Semi
Annual
October 31, 1997
Report
Franklin Strategic Series
Franklin California Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin MidCap Growth Fund
Franklin Global Health Care Fund
Franklin Biotechnology Discovery Fund
Franklin Strategic Income Fund
CELEBRATING 50 YEARS
This year marks 50 years of business for Franklin Templeton. Over these years,
the mutual fund industry has experienced profound changes in technology,
regulations and customer expectations. As one of the largest mutual fund
families, we're proud to be an innovative industry leader, providing people like
you with an opportunity to invest around the globe. We thank you for your past
support and look forward to serving your investment needs in the years ahead.
GRAPHIC PICTURE OMITTED
Rupert H. Johnson, Jr.
President
Franklin Strategic Series
CONTENTS
Shareholder Letter 1
Fund Reports
Franklin California
Growth Fund 3
Franklin Global
Utilities Fund 10
Franklin Small Cap
Growth Fund 17
Franklin Natural
Resources Fund 25
Franklin Blue Chip Fund 31
Franklin MidCap
Growth Fund 35
Franklin Global
Health Care Fund 40
Franklin Biotechnology
Discovery Fund 46
Franklin Strategic
Income Fund 50
Financial Highlights &
Statement of Investments 57
Financial Statements 110
Notes to
Financial Statements 124
SHAREHOLDER LETTER
October 31, 1997
Dear Shareholder:
We are pleased to bring you this semi-annual report for the Franklin
Strategic Series, which covers the period ended October 31, 1997.
If one word could be used to describe financial markets during the six months
under review, that word would probably be "volatile." On April 30, 1997 the Dow
Jones(R) Industrial Average (the Dow) closed at 7008.99. By July, it had pushed
through the 8000-point mark for the first time. Knowing that no securities
market can advance forever without a correction, many investors were asking,
"When will this market experience one?" The answer came on October 27th, when,
fueled by concerns about currency crises in Southeast Asia, the Dow dropped
7.18%. But the next day, the Dow surged 4.7%, gaining back almost half of its
losses. At the close of the reporting period on October 31, it stood at 7442.08
- -- 6.18% higher than its level six months earlier.
While seesawing such as this can be unsettling, it is important to remember that
securities markets always have been -- and always will be -- subject to
volatility. No one can predict exactly how they will perform. However, over the
long term, stocks and bonds have historically delivered impressive results. For
this reason, we encourage you to speak to your investment representative about
your financial goals, stay focused on the long term, and diversify your
investments. As you know, mutual funds offer a level of diversification almost
impossible for individual investors to achieve on their own.
"Regardless of the market's future direction, Franklin Templeton's disciplined
investment strategy remains the same."
Regardless of the market's future direction, Franklin Templeton's disciplined
investment strategy remains the same: all of our portfolio managers are
dedicated to providing shareholders like you with careful selection and constant
professional supervision. As always, we thank you for your support, welcome your
questions, and look forward to serving you in the years to come.
Sincerely,
Rupert H. Johnson, Jr.
President
Franklin Strategic Series
FRANKLIN CALIFORNIA GROWTH FUND
- --------------------------------------------------------------------------------
Your Fund's Objective: Franklin California Growth Fund seeks capital
appreciation through a policy of investing at least 65% of its assets in the
securities of companies either headquartered or conducting a majority of their
operations in the state of California.
- --------------------------------------------------------------------------------
During the six months ended October 31, 1997, U.S. gross domestic product (GDP)
grew at an annualized rate of about 3.3%, employment rose, and inflation
increased only 1.6%.1 California's economy also grew at a strong pace.
Approximately 200,000 jobs were created, the state's unemployment rate declined
and personal income grew at an annual rate of approximately 7%. While not all
investment opportunities are necessarily tied to the fluctuations of
California's economy, it was within this environment that Franklin California
Growth Fund - Class I provided a +23.01% six-month cumulative total return, as
shown in the Performance Summary on page 7, significantly outperforming the
Standard & Poor's 500(R) Stock Index (S&P 500(R)), which posted a +15.15% total
return during the same period.
1. Source: U.S. Dept. of Commerce report dated November 26, 1997 for the periods
April-June and July-September 1997. Percent increases are annual rates.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Contributing to the fund's strong performance was the rise in value of small-
and mid-capitalization securities. Some of these stocks, which form a
significant portion of the fund's assets, increased more than 80% between
April 30 and October 31, 1997. For example, Access Health Inc., a health
management services provider, rose 144%, and Mercury Interactive, which
markets quality assurance tools for software producers, increased 84%. The
fund also benefited from its holdings in retailer Cost Plus (+64%), Silicon
Valley Bancshares (+56%), and toy manufacturer Mattel (+40%), to name a few.2
A large number of mergers and acquisitions also helped the fund. Three
holdings were acquired at prices significantly higher than their market value
prior to acquisition. Specifically, Texaco purchased Monterey Resources, an
independent oil and gas company, at about a 30% premium; Northrup Grumman
(later acquired by Lockheed Martin) acquired the defense technology company
Logicon; and Harbinger bought out Premenos Technology just before the end
of the period.
