Securities, Inc., (Maturity Value $1,925,754)
Collateral: U.S. Treasury Bills, 09/26/96 - 01/09/97
U.S. Treasury Notes, 6.25% - 9.125%, 05/15/99 - 08/31/00
SBC Capital Markets, Inc., (Maturity Value $1,907,674)
Collateral: U.S. Treasury Notes, 6.875% - 8.25%, 07/15/98 - 07/31/99. $9,609,268
------------
Total Investments (Cost $152,416,226) 100.8%....................... 171,334,906
Liabilities in Excess of Other Assets ( .8)%....................... (1,383,399)
--------------
Net Assets 100.0%.................................................. $169,951,507
=============
At April 30, 1996, the net unrealized appreciation based on the cost of
investments for income tax purposes of $152,418,044 was as follows:
Aggregate gross unrealized appreciation for all investments in which
there was an excess of value over tax cost...........................$ 23,455,032
Aggregate gross unrealized depreciation for all investments in which
there was an excess of tax cost over value........................... (4,538,170)
-------------
Net unrealized appreciation....................................... $ 18,916,862
=============
</TABLE>
PORTFOLIO ABBREVIATIONS:
L.L.C. - Limited Liability Corp.
COUNTRY LEGEND:
AT - Austria
AU - Australia
BE - Belgium
CH - Switzerland
DD - Germany
DK - Denmark
FR - France
GB - United Kingdom
GR - Greece
HK - Hong Kong
IT - Italy
JP - Japan
KR - South Korea
MX - Mexico
NO - Norway
NZ - New Zealand
US - United States
*Securities are traded in currency of country indicated. Face amount of
bonds is stated in the currency of country indicated. Value is stated in
U.S. dollars.
aNon-income producing.
cPurchased in a private placement transaction; resale may only be to qualified
institutional buyers.
dFace amount for repurchase agreements is for the underlying collateral.
See Note 1(h) regarding joint repurchase agreement.
FRANKLIN STRATEGIC SERIES
<TABLE>
<CAPTION>
Statement of Investments in Securities and Net Assets, April 30, 1996
Value
Shares Franklin Small Cap Growth Fund (Note 1)
- ---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Common Stocks 85.4%
Commercial Services 1.2%
25,000 aLabor Ready, Inc. ............................................................. $ 650,000
8,700 aOutdoor Systems, Inc. ......................................................... 200,100
81,000 aRobert Half International, Inc. ............................................... 4,657,500
----------
5,507,600
----------
Consumer Durables 4.5%
135,000 aAldila, Inc. .................................................................. 708,750
197,200 Anthony Industries, Inc. ...................................................... 5,620,200
178,000 aBelmont Homes, Inc. ........................................................... 4,027,250
185,000 Callaway Golf Co. ............................................................. 4,948,750
50,000 aMorrow Snowboards, Inc. ....................................................... 512,500
29,200 a,bNVR, Inc. ..................................................................... 295,650
284,000 aSouthern Energy Homes, Inc. ................................................... 5,005,500
------------
21,118,600
-----------
Consumer Non-Durables 2.2%
67,800 aScholastic Corp. .............................................................. 4,440,900
127,900 aTommy Hilfiger Corp. .......................................................... 5,819,450
----------
10,260,350
------------
Consumer Services 2.9%
419,600 aAztar Corp. ................................................................... 4,091,100
50,000 aGillett Holdings, Inc. ........................................................ 1,300,000
200,000 aPrime Hospitality Corp. ....................................................... 3,025,000
224,600 aRed Lion Hotels, Inc. ......................................................... 4,941,200
----------
13,357,300
-----------
Electronic Technology 13.6%
59,000 aAspect Telecommunications Corp. ............................................... 3,392,500
75,000 aCabletron Systems, Inc. ....................................................... 5,653,125
164,900 aCognex Corp. .................................................................. 4,411,075
130,000 ECI Telecommunications, Ltd. .................................................. 3,396,250
151,000 aKomag, Inc. ................................................................... 5,058,500
150,000 aLexmark International Group, Inc. ............................................. 3,243,750
120,000 Logicon, Inc. ................................................................. 3,570,000
110,891 aMentor Graphics Corp. ......................................................... 1,774,256
119,500 aNatural Microsystems Corp. .................................................... 4,511,125
110,000 aNewbridge Networks Corp. ...................................................... 7,081,250
75,000 aShiva Corp. ................................................................... 4,481,250
150,000 aSilicon Graphics, Inc. ........................................................ 4,443,750
340,000 aSpectralink Corp. ............................................................. 3,187,500
230,000 aTekelec........................................................................ $ 3,220,000
180,000 aTracor, Inc. .................................................................. 3,397,500
49,000 aVeriFone, Inc. ................................................................ 2,058,000
59,500 aVisioneer, Inc. ............................................................... 892,500
--------
63,772,331
----------
Energy/Minerals 4.3%
615,000 a,eAbacan Resource Corp. (Canada)................................................. 3,364,600
165,000 aBarrett Resources Corp. ....................................................... 4,578,750
495,000 aCairn Energy USA, Inc. ........................................................ 6,125,625
555,000 aGlobal Marine, Inc. ........................................................... 6,313,125
---------
20,382,100
------------
Finance 4.9%
200,000 aACMAT Corp., Class A........................................................... 2,475,000
250,000 aAmeriCredit Corp. ............................................................. 3,593,750
190,400 aChartwell Re Corp. ............................................................ 4,153,100
71,100 aContiFinancial Corp. .......................................................... 2,266,313
36,400 Leucadia National Corp. ....................................................... 946,400
241,900 aRisk Capital Holdings, Inc. ................................................... 4,807,763
110,000 aSilicon Valley Bancshares...................................................... 2,557,500
50,000 The PMI Group, Inc. ........................................................... 2,125,000
----------
22,924,826
-----------
Health Services 6.1%
78,050 aAccess Health, Inc. ........................................................... 4,322,019
210,000 aAdvocat, Inc. ................................................................. 2,178,750
75,000 aCommunity Health Systems, Inc. ................................................ 3,253,125
51,000 aMedic Computer Systems, Inc. .................................................. 4,768,500
223,400 aSierra Health Services, Inc. .................................................. 7,372,200
275,000 aTransition Systems, Inc. ...................................................... 6,668,750
----------
28,563,344
----------
Health Technology 3.1%
215,000 Mentor Corp. .................................................................. 5,079,375
378,200 aNoven Pharmaceutical, Inc. .................................................... 4,632,950
76,000 aPenederm, Inc. ................................................................ 1,292,000
130,300 aPharmacopeia, Inc. ............................................................ 3,501,813
----------
14,506,138
----------
Industrial Services 2.7%
212,000 aAES Corp. ..................................................................... $ 4,823,000
50,000 aGlenayre Technologies, Inc. ................................................... 2,325,000
195,700 aWaters Corp. .................................................................. 5,455,138
----------
12,603,138
----------
Producer/Manufacturing 6.9%
77,900 aAtchison Casting Corp. ........................................................ 1,100,338
22,100 Butler Manufacturing Co. ...................................................... 812,175
261,000 aCasTech Aluminum Group, Inc. .................................................. 3,817,125
273,700 aCentury Aluminum Co. .......................................................... 4,037,075
430,000 Easco, Inc. ................................................................... 3,762,500
120,000 aGentex Corp. .................................................................. 4,740,000
150,000 Pittston Brink's Group......................................................... 4,181,250
79,300 Roper Industries, Inc. ........................................................ 3,687,450
152,600 aUCAR International, Inc. ...................................................... 6,256,600
----------
32,394,513
----------
Real Estate Investment Trust 3.5%
345,000 Equity Inns, Inc. ............................................................. 4,096,875
175,300 FelCor Suite Hotels, Inc. ..................................................... 5,105,613
150,000 OMEGA Healthcare Investors, Inc. .............................................. 4,200,000
265,500 Winston Hotels, Inc. .......................................................... 3,119,625
---------
16,522,113
----------
Retail 1.1%
125,000 aBorders Group, Inc. ........................................................... 4,000,000
252,800 aStrouds, Inc. ................................................................. 1,137,600
----------
5,137,600
---------
Semiconductors/Equipment 9.2%
70,000 aAdaptec, Inc. ................................................................. 4,025,000
80,000 aAltera Corp. .................................................................. 4,220,000
8,400 aBerg Electronics Corp. ........................................................ 223,650
100,000 aElectro Scientific Industries, Inc. ........................................... 2,400,000
200,000 aExar Corp. .................................................................... 3,300,000
130,000 aLattice Semiconductor Corp. ................................................... 4,257,500
250,000 Linear Technology Corp. ....................................................... 8,593,750
406,000 aMicro Linear Corp. ............................................................ 4,821,250
139,500 aUniphase Corp. ................................................................ 7,358,625
105,000 aXilinx, Inc. .................................................................. 3,871,875
---------
43,071,650
----------
Technology Services 11.8%
228,800 aAcclaim Entertainment, Inc. ................................................... $ 2,345,200
71,000 aAffiliated Computer Services, Inc. ............................................ 3,381,375
50,400 aBusiness Objects, SA, ADR...................................................... 4,359,600
220,000 aFractal Design Corp. .......................................................... 2,805,000
95,400 aFulcrum Technologies, Inc. .................................................... 3,434,400
105,600 aIDT Corp. ..................................................................... 990,000
108,000 aIntegrated Systems, Inc. ...................................................... 3,159,000
240,000 aMapInfo Corp. ................................................................. 3,210,000
200,000 aMercury Interactive Corp. ..................................................... 2,750,000
8,600 aMetaTools, Inc. ............................................................... 240,800
10,500 aPlanning Sciences International, Plc., ADR..................................... 253,313
71,200 aScopus Technology, Inc. ....................................................... 1,388,400
255,000 aSoftware Artistry, Inc. ....................................................... 1,848,750
100,000 aSterling Software, Inc. ....................................................... 7,775,000
280,000 aSymantec Corp. ................................................................ 4,515,000
190,000 aSynopsys, Inc. ................................................................ 7,837,500
182,000 aSystemsoft Corp. .............................................................. 5,073,25
---------
55,366,588
----------
Transportation 4.6%
249,000 Air Express International Corp. ............................................... 6,972,000
175,000 Expeditors International of Washington, Inc. .................................. 5,206,250
260,000 Harper Group, Inc. ............................................................ 5,037,500
166,000 aLandstar System, Inc. ......................................................... 4,565,000
----------
21,780,750
-----------
Utilities/Communication 2.8%
140,000 aBell Cablemedia, Plc........................................................... 2,380,000
25,000 aCellular Communications, Inc. ................................................. 1,310,938
150,000 aComnet Cellular, Inc. ......................................................... 4,950,000
26,400 aIntelCom Group, Inc. .......................................................... 531,300
105,200 aRural Cellular Corp. .......................................................... 1,288,700
90,000 aSilver King Communications, Inc. .............................................. 2,632,500
----------
13,093,438
-----------
Total Common Stocks (Cost $343,714,154)........................................ 400,362,379
-----------
Convertible Bonds 2.2%...........................................................