As always, there were a few laggards in the portfolio. Computer equipment
companies Komag and Xilinx, as well as the biotechnology company Amgen,
experienced significant declines. However, in our opinion, all three companies
have strong intermediate-term growth prospects and the recent volatility
associated with these shares presented a buying opportunity.
2. All percent increases represent total returns between April 30, 1997, and
October 31, 1997, and include reinvested dividends.
Looking forward, October's turmoil in Asian stock and currency markets may
temporarily reduce this region's demand for California high-technology
products. However, we expect much of this impact to be concentrated in the
electronic technology sector, especially semiconductor equipment companies,
and the overall effect on California businesses should be relatively minor,
particularly when viewed with a long-term perspective. In fact, during the
next several months, California's gross state product (the total value of
goods and services produced in the state) should exceed $1 trillion for the
first time, while per capita income growth is forecast to rise approximately
8.0% over 1998.
As we continue to scan the investment horizon for opportunities, we find no
shortage of potential investments for the Franklin California Growth Fund.
According to Fortune magazine, 25 of the 100 fastest growing companies in the
U.S. were headquartered in California.3 California is fertile soil indeed for
investment opportunity, and we shall continue to utilize the many resources at
our command as we seek to take advantage of this fact.
3. September 19, 1997 issue.
Franklin California
Growth Fund
Top 10 Holdings on 10/31/97
Company % of Total
INDUSTRY Net Assets
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Cisco Systems, Inc 2.1%
ELECTRONIC TECHNOLOGY
Electronic Arts, Inc. 1.9%
TECHNOLOGY SERVICES
Mattel, Inc. 1.8%
CONSUMER DURABLES
Hilton Hotels Corp. 1.8%
CONSUMER SERVICES
Oracle Corp. 1.8%
TECHNOLOGY SERVICES
BankAmerica Corp. 1.8%
FINANCE
Atlantic Richfield Co. (ARCO) 1.8%
ENERGY/MINERALS
Synopsys, Inc. 1.8%
TECHNOLOGY SERVICES
Autodesk, Inc. 1.7%
TECHNOLOGY SERVICES
Remedy Corp. 1.7%
TECHNOLOGY SERVICES
For a detailed listing of portfolio holdings, please see page 67 of this report.
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.
Please remember, this discussion accurately reflects our views and opinions
as of October 31, 1997, the end of the reporting period. However, market and
economic conditions are changing constantly and our strategies and portfolio
holdings may be different at this time. Although historic performance is no
guarantee of future results, these insights may help you understand our
investment and management philosophy.
Thank you for your participation in the Franklin California Growth Fund. We
welcome any comments or suggestions you may have.
Sincerely,
Conrad B. Herrmann
Portfolio Manager
Franklin California Growth Fund
PERFORMANCE SUMMARY
Class I
Franklin California Growth Fund - Class I provided a +23.01% cumulative total
return for the six-month period ended October 31, 1997. Cumulative 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.
During the reporting period, shareholders received 7.4 cents ($0.074) per share
in income dividends. As measured by net asset value, the price of the fund's
shares increased by $4.37, from $19.35 on April 30, 1997, to $23.72 on October
31, 1997. Distributions will vary depending on income earned by the fund and any
profits realized from the sale of securities in the portfolio, as well as the
level of the fund's operating expenses.
Franklin California Growth Fund - Class I
Periods ended 10/31/97
Since
One- Five- Inception
Year Year (10/30/91)
- --------------------------------------------------------------------------------
Cumulative Total Return1 25.40% 241.30% 233.83%
Average Annual Total Return2 19.64% 26.67% 21.30%
Value of $10,000 Investment3 $11,964 $32,607 $31,882
10/31/93 10/31/94 10/31/95 10/31/96 10/31/97
- --------------------------------------------------------------------------------
One-Year Total Return4 25.63% 19.75% 45.31% 24.61% 25.40%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the maximum 4.5% initial
sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the sales charge.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
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
expense reductions by the fund's manager increased the fund's total returns.
Without this reduction, the fund's total returns would have been lower.
Class II
Franklin California Growth Fund - Class II provided a +22.48% cumulative
total return for the six-month period ended October 31, 1997. Cumulative
total return measures the change in value of an investment, assuming
reinvestment of dividends and capital gains, and does not include sales
charges.
During the reporting period, shareholders received 2.91 cents ($0.0291) per
share in income dividends. As measured by net asset value, the price of the
fund's shares increased by $4.30, from $19.27 on April 30, 1997, to $23.57 on
October 31, 1997. Distributions will vary depending on income earned by the
fund and any profits realized from the sale of securities in the portfolio,
as well as the level of the fund's operating expenses.
Franklin California Growth Fund - Class II
Periods ended 10/31/97
Since
One- Inception
Year (9/3/96)
- --------------------------------------------------------------------------------
Cumulative Total Return1 24.39% 33.63%
Aggregate Total Return2 22.13% 26.53%
Value of $10,000 Investment3 $12,213 $13,133
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Aggregate total return represents the change in value of an investment over
the periods indicated and includes the 1.0% initial sales charge and 1.0%
contingent deferred sales charge applicable to shares redeemed within 18 months
of purchase.
3. This figure represents the value of a hypothetical $10,000 investment in the
fund over the periods indicated and includes sales charges.
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 UTILITIES FUND
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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.
- --------------------------------------------------------------------------------
During the six months ended October 31, 1997, many U.S., Latin American, and
European utility stocks rose in value, while the share prices of most Asian
utilities declined. Within this environment, the Franklin Global Utilities
Fund - Class I produced a +12.18% six-month cumulative total return, as
discussed in the Performance Summary on page 14.
United States
Due to benign inflation and an expanding economy, stocks of many companies in
economically sensitive sectors rose. Although U.S. utility stocks generally
underperformed broad market indices, many appreciated in value because of lower
interest rates and relatively high natural gas prices. Utility stocks also
benefited from positive regulatory news concerning the telephone and electric
utility industries. In September, the 8th U.S. Circuit Court of Appeals made
some key decisions removing some of the uncertainty surrounding the
Telecommunications Act of 1996 and more clearly defining the role of new
competitors. However, their decisions are likely to be appealed to the U.S.
Supreme Court, which typically can take a few years to resolve a case. And
California announced a plan to restructure the electric generation business,
with a number of other states coming close to completing plans as well. These
plans could help make electric utility companies more competitive, and, in some
cases, also improve their balance sheets. In our opinion, complete resolution of
regulatory issues should enhance the earnings of utility companies and make
their stocks more attractive to investors.
Europe
During the reporting period, the economic growth of most European countries
was restrained by fiscal policies designed to help them meet European
Monetary Union criteria. Encouraged by the declining interest rates resulting
from these requirements, investors bid up many utility stock prices. Germany,
Switzerland, Finland, Italy, and Portugal were among the region's best
performing utility markets, and taking advantage of this strength, we sold
our shares of Italmobiliare and Electricidade de Portugal at a profit.
In our opinion, many European companies are now positioned to benefit from a
large, pent-up demand for telecommunications services, and we believe that
our holdings of Telefonica de Espana (Spain) and Hellenic Telecommunications
Organization, SA (Greece) may experience extensive growth for several years
to come.
Latin America
Solid economic growth and lower inflation contributed to an increase in
infrastructure spending in Latin America during the six months under review.
This bolstered the earnings outlook for utility companies across the region, and
we initiated positions in Telefonica del Peru, SA, and Companhia Paranaense de
Energia-Copel, two firms that have positioned themselves to profit from rapidly
growing demand for electricity in Latin America. Accelerating privatization and
regulatory reform in telecommunications and electric utilities in Brazil also
created promising investment opportunities, and we purchased shares of
Telecomunicacoes Brasileiras, SA, Brazil's largest telecommunications provider.
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Global Utilities Fund
Top 10 Holdings
10/31/97
Company % of Total
INDUSTRY, COUNTRY Net Assets
- ------------------------------------------------------------------------------
Duke Energy Corp. 3.8%
Electric & Gas Utilities,
United States
ICG Communications, Inc. 3.7%
Telecommunications Services,
United States
Hellenic Telecommunications
Organization, SA 2.8%
Telecommunications Services, Greece
AES Corp. 2.8%
Electric & Gas Utilities,
United States
SBC Communications, Inc. 2.7%
Telecommunications Services,
United States
Airtouch Communications, Inc. 2.6%
Telecommunications Services,
United States
Espoon Sahko Oy, 144A 2.6%
Electric & Gas Utilities,
United States
Portugal Telecom, SA 2.5%
Telecommunications Services,
Portugal
Enron Corp. 2.4%
Electric & Gas Utilities,
United States
National Fuel Gas Co. 2.4%
Electric & Gas Utilities,
United States
For a detailed listing of portfolio holdings, please see page 78 of this report.
Asia
We maintained a low weighting in Asia because we felt that most utility stock
valuations there were too high. Because of currency turmoil this past summer
in Southeast Asia, we are unlikely to increase our Asian position
substantially in the near future. However, we do not believe that this
turmoil is the end of the "Asian growth miracle." In our opinion, the area's
long-term economic growth rate is likely to be much higher than that of most
developed and emerging markets. Even though some Asian countries have been
hurt by recession and currency devaluation, the economies of China, Hong Kong
and India could still grow strongly over the next few years. Many of our
Asian holdings are in these countries.