Industrial
$ 1,400,000 Mercury Air Group, Inc., sub. deb., 7.75%, 02/01/06 ........................... $ 1,603,000
4,500,000 cQuantum Corp., sub. notes, 5.00%, 03/01/03..................................... 4,995,000
3,400,000 cUS Diagnostic Labs, Inc., sub. deb., 9.00%, 03/31/03 .......................... 3,570,000
----------
Total Convertible Bonds (Cost $9,300,000)...................................... 10,168,000
----------
Total Long Term Investments (Cost $353,014,154)................................ 410,530,379
-----------
dReceivables from Repurchase Agreements 14.4%
67,423,363 Joint Repurchase Agreement, 5.326%, 05/01/96 (Maturity Value $67,662,668)
(Cost $67,652,659)
Bear Stearns & Co., Inc., (Maturity Value $13,557,992)
Collateral: U.S. Treasury Notes, 5.625% - 8.75%, 04/30/97 - 10/31/00
B.T. Securities Corp., (Maturity Value $13,557,992)
Collateral: U.S. Treasury Notes, 6.125% - 7.25%, 11/30/96 - 05/15/98
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $13,557,992)
Collateral: U.S. Treasury Notes, 5.625% - 8.875%, 02/28/97 - 11/15/99
Fuji Securities, Inc., (Maturity Value $13,557,992)
Collateral: U.S. Treasury Bills, 09/26/96 - 01/09/97
U.S. Treasury Notes, 6.25% - 9.125%, 05/15/99 - 08/31/00
SBC Capital Markets, Inc., (Maturity Value $13,430,700)
Collateral: U.S. Treasury Notes, 6.875% - 8.25%, 07/15/98 - 07/31/99 ......... 67,652,659
----------
Total Investments (Cost $420,666,813) 102.0%.................................. 478,183,038
Liabilities in Excess of Other Assets (2.0)%.................................. (9,169,079)
----------
Net Assets 100.0%............................................................. $469,013,959
=============
At April 30, 1996, the net unrealized appreciation based on the cost of investments
for income tax purposes of $420,980,801 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was
an excess of value over tax cost.............................................. $ 68,293,302
Aggregate gross unrealized depreciation for all investments in which there was
an excess of tax cost over value.............................................. (11,091,065)
-------------
Net unrealized appreciation.................................................... $ 57,202,237
=============
</TABLE>
aNon-income producing.
bSee Note 7 regarding restricted securities.
cPurchased in a private placement transaction; resale may only be to qualified
institutional buyers.
dFace amount for repurchase agreements is for the underlying collateral.
See Note 1(h) regarding joint repurchase agreement.
eSecurities traded in foreign currency and valued in U.S.dollars.
FRANKLIN STRATEGIC SERIES
<TABLE>
<CAPTION>
Statement of Investments in Securities and Net Assets, April 30, 1996
Value
Country* Shares Franklin Global Health Care Fund (Note 1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks 83.1%
Biotechnology 4.9%
GB 20,000 aBritish Bio-Technology Group........................................ $ 881,276
US 50,000 aCytoTherapeutics, Inc. ............................................. 737,500
US 10,000 aMyriad Genetics, Inc. .............................................. 329,375
US 100,000 aNabi, Inc. ......................................................... 1,231,250
US 30,000 aPharmacopeia, Inc. ................................................. 806,250
US 52,000 aSerologicals Corp. ................................................. 1,339,000
----------
5,324,65
----------
Hospitals 4.1%
US 35,000 Columbia/HCA Healthcare Corp. ...................................... 1,859,375
US 44,000 aCommunity Health Systems, Inc. ..................................... 1,908,500
US 35,000 aOwen Healthcare, Inc. .............................................. 735,000
--------
4,502,875
----------
Managed Care/HMOs 10.7%
US 60,000 aHealthSource, Inc. ................................................. 2,047,500
US 50,000 aHealth Systems International, Inc., Class A......................... 1,543,750
US 40,000 aOxford Health Plans, Inc. .......................................... 2,020,000
US 25,000 aPacifiCare Health Systems, Inc., Class B............................ 2,096,875
US 50,000 aSierra Health Services, Inc. ....................................... 1,650,000
US 13,500 United Healthcare Corp. ............................................ 789,750
US 50,000 aValue Health, Inc. ................................................. 1,456,250
---------
11,604,125
----------
Medical Technology & Supplies 14.6%
US 14,000 aArterial Vascular Engineering, Inc. ................................ 616,000
US 40,000 Bard (C.R.), Inc. .................................................. 1,460,000
US 25,000 aBoston Scientific Corp. ............................................ 1,078,125
US 50,000 aCardioThoracic Systems, Inc. ....................................... 1,181,250
AU 225,000 Cochlear, Ltd. ..................................................... 548,060
US 18,300 aHeartport, Inc. .................................................... 654,225
US 94,300 aInnotech, Inc. ..................................................... 848,700
US 30,000 aIsolyser Co., Inc. ................................................. 532,500
US 100,000 Kinetic Concepts, Inc. ............................................. 1,475,000
US 50,000 aMediSense, Inc. .................................................... 2,250,000
US 60,000 Mentor Corp. ....................................................... 1,417,500
US 18,900 aOptical Sensors, Inc. .............................................. 248,063
US 75,000 aPhysiometrix, Inc. ................................................. 918,750
US 110,000 aTechnical Chemicals and Products, Inc. ............................. 1,691,250
US 65,000 aVentritex, Inc. .................................................... 1,019,688
----------
15,939,111
----------
Miscellaneous 8.1%
US 100,000 aCNS, Inc. .......................................................... $ 1,975,000
US 60,000 Grupo Casa Autrey, SA de C.V., ADR.................................. 1,372,500
US 80,000 aIMPATH, Inc. ....................................................... 1,400,000
US 30,000 Loewen Group, Inc. ................................................. 896,250
US 30,000 aParexel International Corp. ........................................ 1,477,500
US 40,000 aPharmaceutical Product Development, Inc. ........................... 1,690,000
---------
8,811,250
----------
Pharmaceuticals 10.4%
SE 70,000 Astra, AB, Series B................................................. 3,090,565
CH 1,500 Ciba-Geigy, AG...................................................... 1,740,969
US 15,000 Pfizer, Inc. ....................................................... 1,033,125
CH 100 Roche Holding....................................................... 786,517
CH 1,300 Sandoz, AG-R........................................................ 1,419,838
FR 28,300 Sanofi, SA.......................................................... 2,283,716
US 17,000 Schering-Plough Corp. .............................................. 975,375
--------
11,330,105
----------
Physician Practice Management 5.0%
US 70,000 aEmCare Holdings, Inc. .............................................. 1,960,000
US 25,000 aPediatrix Medical Group, Inc. ...................................... 1,193,750
US 20,000 aPhyCor, Inc. ....................................................... 985,000
US 30,000 aPhyMatrix Corp. .................................................... 570,000
US 26,000 aRural/Metro Corp. .................................................. 770,250
--------
5,479,000
---------
Post-Acute Providers 2.4%
US 50,000 aAdvocat, Inc. ...................................................... 518,750
US 60,000 aRenal Care Group, Inc. ............................................. 2,070,000
----------
2,588,750
----------
Software/Information Systems 13.6%
US 40,000 aAccess Health, Inc. ................................................ 2,215,000
US 15,000 HBO & Co. .......................................................... 1,781,250
US 100,000 aHealth Systems Design Corp. ........................................ 1,512,500
US 50,000 aIDX Systems Corp. .................................................. 1,837,500
US 45,000 aImnet Systems, Inc. ................................................ 1,479,375
US 50,000 aLanVision Systems, Inc. ............................................ 918,750
US 50,000 aMecon, Inc. ........................................................ 1,400,000
US 10,000 aMedic Computer Systems, Inc. ....................................... 935,000
US 32,900 aPyxis Corp. ........................................................ $ 830,725
US 80,000 aTransition Systems, Inc. ........................................... 1,940,000
----------
14,850,100
----------
Specialty Pharmaceuticals 9.3%
US 30,000 Allergan, Inc. ..................................................... 1,061,250
US 75,000 aAnesta Corp. ....................................................... 956,250
US 30,000 aCygnus, Inc. ....................................................... 641,250
US 100,000 aEthical Holdings, Plc., ADR......................................... 1,000,000
US 40,000 aIntercardia, Inc. .................................................. 900,000
US 36,000 aKV Pharmaceutical Co., Class B...................................... 436,500
US 25,000 aMatrix Pharmaceutical, Inc. ........................................ 650,000
US 120,000 aNoven Pharmaceuticals, Inc. ........................................ 1,470,000
US 175,000 aPenederm, Inc. ..................................................... 2,975,000
----------
10,090,250
----------
Total Long Term Investments (Cost $72,870,451)...................... 90,520,217
----------
Face
Amount
--------
dReceivables from Repurchase Agreements 20.6%
US $22,380,143 Joint Repurchase Agreement, 5.326%, 05/01/96
(Maturity Value $22,459,704) (Cost 22,456,382)
Bear Stearns & Co., Inc., (Maturity Value $4,500,391)
Collateral: U.S. Treasury Notes, 5.625% - 8.75%, 04/30/97 - 10/31/00
B.T. Securities Corp., (Maturity Value $4,500,391)
Collateral: U.S. Treasury Notes, 6.125% - 7.25%, 11/30/96 - 05/15/98
Donaldson, Lufkin & Jenrette Securities Corp.,
(Maturity Value $4,500,391)
Collateral: U.S. Treasury Notes, 5.625% - 8.875%, 02/28/97 - 11/15/99
Fuji Securities, Inc., (Maturity Value $4,500,391)
Collateral: U.S. Treasury Bills, 09/26/96 - 01/09/97
U.S. Treasury Notes, 6.25% - 9.125%, 05/15/99 - 08/31/00
SBC Capital Markets, Inc., (Maturity Value $4,458,140)
Collateral: U.S. Treasury Notes, 6.875% - 8.25%, 07/15/98 - 07/31/99... 22,456,382
--------
Total Investments (Cost $95,326,833 103.7%.......................... 112,976,599
Liabilities in Excess of Other Assets (3.7)%......................... (4,062,209)
----------
Net Assets 100.0%.................................................... $108,914,390
=============
At April 30, 1996, the net unrealized appreciation based on the cost of
investments for income tax purposes of $95,365,354 was as follows:
Aggregate gross unrealized appreciation for all investments in which
there was an excess of value over tax cost........................... 18,452,231
Aggregate gross unrealized depreciation for all investments in which
there was an excess of tax cost over value.................... ...... (840,986)
--------
Net unrealized appreciation......................................... $ 17,611,245
=============
</TABLE>
COUNTRY LEGEND:
AU - Australia
CH - Switzerland
FR - France
GB - United Kingdom
SE - Sweden
US -United States
*Securities traded in currency of country indicated and value is in U.S.
dollars.
aNon-income producing.
dFace amount for repurchase agreements is for the underlying collateral.
See Note 1(h) regarding joint repurchase agreement.