Looking forward, we are optimistic about prospects for utility companies
worldwide. They provide services that are an essential part of peoples' lives,
and we believe that their stocks play an important role in a well-diversified
investment portfolio. In the U.S., many high-quality utility companies with
aggressive, entrepreneurial management have the potential to expand their
operations and generate strong earnings growth. Latin American utilities markets
could continue to grow rapidly due to accelerating privatization and regulatory
changes in the near future. And European utility companies may improve earnings
by containing costs, narrowing their focus on core business, and utilizing their
balance sheets more effectively.
Of course, there are special risks involved with investing globally
in a non-diversified fund concentrating in a single industry. These risks,
which include currency fluctuations and increased susceptibility to adverse
economic, political, social and regulatory developments, are further
discussed in the fund's prospectus.
Please remember that this discussion accurately reflects our views and
opinions as of October 31, 1997, the end of the reporting period. However,
market and economic conditions are changing constantly, which may affect our
strategies and portfolio holdings. Although historic performance is no
guarantee of future results, these insights may help you understand our
investment and management philosophy.
We thank you for your participation in the Franklin Global Utilities Fund and
look forward to serving you in the future. Please feel free to contact us
with any questions or comments.
Sincerely,
Sally E. Haff
Portfolio Manager
Franklin Global Utilities Fund
"Utility companies provide services that are an essential part of peoples'
lives, and we believe that their stocks play an important role in a
well-diversified investment portfolio."
PERFORMANCE SUMMARY
Class I
Franklin Global Utilities Fund - Class I produced a +12.18% cumulative total
return for the six-month period ended October 31, 1997. Cumulative 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.
The price of the fund's shares, as measured by net asset value, increased
$1.53, from $14.46 on April 30, 1997, to $15.99 on October 31, 1997. During
this time, shareholders received 22.9 cents ($0.229) per share in dividend
income. Distributions will vary depending on income earned by the fund and
any profits realized from the sale of securities in the portfolio, as well as
the level of the fund's operating expenses.
Franklin Global Utilities Fund - Class I
Periods ended 10/31/97
Since
One- Three- Five- Inception
Year Year Year (7/2/92)
- --------------------------------------------------------------------------------
Cumulative Total Return1 18.98% 57.86% 109.04% 111.34%
Average Annual Total Return2 13.59% 14.67% 14.82% 14.08%
Value of $10,000 Investment3 $11,359 $15,077 $19,956 $20,185
10/31/93 10/31/94 10/31/95 10/31/96 10/31/97
- --------------------------------------------------------------------------------
One-Year Total Return4 34.12% -1.27% 12.29% 18.16% 18.98%
1. Cumulative total return represents the change in value of an investment over
the indicated periods and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the indicated 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 periods indicated and include the sales charge.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Investment return and principal value will fluctuate with market
conditions, currency volatility and the social, economic and political climates
of countries where investments are made. Emerging markets involve heightened
risks related to the same factors, in addition to those associated with the
relatively small size and lesser liquidity of these markets. You may have a gain
or loss when you sell your shares. Past expense reductions by the fund's manager
increased the fund's total returns.
Class II
Franklin Global Utilities Fund - Class II produced a +11.84% cumulative total
return for the six-month period ended October 31, 1997. Cumulative total
return measures the change in value of an investment, assuming reinvestment
of dividends and capital gains, and does not include sales charges.
The price of the fund's shares, as measured by net asset value, increased
$1.52, from $14.37 on April 30, 1997, to $15.89 on October 31, 1997. During
this time, shareholders received 18.06 cents ($0.1806) per share in dividend
income. Distributions will vary depending on income earned by the fund and
any profits realized from the sale of securities in the portfolio, as well as
the level of the fund's operating expenses.
Franklin Global Utilities Fund - Class II
Periods ended 10/31/97
Since
One- Inception
Year (5/1/95)
- --------------------------------------------------------------------------------
Cumulative Total Return1 18.15% 54.29%
Average Annual Total Return2 15.98% 18.46%
Value of $10,000 Investment3 $11,598 $15,278
1. Cumulative total return represents the change in value of an investment
over the indicated periods and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated. It includes the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge applicable to shares
redeemed within the first 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include all sales charges.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Investment return and principal value will fluctuate with market
conditions, currency volatility and the social, economic and political climates
of countries where investments are made. Emerging markets involve heightened
risks related to the same factors, in addition to those associated with the
relatively small size and lesser liquidity of these markets. 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
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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.
- --------------------------------------------------------------------------------
Despite severe volatility late in the period, the six months ended October 31,
1997 proved to be a fruitful time for many investors in small-cap companies.