FRANKLIN STRATEGIC SERIES
<TABLE>
<CAPTION>
Statement of Investments in Securities and Net Assets, April 30, 1996
Shares,
Warrants Value
& Rights Franklin Natural Resources Fund (Note 1)
- ---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Common Stocks, Units, Warrants & Rights 89.9%
Chemicals 10.9%
15,100 Arcadian Corp. ................................................................... $ 302,000
1,200 Avery-Dennison Corp. ............................................................. 68,400
6,200 IMC Global, Inc. ................................................................. 228,625
1,000 Loctite Corp. .................................................................... 50,500
2,100 Lubrizol Corp. ................................................................... 60,900
3,500 ePotash Corp. of Saskatchewan, Inc. (Canada) ...................................... 246,750
3,100 Praxair, Inc. .................................................................... 119,731
--------
1,076,906
----------
Environmental Control/Construction 3.4%
1,100 Armstrong World Industries, Inc. ................................................. 62,700
2,300 Browning-Ferris Industries, Inc. ................................................. 74,175
1,800 Butler Manufacturing Co. ......................................................... 66,150
4,500 aContinental Waste Industries, Inc. ............................................... 54,000
5,100 Hanson, Plc., ADR................................................................. 77,138
--------
334,163
--------
Forest Products and Paper 1.9%
1,000 aAsia Pulp & Paper Co., Ltd., ADR.................................................. 12,000
600 Bowater, Inc. .................................................................... 24,000
1,300 Champion International Corp. ..................................................... 62,725
5,500 a,c,ePortucel Industrial, SA (Portugal)................................................ 33,299
900 Willamette Industries, Inc. ...................................................... 55,350
--------
187,374
--------
Iron/Steel 4.4%
4,900 aGibraltar Steel Corp. ............................................................ 88,200
200 Huntco, Inc., Class A............................................................. 3,525
2,000 J&L Specialty Steel, Inc. ........................................................ 36,250
1,300 Nucor Corp. ...................................................................... 73,125
1,400 Pohang Iron & Steel Co., Ltd., ADR................................................ 38,500
2,100 aUCAR International, Inc. ......................................................... 86,100
5,700 Worthington Industries, Inc. ..................................................... 116,138
--------
441,838
--------
Machine - Diversified/Construction and Mining .4%
900 Harnischfeger Industries, Inc. ................................................... 36,450
--------
Metal - Diversified 3.3%
1,000 eAlcan Aluminum, Ltd. (Canada)..................................................... 31,875
1,000 Aluminum Co. of America (ALCOA)................................................... 62,375
2,100 aCastech Aluminum Group, Inc. ..................................................... 30,713
2,000 aCentury Aluminum Co. ............................................................. $ 29,500
1,800 Commonwealth Aluminum Corp. ...................................................... 28,125
2,700 Freeport-McMoran Copper & Gold, Inc., Class A..................................... 85,388
300 Phelps Dodge Corp. ............................................................... 22,050
2,000 a,cPT Tambang Timah, GDR............................................................. 34,510
--------
324,536
--------
Mining - Precious Metals 7.7%
23,000 a,eAcacia Resources, Ltd. (Australia)................................................ 57,831
4,500 Ashanti Goldfields Co. Ltd., GDR.................................................. 98,438
38,000 a,eCampbell Resources, Inc. (Canada)................................................. 47,500
19,000 a,eCampbell Resources, Inc., warrants (Canada)....................................... 9,488
1,500 aCanyon Resources Corp. ........................................................... 5,531
14,000 aCanyon Resources Corp., units .................................................... 51,625
3,699 Compania de Minas Buenaventure, SA, Class A (Peru)................................ 31,210
924 a,eCompania de Minas Buenaventure, SA, rights (Peru)................................. -
2,900 Driefontein Consolidated, Ltd., ADR............................................... 46,038
13,350 a,eGoldfields, Ltd. (Australia)...................................................... 35,141
6,700 a,eGreenstone Resources, Ltd. (Canada)............................................... 63,716
1,800 Newmont Mining Corp. ............................................................. 104,175
2,600 eRustenburg Platinum Holdings, Ltd., ADR (South Africa)............................ 51,458
6,500 Santa Fe Pacific Gold Corp. ...................................................... 96,688
6,700 eSons of Gwalia, Ltd. (Australia).................................................. 47,644
1,000 a,cStillwater Mining Co. ............................................................ 21,600
--------
768,083
--------
Oil/Gas - Domestic 12.7%
33,300 aCairn Energy USA, Inc. ........................................................... 412,088
7,600 Occidental Petroleum Corp. ....................................................... 195,700
1,700 Phillips Petroleum Co. ........................................................... 70,550
10,800 Total Petroleum (North America), Ltd. ............................................ 132,300
4,800 aUltramar Corp. ................................................................... 150,600
9,500 aUnited Meridian Corp. ............................................................ 294,500
--------
1,255,738
---------
Oil/Gas - Equipment & Services 20.9%
5,000 aCarbo Ceramics, Inc. ............................................................. 107,500
3,400 aDiamond Offshore Drilling, Inc. .................................................. 169,150
7,500 aDreco Energy Services, Ltd. ...................................................... 189,375
7,200 aENSCO International, Inc. ........................................................ 216,000
5,900 aFalcon Drilling Co., Inc. ........................................................ 158,563
52,500 aGrant Geophysical, Inc. .......................................................... $ 239,531
5,700 aSmith International, Inc. ........................................................ 169,575
14,000 a3-D Geophysical, Inc. ............................................................ 164,500
14,000 aTuboscope Vetco International Corp. .............................................. 182,000
13,700 aVarco International, Inc. ........................................................ 227,763
7,100 aWeatherford Enterra, Inc. ........................................................ 250,275
--------
2,074,23
----------
Oil/Gas - Exploration 7.8%
26,500 a,eAbacan Resource Corp. (Canada).................................................... 144,979
3,500 eAthabasca Oil Sands Trust (Canada)................................................ 33,284
3,000 aBarrett Resources Corp. .......................................................... 83,250
2,500 aBelco Oil & Gas Corp. ............................................................ 72,188
6,300 Enron Oil & Gas Co. .............................................................. 166,950
2,400 aForcenergy Gas Exploration, Inc................................................... 33,600
6,900 Noble Affiliates, Inc. ........................................................... 242,363
--------
776,614
--------
Oil/Gas - Foreign 9.7%
15,000 a,eCanadian Oil Sands Trust, warrants (Canada)....................................... 150,358
4,400 Repsol, SA, ADR................................................................... 162,800
700 eRoyal Dutch Petroleum Co., New York Shares (Netherlands).......................... 100,275
10,700 Total, SA, ADR.................................................................... 366,475
8,500 YPF, SA, ADR...................................................................... 185,938
--------
965,846
--------
Real Estate Investment Trusts 3.5%
1,100 Bay Apartment Communities, Inc. .................................................. 27,638
1,200 Equity Residential Properties Trust............................................... 38,700
3,000 FelCor Suite Hotels, Inc. ........................................................ 87,375
2,300 OMEGA Healthcare Investors, Inc. ................................................. 64,400
3,600 Storage Trust Realty.............................................................. 78,750
4,100 Winston Hotels, Inc. ............................................................. 48,175
--------
345,038
--------
Utilities 3.3%
4,500 aAES Corp. ........................................................................ 102,375
4,800 Enron Global Power & Pipelines.................................................... 118,800
1,000 New Jersey Resources Corp. ....................................................... 28,375
300 Northwest Natural Gas Co. ........................................................ $ 9,750
2,600 Pacific Enterprises............................................................... 66,950
--------
326,250
--------
Total Common Stocks, Units, Warrants & Rights (Cost $7,731,109)................... 8,913,068
---------
dReceivables from Repurchase Agreements 11.0%
$1,084,763 Joint Repurchase Agreement, 5.326%, 05/01/96 (Maturity Value $1,088,813)
(Cost $1,088,652)
Bear Stearns & Co., Inc., (Maturity Value $218,172)
Collateral: U.S. Treasury Notes, 5.625% - 8.75%, 04/30/97 - 10/31/00
B.T. Securities Corp., (Maturity Value $218,172)
Collateral: U.S. Treasury Notes, 6.125% - 7.25%, 11/30/96 - 05/15/98
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $218,172)
Collateral: U.S. Treasury Notes, 5.625% - 8.875%, 02/28/97 - 11/15/99
Fuji Securities, Inc., (Maturity Value $218,172)
Collateral: U.S. Treasury Bills, 09/26/96 - 01/09/97
U.S. Treasury Notes, 6.25% - 9.125%, 05/15/99 - 08/31/00
SBC Capital Markets, Inc., (Maturity Value $216,125)
Collateral: U.S. Treasury Notes, 6.875% - 8.25%, 07/15/98 - 07/31/99 ........... $1,088,652
----------
Total Investments (Cost $8,819,761 100.9%.............................. 10,001,720
Liabilities in Excess of Other Assets (.9)%............................ (92,852)
--------
Net Assets 100.0%...................................................... $9,908,868
=============
At April 30, 1996, the net unrealized appreciation based on the cost of
investments for income tax purposes of $8,824,664 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
was an excess of value over tax cost............................................. $1,224,857
Aggregate gross unrealized depreciation for all investments in which there
was an excess of tax cost over value............................................. (47,801)
--------
Net unrealized appreciation....................................................... $1,177,056
=============
</TABLE>
aNon-income producing.
cPurchased in a private placement transaction; resale may only be to qualified
institutional buyers.
dFace amount for repurchase agreements is for the underlying collateral.
See Note 1(h) regarding joint repurchase agreement.
eSecurities traded in foreign currency and valued in U.S. dollars.
The accompanying notes are an integral part of these financial statements.
FRANKLIN STRATEGIC SERIES
<TABLE>
<CAPTION>
Financial Statements
Statements of Assets and Liabilities
April 30, 1996
Franklin Franklin Franklin
California Strategic Global
Growth Fund Income Fund Utilities Fund
----------- ---------- --------------
<S> <C> <C> <C>
Assets:
Investments in securities:
At identified cost....................................................... $54,652,175 $12,193,719 $ 142,806,959
=========== ========== ===========
At value................................................................. 66,082,963 12,646,228 61,725,638
Receivables from repurchase agreements, at value and cost................. 14,945,696 544,922 9,609,268
Cash...................................................................... 249,239 7,839 --
Foreign currencies (Cost $339,015 and $1,321,460, respectively)........... -- 339,785 1,285,255
Receivables:
Dividends and interest................................................... 60,989 278,967 710,820
Investment securities sold............................................... -- 91,500 --
From affiliates.......................................................... -- 18,070 --
Capital shares sold...................................................... 485,331 14,000 311,876
Unamortized organization costs (Note 2)................................... 3,329 -- 3,700
Unrealized gain on forward foreign currency contracts (Note 1)............ -- 7,294 --
-------- -------- -------
Total assets......................................................... 81,827,547 13,948,605 173,646,557
----------- ---------- -----------
Liabilities:
Payables:
Investment securities purchased.......................................... 574,164 921,058 2,680,587
Capital shares repurchased............................................... -- -- 770,843
Management fees.......................................................... 40,687 -- 81,181
Distribution fees........................................................ 20,750 3,125 86,063
Shareholder servicing costs.............................................. 8,443 450 15,476
Accrued expenses and other liabilities.................................... 8,737 2,436 60,900
-------- -------- -------
Total liabilities.................................................... 652,781 927,069 3,695,050
-------- -------- ---------
Net assets, at value....................................................... $81,174,766 $13,021,536 $169,951,507
=========== ========== ==========
Net assets consist of:
Undistributed net investment income....................................... $ 192,438 $ 59,325 $ 1,473,140
Unrealized appreciation on investments and translation of assetsand liabilities
denominated in foreign currencies......................................... 11,430,788 459,755 18,886,809
Undistributed net realized gain from investments and foreign
currency transactions..................................................... 885,590 119,947 4,840,336
Class I Capital shares.................................................... 68,665,950 12,382,509 142,175,533
Class II Capital shares................................................... -- -- 2,575,689
-------- -------- ---------
Net assets, at value....................................................... $81,174,766 $13,021,536$169,951,507
======== ======== =========
Class I Shares:
Net assets, at value...................................................... $81,174,766 $13,021,536$167,224,858
======== ======== =========
Shares outstanding........................................................ 4,445,434 1,208,880 11,709,122
======== ======== =========
Net asset value per share*................................................ $18.26 $10.77 $14.28
======== ======== =========
Maximum offering price per share (100/95.5,100/95.75 and 100/95.5 of net asset value per
share, respectively)...................................................... $19.12 $11.25 $14.95
======== ======== =========
Class II Shares:
Net assets, at value...................................................... -- -- $ 2,726,649
======== ======== =========
Shares outstanding........................................................ -- -- 191,462
======== ======== =========
Net asset value per share*................................................ -- -- $14.24
======== ======== =========
Maximum offering price per share (100/99 of net asset value per share).... -- -- $14.38
======== ======== =========
*Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
Franklin Franklin Franklin
Small Cap Global Health Natural
Growth Fund Care Fund Resources Fund
--------- --------- ----------
<S> <C> <C> <C>
Assets:
Investments in securities:
At identified cost ................................................... $353,014,154$ 72,870,451 $ 7,731,109
========= ========= ==========
At value ............................................................. 410,530,379 90,520,217 8,913,068
Receivables from repurchase agreements, at value and cost ............. 67,652,659 22,456,382 1,088,652
Cash .................................................................. 4,523,307 1,027,278 --
Foreign currencies (Cost $2,116,966)................................... -- 2,114,545 --
Receivables:
Dividends and interest ............................................... 256,820 36,969 7,596
Investment securities sold ........................................... 4,953,560 524,605 101,724
Capital shares sold .................................................. 3,593,022 2,077,717 132,829
Unamortized organization costs (Note 2) ............................... 2,970 3,155 --
--------- --------- ----------
Total assets ..................................................... 491,512,717 118,760,868 10,243,869
--------- --------- ----------
Liabilities:
Payables:
Investment securities purchased ...................................... 21,946,979 9,756,161 322,890
Capital shares repurchased ........................................... 93,189 24,658 --
Management fees ...................................................... 174,238 4,339 1,440
Distribution fees .................................................... 222,564 44,700 5,390
Shareholder servicing costs .......................................... 37,000 8,809 856
Payable to Manager for organization costs (Note 2).................... -- 3,155 --
Accrued expenses and other liabilities ................................ 24,788 4,656 4,425
--------- --------- ----------
Total liabilities ................................................ 22,498,758 9,846,478 335,001
--------- --------- ----------
Net assets, at value ................................................... $469,013,959$108,914,390 $ 9,908,868
========= ========= ==========
Net assets consist of:
Undistributed net investment income ................................... $ 124,074 $ 67,625 $ 16,048
Unrealized appreciation on investments and translation of assets and liabilities
denominated in foreign currencies ..................................... 57,516,225 17,647,222 1,181,961
Undistributed net realized gain from investments and foreign
currency transactions 16,100,061 2,154,213 186,460
Class I Capital shares ................................................ 373,651,747 89,045,330 8,524,399
Class II Capital shares ............................................... 21,621,852 -- --
--------- --------- ----------
Net assets, at value ................................................... $469,013,959$108,914,390 $ 9,908,868
========= ========= ==========
Class I Shares:
Net assets, at value................................................... $444,912,090$108,914,390 $ 9,908,868
========= ========= ==========
Shares outstanding .................................................... 22,525,659 5,630,910 754,261
========= ========= ==========
Net asset value per share*............................................. $19.75 $19.34 $13.14
========= ========= ==========
Maximum offering price per share (100/95.5 of net asset value per share) $20.68 $20.25 $13.76
========= ========= ==========
Class II Shares:
Net assets, at value................................................... $ 24,101,869 -- --
========= ========= ==========
Shares outstanding .................................................... 1,225,769 -- --
========= ========= ==========
Net asset value per share*............................................. $19.66 -- --
========= ========= ==========
Maximum offering price per share (100/99 of net asset value per share). $19.86 -- --
========= ========= ==========
*Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.