Stocks of these companies performed particularly well as investor sentiment
shifted from larger-cap multinational companies whose earnings were pressured by
weak overseas currencies. On the other hand, earnings of small-cap companies
without overseas exposure were supported by the strong U.S. economy. Within this
environment, the Franklin Small Cap Growth Fund - Class I delivered a +31.28%
six-month cumulative total return, as discussed in the Performance Summary on
page 21, outperforming major domestic indices including the Standard & Poor's(R)
500 Stock Index and Dow Jones(R) Industrial Average, which delivered total
returns of +15.15% and +7.16%, respectively, for the same period. The fund also
outperformed its benchmark index, the Russell 2500 Index(R), which produced a
24.15% total return for the six months under review.*
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
In our search for small-capitalization companies that were well-positioned
for rapid growth of revenues, earnings, or cash flow, we focused on those
with competitive advantages such as a proprietary product or unique marketing
niche. Despite the strength of the stock market, we found no shortage of
attractively priced growth companies. The expanding U.S. economy provided a
healthy environment for smaller companies to develop, and our research led us
to invest in a number of industries.
During the reporting period, companies in the oil and gas service sector
performed well. Increased drilling activity and related spending on drilling
rig equipment led to higher profits and a higher share price for Varco
International, Inc., the fund's largest holding on October 31, 1997.
*Indices are unmanaged, and price appreciation includes reinvested dividends.
One cannot invest directly in an index. Dow Jones Industrial Average's total
return is calculated by Wilshire Associates, Inc.
The Russell 2500 is an index of 2,500 companies with small market
capitalizations.
In the full-service lodging sector, a healthy U.S. economy spurred demand for
hotel rooms. However, because it is cheaper to buy hotels than to build them,
growth in room supply did not keep up with this demand. Consequently, room rates
rose substantially in most urban markets. Such increases can dramatically impact
profitability, as there is no associated cost to the hotel owner. During the
period, we initiated a position in Innkeepers USA Trust, a Real Estate
Investment Trust that owns several all-suite hotels, and added to our position
in CapStar Hotel Co., an owner and operator of full-service hotels under brand
names such as Hilton, Sheraton, Marriott and Westin.
Believing that new developments in technology will lead to significant growth
for market leaders well into the next century, we established several new
positions in the software sector, including Electronic Arts, Inc. and Check
Point Software Technologies Ltd. Our weighting in the semiconductor sector
declined during the period, as lofty stock valuations prevented us from finding
equities that we considered undervalued. However, we believe that many
semiconductor companies will profit from higher demand for their products in the
future.
GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Small Cap
Growth Fund
Top 10 Holdings
10/31/97
Company % of Total
INDUSTRY Net Assets
- --------------------------------------------------------------------------------
Varco International, Inc. 2.1%
ENERGY/MINERALS
Komag, Inc. 1.4%
ELECTRONIC TECHNOLOGY
Affiliated Computer
Services, Inc. 1.3%
TECHNOLOGY SERVICES
Synopsys, Inc. 1.2%
TECHNOLOGY SERVICES
Integrated Systems, Inc. 1.2%
TECHNOLOGY SERVICES
Barrett Resources Corp. 1.2%
ENERGY/MINERALS
Paging Network, Inc. 1.2%
UTILITIES AND COMMUNICATION
CapStar Hotel Co. 1.2%
CONSUMER SERVICES
Norrell Corp. 1.2%
COMMERCIAL SERVICES
Expeditors International
of Washington, Inc. 1.1%
TRANSPORTATION
For a complete list of portfolio holdings, please see page 95 of this report.
Looking forward, we remain optimistic about prospects for the fund. In our
opinion, small-cap stocks are attractively valued relative to the overall
market, and we believe the growing U.S. economy and apparent lack of
inflationary pressure should create an environment conducive to the
prosperity of smaller capitalization companies. Of course, there are risks
involved in investing in a fund seeking long-term growth from small or
relatively new or unseasoned companies. These risks, which include relatively
small revenues, limited product lines and small market share, are further
discussed in the fund's prospectus.
Please remember that this discussion accurately reflects our views and
opinions as of October 31, 1997, the end of the reporting period. However,
market and economic conditions are changing constantly, which may affect our
strategies and portfolio holdings. Although historic performance is no
guarantee of future results, these insights may help you understand our
investment and management philosophy.
We thank you for your participation in the Franklin Small Cap Growth Fund and
look forward to serving you in the future. Please feel free to contact us
with any questions or comments.
Sincerely,
Edward B. Jamieson
Portfolio Manager
Franklin Small Cap Growth Fund
PERFORMANCE SUMMARY
Class I
Franklin Small Cap Growth Fund - Class I produced a +31.28% cumulative total
return for the six-month period ended October 31, 1997. Cumulative 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.
The price of the fund's shares, as measured by net asset value, increased
$5.93, from $18.96 on April 30, 1997, to $24.89 on October 31, 1997. During
this time, shareholders received no distributions.
Franklin Small Cap Growth Fund - Class I
Periods ended 10/31/97
Since
One- Three- Five- Inception
Year Year Year (2/14/92)
- --------------------------------------------------------------------------------
Cumulative Total Return1 27.71% 114.04% 226.64% 220.76%
Average Annual Total Return2 21.90% 26.92% 25.55% 21.66%
Value of $10,000 Investment3 $12,190 $20,445 $25,128 $32,140
10/31/93 10/31/94 10/31/95 10/31/96 10/31/97
- --------------------------------------------------------------------------------
One-Year Total Return4 31.12% 16.38% 34.31% 24.85% 27.71%
1. Cumulative total return represents the change in value of an investment over
the indicated periods and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the indicated 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 periods indicated and include the sales charge.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Investment return and principal value will fluctuate with market
conditions, currency volatility and the social, economic and political climates
of countries where investments are made. You may have a gain or loss when you
sell your shares.
Past expense reductions by the fund's manager increased the fund's total
returns.
Class II
Franklin Small Cap Growth Fund - Class II produced a +30.78% cumulative total
return for the six-month period ended October 31, 1997. Cumulative total
return measures the change in value of an investment, assuming reinvestment
of dividends and capital gains, and does not include sales charges.
The price of the fund's shares, as measured by net asset value, increased
$5.78, from $18.78 on April 30, 1997, to $24.56 on October 31, 1997. During
this time, shareholders received no distributions.
Franklin Small Cap Growth Fund - Class II
Periods ended 10/31/97
Since
One- Inception
Year (10/2/95)
- --------------------------------------------------------------------------------
Cumulative Total Return1 26.71% 52.82%
Average Annual Total Return2 24.41% 22.01%
Value of $10,000 Investment3 $12,441 $15,128
1. Cumulative total return represents the change in value of an investment over
the indicated periods and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge applicable to shares
redeemed within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include all sales charges.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Investment return and principal value will fluctuate with market
conditions, currency volatility and the social, economic and political climates
of countries where investments are made. You may have a gain or loss when you
sell your shares.
Advisor Class
Franklin Small Cap Growth Fund - Advisor Class produced a +31.47% cumulative
total return for the six-month period ended October 31, 1997. The price of
the Fund's shares, as measured by net asset value, increased $5.97, from
$18.97 to $24.94 over the same period. During this time, shareholders
received no distributions.
Franklin Small Cap Growth Fund - Advisor Class
Periods ended 10/31/97
Since
Inception
One- Three- Five- of the Fund
Year* Year* Year* (2/14/92)*
- --------------------------------------------------------------------------------
Cumulative Total Return1 27.91% 114.47% 227.30% 221.40%
Average Annual Total Return1 27.91% 28.96% 26.76% 22.68%
Value of $10,000 Investment2 $12,791 $21,447 $32,730 $32,140
10/31/93 10/31/94 10/31/95 10/31/96 10/31/97
- --------------------------------------------------------------------------------
One-Year Total Return*,3 31.12% 16.38% 34.31% 24.85% 27.91%
*Effective January 2, 1997, the fund began offering Advisor Class shares to
certain eligible investors as described in its prospectus. This share class
does not have sales charges. Performance quotations have been calculated as
follows: (a) For periods prior to January 2, 1997, figures reflect the fund's
Class I performance, excluding the effect of the Class I maximum initial
sales charge, but including the effect of Class I expenses; and (b) for
periods after January 1, 1997, figures reflect actual Advisor Class
performance including the deduction of all charges and fees applicable only
to that class. Since January 2, 1997 (commencement of sales), the cumulative
total return of Advisor Class shares was 21.78%.
1. Cumulative total return represents the change in value of an investment over
the periods indicated. Average annual total return represents the average annual
change in value of an investment over the indicated periods.
2. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated.
3. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Investment return and principal value will fluctuate with market
conditions, currency volatility and the social, economic and political climates
of countries where investments are made. You may have a gain or loss when you
sell your shares.
Past expense reductions by the fund's manager increased the fund's total
returns.
Past performance is not predictive of future results.
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.
- --------------------------------------------------------------------------------
This semi-annual report for the Franklin Natural Resources Fund covers the
six months ended October 31, 1997. During the reporting period, the U.S. and
many global economies experienced moderate growth and a gradual reduction in
the supply of steel, chemicals, and natural gas. Although this contributed to
the profitability of some companies in these industries, gold and copper
prices declined. At the same time, international stock markets generally
performed well but were subject to severe volatility along the
way. Within this environment, the Franklin Natural Resources Fund - Class I
delivered a +22.00% six-month cumulative total return, as discussed in the
Performance Summary on page 28, outperforming the Standard & Poor's(R) 500 (S&P
500(R)) Stock Index, which produced a total return of +15.15% for the period.*
*The S&P 500 Stock Index consists of 500 widely held common stocks within
four sectors (industrials, utilities, financial, and transportation). This
index, calculated by Standard & Poor's, is a total return index with
dividends reinvested.