Statements of Operations
for the year ended April 30, 1996
Franklin Franklin Franklin Franklin
California Strategic Global Small Cap
Growth Fund Income Fund Utilities Fund Growth Fund
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Investment income:
Dividends+............................................ $ 400,647 $ 42,914 $ 4,449,454 $ 940,536
Interest (Note 1)..................................... 445,941 771,902 560,482 1,307,833
--------- --------- --------- ---------
Total Income........................................... 846,588 814,816 5,009,936 2,248,369
--------- --------- --------- ---------
Expenses:
Management fees (Note 6).............................. 249,784 58,092 770,522 1,174,738
Distribution fees Class I (Note 6).................... 61,526 7,797 301,051 462,119
Distribution fees Class II (Note 6)................... -- -- 11,642 46,747
Shareholder servicing costs (Note 6).................. 54,195 3,208 109,182 258,766
Reports to shareholders............................... 18,411 12,719 56,182 88,970
Registration and filing fees.......................... 35,246 12,421 53,034 75,996
Professional fees..................................... 4,413 1,664 17,321 17,864
Custodian fees........................................ 2,193 2,320 18,492 15,059
Directors' fees and expenses.......................... 701 137 1,559 3,774
Amortization of organization costs (Note 2)........... 6,652 -- 3,168 3,756
Other................................................. 3,103 1,978 7,601 7,256
Management fees waived by manager..................... (154,039) (58,092) -- (56,129)
Other expenses assumed by manager..................... -- (19,030) -- --
--------- --------- --------- ---------
Total expenses......................................... 282,185 23,214 1,349,754 2,098,916
--------- --------- --------- ---------
Net investment income.................................. 564,403 791,602 3,660,182 149,453
--------- --------- --------- ---------
Realized and unrealized gain (loss) from investments and foreign currency:
Net realized gain (loss) on:
Investments........................................... 4,257,109 189,152 6,545,324 28,798,153
Foreign currency transactions......................... -- (5,039) 13,445 4,680
Net unrealized appreciation (depreciation) on:
Investments........................................... 9,813,402 338,033 16,492,558 50,744,410
Translation of assets and liabilities
denominated in foreign currency....................... -- (143) (2,043) --
--------- --------- --------- ---------
Net realized and unrealized gain from
investments and foreign currency...................... 14,070,511 522,003 23,049,284 79,547,243
--------- --------- --------- ---------
Net increase in net assets resulting from operations... $14,634,914 $1,313,605 $26,709,466 $79,696,696
========= ========= ========= =========
+Net of foreign taxes withheld of $212,524 and $8,160 for the Global Utilities Fund and the Small Cap Growth Fund,
respectively.
Franklin Franklin
Global Health Natural
Care Fund Resources Fund*
---------- -----------
<S> <C> <C>
Investment income:
Dividends+....................................................................... $ 83,578 $ 50,586
Interest (Note 1)................................................................ 325,098 21,250
---------- ----------
Total Income...................................................................... 408,676 71,836
---------- -----------
Expenses:
Management fees (Note 6)......................................................... 208,494 21,007
Distribution fees Class I (Note 6)............................................... 77,452 9,765
Shareholder servicing costs (Note 6)............................................. 43,367 3,275
Registration and filing fees..................................................... 30,249 5,295
Reports to shareholders.......................................................... 11,190 11,316
Professional fees................................................................ 3,898 7,197
Custodian fees................................................................... 3,548 328
Amortization of organization costs (Note 2)...................................... 3,240 --
Other............................................................................ 2,553 997
Directors' fees and expenses..................................................... 730 37
Management fees waived by manager................................................ (143,003) (21,007)
Other expenses assumed by manager................................................ -- (5,058)
---------- -----------
Total expenses.................................................................... 241,718 33,152
---------- -----------
Net investment income............................................................. 166,958 38,684
---------- -----------
Realized and unrealized gain (loss) from investments and foreign currency:
Net realized gain (loss) on:
Investments...................................................................... 3,444,681 220,775
Foreign currency transactions.................................................... 2,640 (540)
Net unrealized appreciation (depreciation) on:
Investments...................................................................... 17,057,784 1,181,961
Translation of assets and liabilities
denominated in foreign currency.................................................. (2,544) --
---------- -----------
Net realized and unrealized gain from investments
and foreign currency............................................................. 20,502,561 1,402,196
---------- -----------
Net increase in net assets resulting from operations.............................. $20,669,519 $1,440,880
========== ===========
*For the period June 5, 1995 (effective date) to April 30, 1996.
+Net of foreign tax withheld of $16,555 and $2,685, respectively.
Statements of Changes in Net Assets
for the years ended April 30, 1996 and 1995
Franklin California Franklin Strategic Franklin Global
Growth Fund Income Fund Utilities Fund
------------------ ------------------ --------------------
1996 1995 1996 1995* 1996 1995
-------- --------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income.......... $ 564,403 $ 123,528 $ 791,602 $ 406,443 $ 3,660,182 $ 4,243,241
Net realized gain (loss) from
investments and foreign
currency transactions......... 4,257,109 836,699 184,113 (15,782) 6,558,769 1,602,848
Net unrealized appreciation
(depreciation) on investments
and translation of assets and
liabilities denominated in
foreign currencies............ 9,813,402 1,235,649 337,890 121,865 16,490,515 (2,364,729)
-------- --------- --------- -------- ---------- ----------
Net increase in net assets
resulting from operations..... 14,634,914 2,195,876 1,313,605 512,526 26,709,466 3,481,360
Distributions to shareholders from:
Undistributed net investment
income:
Class I...................... (443,477) (64,537) (703,892) (389,899) (3,644,055) (3,707,193)
Class II..................... -- -- -- -- (21,854) --
Net realized capital gains:
Class I....................... (3,902,081) (549,224) (93,313) -- (3,009,080) (3,611,890)
Class II...................... -- -- -- -- (22,015) --
Increase (decrease) in net assets
from capital share transactions
(Note 4)...................... 57,041,143 7,616,445 5,769,430 6,613,079 30,688,563 (1,099,874)
-------- --------- --------- -------- ---------- ----------
Net increase (decrease)
in net assets................. 67,330,499 9,198,560 6,285,830 6,735,706 50,701,025 (4,937,597)
Net assets:
Beginning of year............. 13,844,267 4,645,707 6,735,706 -- 119,250,482 124,188,079
-------- --------- --------- -------- ---------- ----------
End of year................... $81,174,766 $13,844,267 $13,021,536 $6,735,706 $169,951,507 $119,250,482
======== ========= ========= ======== ========== ==========
Undistributed net investment
income included in net assets:
Beginning of year.............. $ 71,512 $ 12,521 $ 16,544 $-- $ 1,475,101 $ 939,053
======== ========= ========= ======== ========== ==========
End of year.................... $ 192,438 $ 71,512 $ 59,325 $ 16,544 $ 1,473,140 $ 1,475,101
======== ========= ========= ======== ========== ==========
*For the period May 24, 1994 (effective date) to April 30, 1995.
Franklin
Natural
Franklin Small Cap Franklin Global Resources
Growth Fund Health Care Fund Fund
------------------- ------------------- --------
1996 1995 1996 1995 1996*
---------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income....................... $ 149,453 $ 91,732 $ 166,958 $ 74,674 $ 38,684
Net realized gain from investments and foreign
currency transactions........................ 28,802,833 3,405,075 3,447,321 943,505 220,235
Net unrealized appreciation on investments and
translation of assets and liabilities denominated
in foreign currencies........................ 50,744,410 6,619,781 17,055,240 189,307 1,181,961
---------- --------- ---------- --------- --------
Net increase in net assets resulting from
operations................................... 79,696,696 10,116,588 20,669,519 1,207,486 1,440,880
Distributions to shareholders from:
Undistributed net investment income:
Class I.................................... (75,813) (50,170) (164,339) (49,631) (22,636)
Net realized capital gains:
Class I.................................... (14,723,317) (2,378,735) (1,815,988) (469,438) (33,775)
Class II................................... (189,559) -- -- -- --
Increase in net assets from capital share
transactions (Note 4)........................ 341,296,317 31,406,861 77,319,269 6,422,416 8,524,399
---------- --------- ---------- --------- --------
Net increase in net assets.............. 406,004,324 39,094,544 96,008,461 7,110,833 9,908,868
Net assets:
Beginning of Year............................ 63,009,635 23,915,091 12,905,929 5,795,096 --
---------- --------- ---------- --------- --------
End of Year.................................. $469,013,959 $63,009,635 $108,914,390 $12,905,929 $9,908,868
========== ========= ========== ========= ========
Undistributed net investment income included in net assets:
Beginning of Year........................... $ 49,242 $ 7,680 $ 31,883 $ 6,840 $ --
========== ========= ========== ========= ========
End of Year................................. $ 124,074 $ 49,242 $ 67,625 $ 31,883 $ 16,048
========== ========= ========== ========= ========
</TABLE>
*For the period June 5, 1995 (effective date) to April 30, 1996.