GRAPHIC MATERIAL 5 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 6 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 7 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Throughout the reporting period, we invested in what we believed were rapidly
growing, well-managed companies with highly efficient, technologically
advanced operations in the sectors shown in the chart to the left. We found
most investment opportunities in the energy sector, making it our largest
exposure on October 31, 1997, at 56.9% of the fund's total net assets.
Our holdings of Hugoton Energy, Varco International, Inc., and Friede Goldman
International rose in value and contributed significantly to the fund's
performance during the six months under review. Hugoton, an oil and gas
exploration company, performed well because of its successful exploration
efforts and subsequent growth in low-cost, rapid production. Varco profited
from high demand for its hardware that makes oil and gas drilling rigs safer
and more productive. And Friede Goldman, an oilfield services company,
benefited from numerous offshore drilling projects in the Gulf of Mexico.
Several other sectors also contributed positively to the fund's performance
during the period. Growing demand for steel caused our shares of Carpenter
Technology Corp., a stainless steel manufacturer, to rise in value. The share
prices of many titanium companies rose, benefiting our holdings of RMI
Titanium Co. and Titanium Metals Corp. And our position in Champion
International Corp., a paper producer, increased in value, as the forest
products and paper sector strengthened as a result of shrinking inventories.
Naturally, some positions hurt the fund's performance. Our investments in the
precious metals sector continued to be adversely affected by the low price of
gold bullion, and some of our investments in the base metals sector performed
poorly due to declining copper prices.
Looking forward, we are optimistic about prospects for natural resources
companies. In our opinion, the U.S. economy may continue to grow moderately,
reflecting steady demand for natural resources. While the stock market
turmoil in Asia could slow the region's economic growth, consumption of
natural resources should continue, as countries there become more developed.
Given this environment, we anticipate a sustained level of high profitability
for commodity-related industries. Of course, we do not purchase stocks based
solely on the assumption that commodity prices will rise. We invest in
companies we believe have the best potential in any price environment based
on factors such as lower costs, rapid production growth and technological
edge.
Please remember that this discussion accurately reflects our views and
opinions as of October 31, 1997, the end of the reporting period. However,
market and economic conditions are changing constantly, which may affect our
strategies and portfolio holdings. Although historic performance is no
guarantee of future results, these insights may help you understand our
investment and management philosophy.
We thank you for your participation in the Franklin Natural Resources Fund
and look forward to serving you in the future. Please feel free to contact us
with any questions or comments.
Sincerely,
Suzanne W. Killea
Portfolio Manager
Franklin Natural Resources Fund
Franklin Natural
Resources Fund
Top 10 Holdings
10/31/97
Company % of Total
INDUSTRY, COUNTRY Net Assets
- --------------------------------------------------------------------------------
Gulf Canada Resources Ltd. 2.9%
ENERGY, CANADA
Varco International, Inc. 2.6%
ENERGY, U.S.
Barrett Resources Corp. 2.5%
ENERGY, U.S.
Transocean Offshore, Inc. 2.4%
ENERGY, U.S.
Oryx Energy Co. 2.0%
ENERGY, U.S.
Diamond Offshore Drilling, Inc. 2.0%
ENERGY, U.S.
Titan Exploration, Inc. 1.9%
ENERGY, U.S.
Devon Energy Corp. 1.9%
ENERGY, U.S.
YPF SA, ADR 1.7%
ENERGY, ARGENTINA
Energy Ventures 1.5%
ENERGY, U.S.
For a complete list of portfolio holdings, please see page 88 of this report.
PERFORMANCE SUMMARY
Class I
Franklin Natural Resources Fund - Class I produced a +22.00% cumulative total
return for the six-month period ended October 31, 1997. Cumulative 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.
The price of the fund's shares, as measured by net asset value, increased
$3.01, from $14.07 on April 30, 1997, to $17.08 on October 31, 1997. During
this time, shareholders received distributions totaling 7.6 cents ($0.076)
per share in dividend income.
Distributions will vary depending on income earned by the fund and any
profits realized from the sale of securities in the portfolio, as well as the
level of the fund's operating expenses.
Franklin Natural Resources Fund - Class I
Periods ended 10/31/97
Since
One- Inception
Year (6/5/95)
- --------------------------------------------------------------------------------
Cumulative Total Return1 23.58% 79.35%
Average Annual Total Return2 18.04% 25.06%
Value of $10,000 Investment3 $11,804 $17,130
1. Cumulative total return represents the change in value of an investment
over the indicated periods and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the indicated 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 periods indicated and include the sales charge.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Investment return and principal value will fluctuate with market
conditions, currency volatility and the social, economic and political
climates of countries where investments are made. You may have a gain or loss
when you sell your shares.