The accompanying notes are an integral part of these financial statements
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (the Trust) is an open-end, management investment
company (mutual fund), registered under the Investment Company Act of 1940, as
amended. The Trust currently consists of eight separate series (the Funds).
There are three separate diversified funds: Franklin Small Cap Growth Fund (the
Small Cap Growth Fund), Franklin MidCap Growth Fund (the MidCap Growth Fund) and
Franklin MidCap Securities Fund (the MidCap Securities 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 Care 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 investment objectives
of each Fund are as follows:
Capital Growth Growth and Income Total Return
- ---------------------- ---------------- ----------------
California Growth Fund Strategic Income Fund Global Utilities Fund
Small Cap Growth Fund Natural Resources Fund
Global Health Care Fund
MidCap Growth Fund
MidCap Securities Fund
On April 18, 1996, the Board of Trustees (the Board) approved the conversion of
the MidCap Growth Fund to a retail fund effective June 1, 1996, and changed its
name from the Institutional MidCap Growth Fund. No financial information is
provided for the MidCap Growth Fund as there were no public shareholders as of
April 30, 1996. The Board also approved the name change of the former MidCap
Growth Fund, which has not commenced operations since the effective date of June
15, 1993, to the MidCap Securities Fund.
The Natural Resources Fund became effective on June 5, 1995.
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 sales charge and has the same rights, except with respect to
the effect of the respective sales charges, the distribution fees borne by each
class, voting rights on matters affecting a single class and the exchange
privilege of each class.
The offering of Class II shares began May 1, 1995 and October 1, 1995 for the
Global Utilities Fund and the Small Cap Growth Fund, respectively, at which time
all previously outstanding shares became Class I shares.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
a. Security Valuation:
Portfolio securities listed on a securities exchange or on the NASDAQ for which
market quotations are readily available are valued at the last sale price or, if
there is no sale price, within the range of the most recent quoted bid and asked
prices. Other securities are valued based on a variety of factors, including
yield, risk, maturity, trade activity and recent developments related to the
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 determined by the manager. The Trust may utilize a
pricing service, bank or broker/dealer experienced in such matters to perform
any of the pricing functions, under procedures approved by the Board. Securities
for which market quotations are not available and securities restricted as to
resale, are valued in accordance with procedures established by the Board.
The value of a foreign security is determined as of the earlier of the close of
trading on the foreign exchange on which it is traded or the close of trading on
the New York Stock Exchange. 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 prices is used.
Occasionally, events which affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and the
close of the exchange and will, therefore, not be reflected in the computation
of the Fund's net asset value, unless material. If events which materially
affect the value of these foreign securities occur during such period, these
securities will be valued in accordance with procedures established by the
Board.
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 shareholders which will be sufficient to relieve the
Funds from income and excise taxes. 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.
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. 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.
A portion of the distributions received by the Funds from investments in Real
Estate Investment Trust (REIT) securities may be characterized as tax basis
return of capital (ROC) distributions, which are not recorded as dividend
income, but reduce the cost basis of the REIT securities. ROC distributions
exceeding the cost basis for the REIT security are recognized by the Funds as
capital gain.
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions. Net realized
capital gains and losses differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and foreign currency
transactions.
e. Accounting Estimates:
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the amounts of income and expense during
the reporting period. Actual results could differ from those estimates.
f. Expense Allocation:
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets. In all other
respects, expenses are charged to each Fund as incurred on a specific
identification basis.
g. Foreign Currency Translation:
The accounting records of the Funds 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 the currencies against U.S. dollars on the
valuation date. Purchases and sales of securities, income and expenses are
translated at the rate of exchange quoted on the day that the transactions are
recorded. Differences between income and expense amounts recorded and collected
or paid are recognized when reported by the custodian.
The Funds do 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.
Realized foreign exchange gains or losses arise from sales and maturities of
short-term securities, sales of foreign currencies, gains or losses realized
between the trade and settlement dates on security transactions, the difference
between the amounts of dividends, interest, and foreign withholding taxes
recorded on the Funds' books and the U.S. dollar equivalent of the amounts
actually received or paid. Net unrealized appreciation or depreciation on
translation of assets and liabilities denominated in foreign currencies arises
from changes in the value of assets and liabilities other than investments in
securities at the end of the reporting period, resulting from changes in
exchange rates.
h. Repurchase Agreements:
The Funds may enter into a joint repurchase agreement whereby their uninvested
cash balances are deposited into a joint cash account to be used to invest in
one or more repurchase agreements with government securities dealers recognized
by the Federal Reserve Board and/or member banks of the Federal Reserve System.
The value and face amount of the joint repurchase agreement are allocated to the
Funds based on their pro-rata interest.
A repurchase agreement is accounted for as a loan by the Funds to the seller,
collateralized by underlying U.S. government securities, which are delivered to
the Funds' custodian. The market value, including accrued interest, of the
initial collateralization is required to be at least 102% of the dollar amount
invested by the Funds, with the value of the underlying securities marked to
market daily to maintain coverage of at least 100%. At April 30, 1996, all
outstanding repurchase agreements held by the Funds had been entered into on
that date.
i. Forward Foreign Currency Contracts:
A forward currency contract, which is individually negotiated and privately
traded by currency traders and their customers, is a commitment to purchase or
sell a specific currency for an agreed-upon price at a future date.
The Strategic Income Fund may enter into forward contracts with the objective of
minimizing the risk to the Fund from adverse changes in the relationship between
currencies or to enhance fund value. The Fund may also enter into a forward
contract in relation to a security denominated in a foreign currency or when it
anticipates receipt in a foreign currency of dividends or interest payments in
order to "lock in" the U.S. dollar price of a security or the U.S. dollar
equivalent of such dividend or interest payments.
Any gain or loss realized from a forward currency contract is recorded as a
realized gain or loss from investments.
The Fund segregates in its custodian bank sufficient cash, cash equivalents or
readily marketable debt securities as collateral for commitments created by open
forward contracts. The Fund could be exposed to risk if counterparties to the
contracts are unable to meet the terms of their contracts or if the value of the
foreign currency changes unfavorably.
As of April 30, 1996, the Strategic Income Fund had the following forward
foreign currency contracts outstanding:
<TABLE>
<CAPTION>
Unrealized
Contracts to Buy In Exchange for Settlement Date Gain (Loss)
- --------------------------------------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
236,000 German Deutschemarks........................... U.S. $154,006 5/09/96 U.S. $ 341
928,000 German Deutschemarks........................... 611,927 5/13/96 (4,712)
140,000 German Deutschemarks........................... 92,133 5/24/96 (405)
------------ ----------
U.S. $858,066 U.S. $(4,776)
------------ ----------
Contracts to Sell
- ---------------------------------------------
928,000 German Deutschemarks........................... U.S. $ 618,906 5/13/96 U.S. $11,690
140,000 German Deutschemarks........................... 92,437 5/24/96 709
236,000 German Deutschemarks........................... 155,409 5/09/96 1,062
35,000,000 Italian Lire................................... 22,233 5/09/96 (153)
35,000,000 Italian Lire................................... 22,247 5/15/96 (110)
175,000 New Zeland Dollars............................. 118,841 5/09/96 (1,128)
------------ ----------
U.S. $1,030,073 $12,070
------------ ----------
Net unrealized appreciation.................................. U.S. $ 7,294
==========
</TABLE>
2. ORGANIZATION COSTS
The organization costs of the Funds are amortized on a straight-line basis over
a period of five years from the effective date of registration under the
Securities Act of 1933. In the event that Franklin Resources, Inc. (Resources),
which was the sole shareholder prior to the effective date of registration,
redeems its shares within the five-year period, the pro-rata share of the
then-unamortized deferred organization costs will be deducted from the
redemption price paid to Resources. New investors purchasing shares of the Trust
subsequent to that date bear such costs during the amortization period only as
such charges are accrued daily against investment income. Franklin Advisers,
Inc. (Advisers), the Funds' investment manager, advanced the organization costs
of the California Growth Fund, the Global Utilities Fund, the Small Cap Growth
Fund, and the Global Health Care Fund in the amount of $28,830, $5,612, $12,049,
and $16,816, respectively. In an effort to minimize the Fund's expenses,
Advisers agreed in advance to waive repayment of a portion of the current
period's amortization of the California Growth Fund, the Small Cap Growth Fund,
and the Global Health Care Fund, aggregating $9,169.
3. NET REALIZED CAPITAL GAINS - TAX BASIS
At April 30, 1996, for tax purposes, the Funds had accumulated net realized
gains as follows:
<TABLE>
<CAPTION>
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
-------- -------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Accumulated net realized gains. $885,590 $100,521 $4,828,710 $16,409,369 $2,190,094 $191,903
======== ======== ======== ========= ======== =======
</TABLE>
For tax purposes, the aggregate cost of securities is higher (and unrealized
appreciation is lower) than for financial reporting purposes at April 30, 1996
by $1,818 in the Global Utilities Fund, $313,988 in the Small Cap Growth Fund,
$38,521 in the Global Health Care Fund, and $4,903 in the Natural Resources
Fund.
4. TRUST SHARES
At April 30, 1996, there was an unlimited number of $.01 par value shares of
beneficial interest authorized. Transactions in each of the Funds' shares for
the years ended April 30, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Franklin California Franklin Strategic Franklin Global
Growth Fund Income Fund* Utilities Fund
------------------- ---------------- --------------------
Shares Amount Shares Amount Shares Amount
-------- ---------- ------ -------- -------- ----------
Class I Shares:
1996
<S> <C> <C> <C> <C> <C> <C>
Shares sold ..................... 4,272,379 $70,851,741 570,808 $6,028,449 2,718,701 $35,864,485
Shares issued in connection
with merger (Note 9)............. __ __ __ __ 3,060,799 43,004,229
Shares issued in reinvestment
of distributions ............... 252,332 3,941,173 69,168 724,303 441,472 5,734,067
Shares redeemed ................. (1,065,789) (17,751,771) (92,840) (983,322) (4,264,622) (56,489,807)
-------- ---------- ------ -------- -------- ----------
Net increase .................... 3,458,922 $57,041,143 547,136 $5,769,430 1,956,350 $28,112,974
======== ========== ====== ======== ======== ==========
1995
Shares sold...................... 695,745 $ 8,910,531 643,207 $6,433,123 2,408,396 $29,088,366
Shares issued in reinvestment
of distributions................. 49,674 577,174 37,975 374,342 525,655 6,120,700
Shares redeemed.................. (144,449) (1,871,260) (19,438) (194,386) (3,040,323) (36,308,940)
-------- ---------- ------ -------- -------- ----------
Net increase (decrease) ......... 600,970 $ 7,616,445 661,744 $6,613,079 (106,272) $ (1,099,874)
======== ========== ====== ======== ======== ==========
Class II Shares:
1996
<S> <C> <C>
Shares sold ..................... 213,747 $ 2,887,409
Shares issued in reinvestment
of distributions ................ 2,918 39,000
Shares redeemed ................. (25,211) (350,820)
-------- ----------
Net increase..................... 191,454 $ 2,575,589
======== ==========
*For the year ended April 30, 1996 and the period May 24, 1994 (effective date)
to April 30, 1995.
Franklin Small Cap Franklin Global
Growth Fund Health Care Fund
--------------------- -------------------
Shares Amount Shares Amount
--------- ----------- -------- ----------
Class I Shares:
1996
<S> <C> <C> <C> <C>
Shares sold ............................................ 24,446,021 $427,099,162 5,717,773 $97,079,874
Shares issued in reinvestment of distributions ......... 777,839 12,787,321 122,615 1,774,376
Shares redeemed ........................................ (6,926,491) (120,212,018) (1,336,633) (21,534,981)
--------- ----------- -------- ----------
Net increase ........................................... 18,297,369 $319,674,465 4,503,755 $77,319,269
========= =========== ======== ==========
1995
Shares sold............................................. 4,351,300 $ 57,529,483 1,033,299 $11,681,548
Shares issued in reinvestment of distributions.......... 165,206 1,980,868 43,569 460,121
Shares redeemed......................................... (2,163,322) (28,103,490) (505,427) (5,719,253)
--------- ----------- -------- ----------
Net increase............................................ 2,353,184 $ 31,406,861 571,441 $ 6,422,416
========= =========== ======== ==========
Class II Shares:
October 1, 1995 to April 30, 1996
Shares sold ............................................ 1,260,870 $ 22,241,934
Shares issued in reinvestment of distributions.......... 9,174 151,637
Shares redeemed ........................................ (44,275) (771,719)
--------- -----------
Net increase............................................ 1,225,769 $ 21,621,852
========= ===========
Franklin Natural
Resources Fund
------------------
Shares Amount
-------- ----------
Class I Shares:
June 5, 1995 to April 30, 1996
Shares sold ............................................ 1,022,068 $11,561,802
Shares issued in reinvestment of distributions ......... 4,873 51,414
Shares redeemed ........................................ (272,680) (3,088,817)
-------- ----------
Net increase ........................................... 754,261 $ 8,524,399
======== ==========
5. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the year ended April 30, 1996, were as follows:
Franklin
Franklin Franklin Franklin Franklin Franklin Natural
California Strategic Global Small Cap Global Health Resources
Growth Fund Income FundUtilities Fund Growth Fund Care Fund Fund*
--------- --------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Purchases......................... $61,254,408 $12,190,152 $61,029,964 $449,131,237 $74,991,738 $9,319,390
Sales ............................ $20,761,915 $ 6,043,427 $78,686,054 $175,178,417 $16,386,560 $1,807,651
*For the period June 5, 1995 (effective date) to April 30, 1996
</TABLE>
6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
a. Management Agreement
Under the terms of a management agreement, Advisers provides investment advice,
administrative services, office spaces and facilities to each Fund, and receives
fees computed monthly based on the average daily net assets of each Fund as
follows:
Annualized Fee Rate Average Daily Net Assets
- ------------- ---------------------------------
0.625% First $100 million
0.50% Over $100 million up to and including $250 million
0.45% Over $250 million up to and including $10 billion
Fee are further reduced on net assets over $10 billion.
Under a subadvisory agreement with Advisers, Templeton Investment Council, Inc.
(TICI or the Subadviser) provides services to the Strategic Income Fund, and
receives from Advisers fees computed monthly based on the average daily net
assets as follows:
Annualized Fee Rate Average Daily Net Assets
- ------------- ---------------------------------
0.3125% First $100 million
0.25% Over $100 million up to and including $250 million
0.225% Over $250 million up to and including $10 billion
The terms of the management agreement provide that aggregate annual expenses of
each Fund 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 each Fund's shares are registered. For the year ended April 30, 1996,
the Funds expenses did not exceed these limitations. However, Advisers agreed in
advance to waive the management fees and assume payments of certain other
expenses, including waiver of repayment of organization cost advances, for the
California Growth Fund, the Strategic Income Fund, the Small Cap Growth Fund,
the Global Health Care Fund, and the Natural Resources Fund, aggregating
$456,358, in an effort to minimize the Funds' expenses.
b. Shareholder Services Agreement
Under the terms of a shareholder services agreement with Franklin/Templeton
Investor Services, Inc., (Investor Services) the Trust pays costs on a per
shareholder account basis. Shareholder servicing costs incurred by the Funds for
the year ended April 30, 1996, aggregated $471,993 of which $469,255 was paid to
Investor Services.
In connection with the acquisition of Templeton Global Utilities, Inc. (Note 9),
a temporary redemption fee of 1% of the net asset value of the Global Utilities
Fund Class I shares issued in the transaction has been imposed. Redemption fees
received by the Fund aggregated $31,578, which was offset against the
shareholder servicing costs.
c. Distribution Plans and Underwriting Agreement
Under the terms of distribution plans pursuant to Rule 12b-1 of the Investment
Company Act of 1940 (the Plans), the California Growth Fund, the Strategic
Income Fund, and the Global Health Care Fund reimburse Franklin/Templeton
Distributors, Inc. (Distributors) in an amount up to .25% per annum of the
Fund's average daily net assets, while the Natural Resources Fund will reimburse
Distributors up to .35% per annum of the Fund's average daily net assets, for
costs incurred in the promotion, offering and marketing of the Funds' shares.
The Global Utilities Fund and the Small Cap Growth Fund will reimburse
Distributors in an amount up to a maximum of .25% and 1% per annum for Class I
and II, respectively, of the average daily net assets of such class, for costs
incurred in the promotion, offering and marketing of the Funds' shares. The
Plans do not permit nor require payments of excess costs after termination. Fees
incurred by the Funds under the Plans aggregated $978,099 for the year ended
April 30, 1996.
In its capacity as underwriter for the shares of the Funds, Distributors
receives commissions on sales of the Funds' shares of beneficial interest.
Commissions are deducted from the gross proceeds received from the sale of the
shares of the Funds, and as such are not expenses of the Funds. Distributors may
also make payments, out of its own resources, to the dealers for certain sales
of the Fund's shares. Commissions received by Distributors, the amounts paid to
other dealers, and any applicable contingent deferred sales charges for the year
ended April 30, 1996, were as follows:
<TABLE>
<CAPTION>
Franklin
Franklin Franklin Franklin Franklin Franklin Natural
California Strategic Global Small Cap Global Health Resources
Growth Fund Income FundUtilities Fund Growth Fund Care Fund Fund
--------- --------- -------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Total commissions received....... $1,154,089 $86,370 $372,208 $5,378,559 $1,317,176 $136,529
Paid to other dealers............ $1,113,942 $91,309 $375,212 $5,280,164 $1,253,600 $134,071
Contingent deferred
sales charges................... -- $ 399 $ 376 $ 11,535 -- --
</TABLE>
d. Other Affiliated Parties and Transactions:
Certain officers and trustees of the Funds are also officers and/or directors of
Distributors, Advisers and Investors Services, all wholly-owned subsidiaries of
Resources.
At April 30, 1996, Resources owned 49% of the Strategic Income Fund and 13% of
the Natural Resources Fund.
7. RESTRICTED SECURITIES
A restricted security is a security which has not been registered with the
Securities and Exchange Commission pursuant to the Securities Act of 1933. The
Funds 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 Funds value these restricted
securities as disclosed in Note 1(a). At April 30, 1996, the California Growth
Fund and the Small Cap Growth Fund held the following restricted securities,
respectively:
<TABLE>
<CAPTION>
Acquisition
Shares Security Date Cost Value
----- -------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
486 Lynx Therapeutics, Inc.............................................10/19/92 $ 328 $ --
29,200 NVR, Inc...........................................................01/05/94 $272,555 $295,650
</TABLE>
8. LOANS OF PORTFOLIO SECURITIES
During the year ended April 30, 1996, the California Growth Fund and the Small
Cap Growth Fund loaned securities to certain brokers for which they received
cash collateral against the loaned securities in an amount equal to at least
102% of the market value of the loaned securities The cash collateral received
is invested by the Funds in short-term instruments and any interest income in
excess of a predetermined rebate to the brokers is kept by the Funds as interest
income. Interest income from this source amounted to $8,197 for the California
Growth Fund and $69,550 for the Small Cap Growth Fund for the year ended April
30, 1996.
At April 30, 1996, there were no loaned securities in the California Growth Fund
and the Small Cap Growth Fund.
9. ACQUISITION OF TEMPLETON GLOBAL UTILITIES, INC.
On March 29, 1996, Franklin Global Utilities Fund acquired all of the net assets
of Templeton Global Utilities, Inc. pursuant to a plan of reorganization
approved by the shareholders of Templeton Global Utilities, Inc. on February 20,
1996.
The acquisition was accomplished by a tax-free exchange of Franklin Global
Utilities Fund Class I shares for all the net assets of Templeton Global
Utilities, Inc. which is accounted for as a pooling-of-interests without
restatement for financial reporting purposes.
The selected financial information and shares outstanding for the funds,
immediately before and after the acquisition were as follows:
<TABLE>
<CAPTION>
Net Assets
Value Shares Exchange
Net Assets Per Share Outstanding Ratio
---------- ------- -------- --------
<S> <C> <C> <C> <C>
Templeton Global Utilities, Inc. ......................... $ 43,004,229 $13.64 3,153,664 0.97055337
Franklin Global Utilities Fund Class I ................... $127,733,178 $14.05 9,091,186
Combined.................................................. $170,737,407 $14.05 12,151,985
</TABLE>
The undistributed net investment income, accumulated net realized gain and the
unrealized appreciation on investments for Franklin Global Utilities Fund before
the acquisition were $888,768, $4,214,505 and $9,595,151, respectively. The
unrealized appreciation on investments for Templeton Global Utilities Fund
before the acquisition was $7,807,292.
10. SUBSEQUENT EVENTS
On May 14, 1996, the Board declared distributions per share as follows:
<TABLE>
<CAPTION>
From Net
Investment
Record Date Payment Date Income
--------- --------- -------
<S> <C> <C> <C>
Franklin California Growth Fund.......................................... 6/13/96 6/28/96 .059
Franklin Strategic Income Fund........................................... 5/31/96 6/14/96 .067
Franklin Global Utilities Fund:
Class I................................................................. 6/13/96 6/28/96 .215
Class II................................................................ 6/13/96 6/28/96 .1838
Franklin Global Health Care Fund......................................... 6/13/96 6/28/96 .021
</TABLE>
11. FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout the
period by Fund are as follows:
<TABLE>
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data
--------------------------------------------- ------------------------------
Net Net Total Distri- Distri- Ratio of Net
Asset Realized & From butions butions Net Net Ratio of Investment
Value at Net Unrealized Invest- From Net From Asset Assets Expenses Income to Average
Begin- Invest- Gain ment Invest- Realized Total Value at at End to Aver- Average Portfolio Com-
Year ning of ment (Loss)on Oper- ment Capital Distri- End of Total of Period age Net Net Assets Turnover mission
Ended Period IncomeSecurities ations Income Gains butions Period Return*(in 000's)Assets***(See Note 6) Rate Rate++
- -----------------------------------------------------------------------------------------------------------------------------------
Franklin California Growth Fund
Class I Shares:
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19921 $10.04 $.07 $ (.168)$ (.098) $(.072) $-- $ (.072) $ 9.87 (1.77)%** $ 3,091 --% 1.27%** 13.73% --
1993 9.87 .12 .340 .460 (.120) -- (.120) 10.21 4.72 3,412 -- 1.23 38.28 --
1994 10.21 .14 2.425 2.565 (.145) (.580) (.725) 12.05 25.55 4,646 .09 1.16 135.12 --
1995 12.05 .16 3.043 3.203 (.124) (1.099) (1.223) 14.03 29.09 13,844 .25 1.63 79.52 --
1996 14.03 .20 6.032 6.232 (.227) (1.775) (2.002) 18.26 47.42 81,175 .71 1.42 61.82 .0536
Franklin Strategic Income Fund
Class I Shares:
19954 $10.00 $.70 $ .154 $ .854 $(.674) $-- $ (.674) $10.18 8.94% $ 6,736 .25%** 7.93%** 68.43% --
1996 10.18 .85 .670 1.520 (.823) (.107) (.930) 10.77 15.59 13,022 .25 8.53 73.95 .0514
Franklin Global Utilities Fund:
Class I Shares:
19932 10.00 .22 1.270 1.490 (.130) -- (.130) 11.36 18.08** 14,227 -- 3.89** -- --
1994 11.36 .30 1.280 1.580 (.299) (.042) (.341) 12.60 14.04 124,188 .84 2.95 16.28 --
1995 12.60 .42 (.067) .353 (.365) (.358) (.723) 12.23 3.17 119,250 1.12 3.47 16.65 --
1996 12.23 .37 2.395 2.765 (.391) (.324) (.715) 14.28 23.27 167,225 1.04 2.85 50.51 .0313
Class II Shares:
1996 12.23 .37 2.322 2.692 (.358) (.324) (.682) 14.24 22.63 2,727 1.81 2.10 50.51 .0313
Franklin Small Cap Growth Fund
Class I Shares:
19923 10.00 .04 (.460) (.420) -- -- -- 9.58 (19.96)** 1,268 -- 2.45** 2.41 --
1993 9.58 .07 .657 .727 (.087) -- (.087) 10.22 7.66 6,026 -- 0.84 63.15 --
1994 10.22 .03 2.944 2.974 (.043) (.401) (.444) 12.75 29.26 23,915 .30 0.24 89.60 --
1995 12.75 .03 3.138 3.168 (.021) (.997) (1.018) 14.90 27.05 63,010 .69 0.25 104.84 --
1996 14.90 .01 6.230 6.240 (.014) (1.376) (1.390) 19.75 44.06 444,912 .97 0.09 87.92 .0505
Class II Shares:
1996 17.94 (.03) 2.714 2.684 -- (.964) (.964) 19.66 15.98 24,102 1.76** (.69)** 87.92 .0505
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 --
1996 11.45 .11 8.955 9.065 (.124) (1.051) (1.175) 19.34 82.78 108,914 .73 .50 54.78 .0709
Franklin Natural Resources Fund
Class I Shares:
19965 10.00 .08 3.217 3.297 (.063) (.094) (.157) 13.14 33.36 9,909 .99** 1.16** 59.04 .0517
</TABLE>
1For the period October 18, 1991 (effective date) to April 30, 1992.
2For the period July 2, 1992 (effective date) to April 30, 1993.
3For the period February 14, 1992 (effective date) to April 30, 1992.
4For the period May 24, 1994 (effective date) to April 30, 1995.
5For the period June 5, 1995 (effective date) to April 30, 1996.
+For the period October 1, 1995 to April 30, 1996.
*Total return measures the change in value of an investment over the periods
indicated. It is not annualized except where indicated. It does not include the
maximum front-end sales charge or contingent deferred sales charge, and assumes
reinvestment of dividends and capital gains, if any, at net asset value. Prior
to May 1, 1994, dividends were reinvested at the maximum offering price, and
capital gains at net asset value. Effective May 1, 1994, with the implementation
of the Rule 12b-1 distribution plans for Class I shares, the sales charge on
reinvested dividends was eliminated. The total return may differ from that
reported in the Manager's Discussion due to differences between the net asset
values quoted and the net asset values calculated for financial reporting
purposes.
**Annualized.
++Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
***During the periods indicated, Advisers agreed to waive in advance a portion
or all of their management fees and made payments of other expenses incurred by
the Funds. Had such action not been taken, the ratios of operating expenses to
average net assets would have been as follows:
Ratio of expenses
to average net assets
- -------------------------------------------------------------------------------
Franklin California Growth Fund,
Class I shares
19921.............................. 1.61%**
1993............................... 1.99
1994............................... 1.89
1995............................... 1.27
1996............................... 1.09
Franklin Strategic Income Fund,
Class I shares
19954.............................. 1.38%**
1996............................... 1.08
Franklin Global Utilities Fund,
Class I shares
19932.............................. 1.51%**
1994............................... 1.28
Ratio of expenses
to average net assets
Franklin Small Cap Growth Fund,
Class I shares
19923.............................. 1.74%**
1993............................... 1.95
1994............................... 1.58
1995............................... 1.16
1996............................... 1.00
Franklin Global Health Care Fund,
Class I shares
19923.............................. 1.62%**
1993............................... 2.16
1994............................... 1.74
1995............................... 1.37
1996............................... 1.16
Franklin Natural Resources Fund,
Class I shares
19965.............................. 1.77%**
Under IRC 854(b)(2) of the Internal Revenue Code, the Funds hereby designate the
following percentages of ordinary income dividends (including short-term capital
gain distributions) paid by each Fund as income qualifying for the dividends
received deduction for the year ended April 30, 1996.
Franklin California Growth Fund................................. 7.14
Franklin Strategic Income Fund.................................. 5.25
Franklin Global Utilities Fund.................................. 53.32
Franklin Small Cap Growth Fund.................................. 1.75
Franklin Global Health Care Fund................................ 2.28
Franklin Natural Resources Fund................................. 28.81
The amounts reported above are estimated percentages and should be used for
information purposes only. Information on the final percentages that qualify for
this deduction for calendar year 1996 will be available shortly after the end of
this calendar year.
FRANKLIN STRATEGIC SERIES
Report of Independent Auditors
To the Shareholders and Board of Trustees
of Franklin Strategic Series
We have audited the accompanying statements of assets and liabilities of each of
the funds comprising the Franklin Strategic Series, including each Fund's
statement of investments in securities and net assets, as of April 30, 1996, and
the related statements of operations and of changes in net assets and the
financial highlights for each of the periods indicated thereon. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of April
30, 1996, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the funds comprising the Franklin Strategic Series as of April 30, 1996, the
results of their operations, changes in their net assets, and the financial
highlights for the periods indicated thereon, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
June 7, 1996
Franklin Strategic Series
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING
(PURSUANT TO ITEM 304 (a) OF REGULATION S-T)
GRAPHIC MATERIAL (1)
This chart shows in pie chart format the fund's portfolio breakdown on April 30,
1996 as a percentage of the fund's total net assets.
Franklin California Growth Fund
Portfolio Breakdown on April 30, 1996
Based on Total Net Assets
Technology Services 13.3%
Electronic Technology 9.0%
Semiconductors/Equipment 7.6%
Energy/Minerals 6.2%
Utilities 5.2%
Transportation 3.9%
Health Technology 4.5%
Health Services 4.4%
Consumer Durables 3.7%
Consumer Services 2.9%
Retail Trade 2.7%
Financials 2.6%
Real Estate 2.5%
Other 12.9%
Cash & Equivalents 18.6%
GRAPHIC MATERIAL (2)
The following line graph hypothetically compares the performance of Franklin
California Growth Fund to that of the S&P 500 Stock Index and the Franklin
California 250 Growth Index, based on a $10,000 investment from 10/30/91 to
4/30/96.
Period Ending Fund Index Index
10/30/91 9550 10000 10000
10/31/91 9550 10004.32 10000
11/30/91 8861 9601.145904 9185
12/31/91 9845 10699.517 10285
1/31/92 10548 10500.50598 11084
2/28/92 10683 10635.96251 11253
3/31/92 9960 10428.56124 10511
4/30/92 9517 10735.16094 10078
5/31/92 9546 10787.76323 10139
6/30/92 8953 10627.02555 9563
7/31/92 9215 11061.6709 9883
8/31/92 8808 10834.90665 9455
9/30/92 8914 10961.67505 9539
10/31/92 9341 10998.94475 10068
11/30/92 10176 11372.90887 11000
12/31/92 10386 11512.79565 11285
1/31/93 10718 11609.50313 11701
2/28/93 10279 11767.39238 11220
3/31/93 10396 12015.68435 11331
4/30/93 9966 11724.90479 10906
5/31/93 10689 12037.95975 11728
6/30/93 10694 12072.86983 11693
7/31/93 10419 12024.57836 11725
8/31/93 11117 12480.30988 12300
9/30/93 11578 12384.21149 12587
10/31/93 11735 12640.56467 12769
11/30/93 11706 12520.4793 12610
12/31/93 12211 12671.9771 12991
1/31/94 12751 13102.82432 13432
2/28/94 12917 12747.73778 13321
3/31/94 12627 12191.93642 12557
4/30/94 12513 12347.9932 12506
5/31/94 12585 12550.50029 12458
6/30/94 12218 12243.01303 11905
7/31/94 12658 12644.58386 12299
8/31/94 13493 13163.0118 13458
9/30/94 13592 12841.83431 13402
10/31/94 14053 13130.77558 13669
11/30/94 14097 12652.81535 13268
12/31/94 14230 12840.07702 13454
1/31/95 14218 13172.63502 13781
2/28/95 15208 13686.36778 14477
3/31/95 15784 14090.11563 15087
4/30/95 16152 14504.36503 15576
5/31/95 16797 15084.53963 16039
6/30/95 17927 15434.50095 17203
7/31/95 19454 15946.92638 18645
8/31/95 19895 15986.7937 19036
9/30/95 20384 16661.43639 19425
10/31/95 20420 16601.45522 18991
11/30/95 21064 17330.25911 19750
12/31/95 21008 17664.73311 19510
1/31/96 21255 18265.33403 19684
2/29/96 21973 18435.20164 20405
3/31/96 22155 18612.17957 20106
4/30/96 23824 18885.77861 22129
GRAPHIC MATERIAL (3)
This chart shows in pie chart format the fund's geographic distribution on April
30, 1996 as a percentage of the fund's total net assets.
Franklin Global Utilities Fund
Geographic Distribution on April 30, 1996
Based on Total Net Assets
United States 43.1%
Europe 20.6%
Latin America 13.4%
Asia 10.3%
United Kingdom 6.3%
Other 1.2%
Cash & Equivalents 5.1%
GRAPHIC MATERIAL (4)
The following line graph hypothetically compares the performance of Franklin
Global Utilities Fund - Class I shares to that of the S&P 500 Stock Index, based
on a $10,000 investment from 7/2/92 to 4/30/96.
Period Ending Fund Index
7/2/92 9551 10000
7/31/92 9637 10409
8/31/92 9618 10195.616
9/30/92 9580 10314.904
10/31/92 9656 10349.975
11/30/92 9809 10701.874
12/31/92 10076 10833.507
1/31/93 10260 10924.509
2/28/93 10646 11073.082
3/31/93 10908 11306.724
4/30/93 10985 11033.101
5/31/93 11111 11327.685
6/30/93 11283 11360.535
7/31/93 11509 11315.093
8/31/93 12245 11743.935
9/30/93 12372 11653.507
10/31/93 12951 11894.734
11/30/93 12461 11781.734
12/31/93 13243 11924.293
1/31/94 13462 12329.719
2/28/94 12756 11995.584
3/31/94 12358 11472.577
4/30/94 12527 11619.426
5/31/94 12527 11809.984
6/30/94 12040 11520.639
7/31/94 12579 11898.516
8/31/94 12870 12386.356
9/30/94 12683 12084.129
10/31/94 12787 12356.021
11/30/94 12299 11906.262
12/31/94 12079 12082.475
1/31/95 12343 12395.411
2/28/95 12449 12878.832
3/31/95 12586 13258.758
4/30/95 12924 13648.565
5/31/95 13653 14194.508
6/30/95 13588 14523.82
7/31/95 13859 15006.011
8/31/95 13686 15043.526
9/30/95 14336 15678.363
10/31/95 14358 15621.921
11/30/95 14835 16307.723
12/31/95 15397 16622.462
1/31/96 15687 17187.626
2/29/96 15709 17347.471
3/31/96 15675 17514.007
4/30/96 15932 17771.463
GRAPHIC MATERIAL (5)
The following line graph hypothetically compares the performance of Franklin
Global Utilities Fund - Class II shares to that of the S&P 500 Stock Index,
based on a $10,000 investment from 5/1/95 to 4/30/96.
Period Ending Fund Index
5/1/95 9902 10000
5/31/95 10504 10400
6/30/95 10449 10641.28
7/31/95 10641 10994.57
8/31/95 10507 11022.06
9/30/95 10991 11487.19
10/31/95 11008 11445.83
11/30/95 11358 11948.31
12/31/95 11825 12178.91
1/31/96 12030 12592.99
2/29/96 12039 12710.11
3/31/96 12004 12832.12
4/30/96 12094 13020.76
GRAPHIC MATERIAL (6)
This chart shows in pie chart format the fund's portfolio breakdown on April 30,
1996 as a percentage of the fund's total net assets.
Franklin Small Cap Fund
Portfolio Breakdown on April 30, 1996
Based on Total Net Assets
Electronic Technology 13.6%
Technology Services 11.8%
Semiconductors 9.2%
Producer Manufacturing 6.9%
Health Services 6.1%
Financials 4.9%
Transportation 4.6%
Consumer Durables 4.5%
Energy Minerals 4.3%
Real Estate 3.5%
Other 18.2%
Cash & Equivalents 12.4%
GRAPHIC MATERIAL (7)
The following line graph hypothetically compares the performance of Franklin
Small Cap Fund - Class I shares to that of the S&P 500 Stock Index and the
Russell 2500 Index, based on a $10,000 investment from 2/14/92 to 4/30/96.
Period Ending Fund Index Index
2/14/92 10000 10000 10000
2/29/92 10150 10129 10264
3/31/92 9860 9931.4845 9935.552
4/30/92 9580 10223.47 9737.83452
5/31/92 9540 10273.565 9826.44881
6/30/92 9307 10120.489 9484.48839
7/31/92 9468 10534.417 9839.20826
8/31/92 9327 10318.461 9580.43708
9/30/92 9347 10439.187 9743.30451
10/31/92 9820 10474.681 10035.6036
11/30/92 10625 10830.82 10695.9464
12/31/92 11111 10964.039 11070.3045
1/31/93 11414 11056.137 11335.9918
2/28/93 10404 11206.5 11177.2879
3/31/93 10899 11442.957 11595.3185
4/30/93 10314 11166.038 11264.8519
5/31/93 11282 11464.171 11716.5725
6/30/93 11237 11497.417 11838.4248
7/31/93 11237 11451.428 11914.1907
8/31/93 12188 11885.437 12441.9894
9/30/93 12643 11793.919 12675.8988
10/31/93 12876 12038.053 12828.0096
11/30/93 12937 11923.691 12416.2305
12/31/93 13530 12067.968 12901.7051
1/31/94 14063 12478.279 13309.399
2/28/94 14209 12140.118 13261.4851
3/31/94 13509 11610.809 12616.9769
4/30/94 13331 11759.427 12690.1554
5/31/94 13091 11952.281 12559.4468
6/30/94 12635 11659.451 12170.104
7/31/94 13107 12041.881 12499.9138
8/31/94 14129 12535.598 13174.9091
9/30/94 14305 12229.729 13041.8425
10/31/94 14986 12504.898 13062.7095
11/30/94 14645 12049.72 12495.7879
12/31/94 14777 12228.056 12765.6969
1/31/95 14505 12544.762 12740.1655
2/28/95 15823 13034.008 13380.9958
3/31/95 16630 13418.511 13708.8302
4/30/95 16937 13813.015 13952.8474
5/31/95 17324 14365.536 14247.2525
6/30/95 18726 14698.816 14931.1206
7/31/95 20302 15186.817 15812.0567
8/31/95 20793 15224.784 16065.0496
9/30/95 20944 15867.27 16365.4661
10/31/95 20127 15810.148 15853.227
11/30/95 20781 16504.213 16530.1598
12/31/95 21014 16822.745 16812.8255
1/31/96 20829 17394.718 16932.1966
2/29/96 21978 17556.489 17441.8557
3/31/96 22509 17725.031 17797.6695
4/30/96 24400 17985.589 18619.9219
GRAPHIC MATERIAL (8)
The following line graph hypothetically compares the performance of Franklin
Small Cap Fund - Class II shares to that of the S&P 500 Stock Index and the
Russell 2500 Index, based on a $10,000 investment from 10/2/95 to 4/30/96.
Period Ending Fund Index Index
10/2/95 9899 10000 10000
10/31/95 9636 9964 9687
11/30/95 9938 10401.4196 10100.6349
12/31/95 10050 10602.167 10273.35576
1/31/96 9961 10962.64068 10346.29658
2/29/96 10500 11064.59323 10657.72011
3/31/96 10749 11170.81333 10875.1376
4/30/96 11544 11335.02429 11377.56896
GRAPHIC MATERIAL (9)
This chart shows in pie chart format the fund's geographic distribution on April
30, 1996 as a percentage of the fund's total net assets.
Franklin Global Health Care Fund
Geographic Distribution on April 30, 1996
Based on Total Net Assets
United States 70.3%
Switzerland 3.6%
Sweden 2.8%
France 2.1%
United Kingdom 1.7%
Mexico 1.3%
Canada 0.8%
Australia 0.5%
Cash & Equivalents 16.9%
GRAPHIC MATERIAL (10)
This chart shows in pie chart format the fund's portfolio breakdown on April 30,
1996 as a percentage of the fund's total net assets.
Franklin Global Health Care Fund
Portfolio Breakdown on April 30, 1996
Based on Total Net Assets
Medical Technology & Supplies 14.6%
Software/Information Systems 13.6%
Managed Care/HMOs 10.7%
Pharmaceuticals 10.4%
Physician Practice Management 5.0%
Biotechnology 4.9%
Specialty Pharmaceuticals 9.3%
Hospitals 4.1%
Post-Acute Providers 2.4%
Other Medical Services 8.1%
Cash & Equivalents 16.9%
GRAPHIC MATERIAL (11)
The following line graph hypothetically compares the performance of Franklin
Global Health Care Fund to that of the S&P 500 Stock Index, based on a $10,000
investment from 2/14/92 to 4/30/96.
Period Ending Fund Index
2/14/92 9551 10000
2/29/92 9790 10064.5
3/31/92 9083 9868.242
4/30/92 8443 10158.37
5/31/92 8663 10208.14
6/30/92 8339 10056.04
7/31/92 8896 10467.34
8/31/92 8598 10252.76
9/30/92 8407 10372.71
10/31/92 8810 10407.98
11/30/92 9453 10761.85
12/31/92 9603 10894.22
1/31/93 9603 10985.73
2/28/93 8321 11135.14
3/31/93 8417 11370.09
4/30/93 8562 11094.93
5/31/93 8996 11391.17
6/30/93 9294 11424.2
7/31/93 8801 11378.51
8/31/93 8955 11809.75
9/30/93 9178 11718.82
10/31/93 9749 11961.4
11/30/93 10049 11847.76
12/31/93 10200 11991.12
1/31/94 11211 12398.82
2/28/94 11121 12062.81
3/31/94 10550 11536.87
4/30/94 10440 11684.54
5/31/94 10560 11876.17
6/30/94 10098 11585.2
7/31/94 10546 11965.2
8/31/94 11584 12455.77
9/30/94 11777 12151.85
10/31/94 12052 12425.27
11/30/94 11940 11972.99
12/31/94 11657 12150.19
1/31/95 11721 12464.88
2/28/95 12188 12951.01
3/31/95 12729 13333.06
4/30/95 12145 13725.06
5/31/95 12506 14274.06
6/30/95 12911 14605.22
7/31/95 14107 15090.11
8/31/95 14898 15127.83
9/30/95 15773 15766.23
10/31/95 15688 15709.47
11/30/95 16467 16399.12
12/31/95 18021 16715.62
1/31/96 19352 17283.95
2/29/96 20305 17444.69
3/31/96 21051 17612.16
4/30/96 22187 17871.06
GRAPHIC MATERIAL (12)
This chart shows in pie chart format the fund's portfolio breakdown on April 30,
1996 as a percentage of the fund's total net assets.
Franklin Strategic Income Fund
Portfolio Breakdown on April 30, 1996
Based on Total Net Assets
High-Yield Corporate Bonds 27.3%
International Bonds 26.3%
Emerging Markets Bonds 13.3%
Convertible Securities 10.8%
Mortgage Bonds 8.6%
U.S. Government Bonds 5.0%
Preferred Stock (Non-Convertible) 4.2%
Cash & Equivalents 4.5%
GRAPHIC MATERIAL (13)
The following line graph hypothetically compares the performance of Franklin
Strategic Income Fund to that of the Narrow Composite Index, Salomon Brothers
World Government Bond Index, Salomon Brothers High Yield Index, and the Lehman
Brothers Aggregate Index, based on a $10,000 investment from 6/1/94 to 4/30/96.
Period Ending Fund Index Index Index Index
6/1/94 9579 10000
6/94 9492 9978
7/94 9617 10176.5622
8/94 9761 10188.77407
9/94 9808 10038.9991
10/94 9825 10029.964
11/94 9793 10007.89808
12/94 9746 10076.95257
1/95 9753 10276.47623
2/95 10023 10521.05637
3/95 10182 10585.23481
4/95 10435 10733.4281
5/95 10731 11148.81177
6/95 10780 11230.19809
7/95 11007 11205.49166
8/95 11035 11341.07811
9/95 11180 11451.08656
10/95 11273 11599.95069
11/95 11366 11773.94995
12/95 11566 11938.78525
1/96 11771 12017.58123
2/96 11779 11808.47532
3/96 11864 11725.81599
4/96 12062 11660.15142
GRAPHIC MATERIAL (14)
This chart shows in pie chart format the fund's geographic distribution on April
30, 1996 as a percentage of the fund's total net assets.
Franklin Natural Resources Fund
Geographic Distribution on April 30, 1996
Based on Total Net Assets
United States 69.3%
Europe 7.5%
Canada 5.2%
Africa 3.4%
South America 2.2%
Australia 1.4%
Asia 0.9%
Cash & Equivalents 10.1%
GRAPHIC MATERIAL (15)
This chart shows in pie chart format the fund's portfolio breakdown on April 30,
1996 as a percentage of the fund's total net assets.
Franklin Natural Resources Fund
Portfolio Breakdown on April 30, 1996
Based on Total Net Assets
Energy 54.4%
Chemicals 10.9%
Gold & Precious Metals 7.7%
Iron/Steel 4.4%
Service/Related Industries 3.8%
REITs 3.5%
Base Metals 3.3%
Forest Products & Paper 1.9%
Cash & Equivalents 10.1%
GRAPHIC MATERIAL (16)
The following line graph hypothetically compares the performance of Franklin
Natural Resources Fund to that of the S&P 500 Stock Index, based on a $10,000
investment from 6/5/95 to 4/30/96.
Period Ending Fund Index
6/5/95 9551 10000
6/30/95 9666 10193
7/31/95 9857 10531.41
8/31/95 9895 10557.74
9/30/95 9828 11003.27
10/31/95 9446 10963.66
11/30/95 9914 11444.97
12/31/95 10575 11665.85
1/31/96 11089 12062.49
2/29/96 11196 12174.67
3/31/96 11894 12291.55
4/30/96 12737 12473.24