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.
Advisor Class
Franklin Natural Resources Fund - Advisor Class produced a +22.26% cumulative
total return for the six-month period ended October 31, 1997. The price of the
Fund's shares increased $3.02, from $14.07 to $17.09 over the same period.
During this time, shareholders received distributions totaling 9.85 cents
($0.0985) per share in dividend income. Distributions will vary depending on
income earned by the fund and any profits realized from the sale of securities
in the portfolio, as well as the level of the fund's operating expenses.
Franklin Natural Resources Fund - Advisor Class
Periods ended 10/31/97
Since
Inception of
One- the Fund
Year* (6/5/95)*
- -------------------------------------------------------------------------------
Cumulative Total Return1 23.84% 79.72%
Average Annual Total Return1 23.84% 27.58%
Value of $10,000 Investment2 $12,384 $17,972
*Effective January 2, 1997, the fund began offering Advisor Class shares to
certain eligible investors as described in its prospectus. This share class
does not have sales charges. Performance quotations have been calculated as
follows: (a) For periods prior to January 2, 1997, figures reflect the fund's
Class I performance, excluding the effect of the Class I maximum initial
sales charge, but including the effect of Class I expenses; and (b) for
periods after January 1, 1997, figures reflect actual Advisor Class
performance including the deduction of all charges and fees applicable only
to that class. Since January 2, 1997 (commencement of sales), the cumulative
total return of Advisor Class shares was 17.34%.
1. Cumulative total return represents the change in value of an investment
over the periods indicated. Average annual total return represents the
average annual change in value of an investment over the indicated periods.
2. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Investment return and principal value will fluctuate with market
conditions, currency volatility and the social, economic and political
climates of countries where investments are made. You may have a gain or loss
when you sell your shares.
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.
Past performance is not predictive of future results.
FRANKLIN BLUE CHIP FUND
- --------------------------------------------------------------------------------
Your Fund's Objective: The Franklin Blue Chip Fund seeks long-term capital
appreciation by investing primarily in high quality, blue chip companies with
market capitalization of $1 billion or more, that the managers believe are
leaders in their industries and are positioned
for stable, long-term growth potential.
- --------------------------------------------------------------------------------
During most of the six months under review, benign inflation, relatively
stable interest rates, and healthy corporate earnings characterized many
economies around the world, and international stock markets generally
performed well. However, toward the end of the period, currency crises in
many Asian countries sent global stock prices spiraling downward. Within this
environment, the Franklin Blue Chip Fund delivered a +1.57% six-month
cumulative total return, as discussed in the Performance Summary on page 34.
In our search for companies offering management excellence, a conservative
balance sheet, and solid long-term earnings potential, we focused on leaders
demonstrating sustainable competitive advantages. As a result of market
volatility, the share prices of many of our holdings fell, and we sought to
take advantage of this by adding to some of these positions.
Although the health care sector strengthened during the reporting period and our
holdings of Novartis, AG and Eli Lilly & Co. appreciated considerably, our
Johnson & Johnson shares fell in value. In an effort to take advantage of this
price decline, we purchased additional shares of this firm. Johnson & Johnson
remained one of our core holdings because it boasts one of the best management
teams and product lines in its industry.
GRAPHIC MATERIAL 8 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 9 OMITTED - SEE APPENDIX AT END OF DOCUMENT
The fund's performance was also helped by the strength of the energy sector,
and our shares of Total, SA and British Petroleum Co., Plc. increased in
value. In our opinion, this industry continues to have growth potential due
to steadily rising energy consumption around the world.
The reporting period proved to be challenging for the consumer staples sector,
particularly for large, multinational companies such as Gillette Co., Procter &
Gamble Co., and The Coca-Cola Co. A combination of a strong U.S. dollar and
slower economic growth in developing markets put short-term pressure on the
sales of many of their products. However, we are optimistic about this sector,
as rising personal income should continue to fuel consumer demand worldwide.
Looking forward, we are optimistic about prospects for many economies around the
world. Factors contributing to this include continued U.S. economic expansion,
deregulation and restructuring in other developed countries, and above-average
economic growth in developing nations. Although some Asian economies may face a
long road to recovery, blue chip companies such as HSBC Holding, Plc. and Sony
Corp. continue to offer attractive long-term growth potential. Of course, it is
important to remember that investing in the fund involves the special risks of
global, and especially emerging market, investing related to market and currency
volatility, and adverse social and political developments.
Please remember that this discussion accurately reflects our views and
opinions as of October 31, 1997, the end of the reporting period. However,
market and economic conditions are changing constantly, which may affect our
strategies and portfolio holdings. Although historic performance is no
guarantee of future results, these insights may help you understand our
investment and management philosophy.
We thank you for your participation in the Franklin Blue Chip Fund and look
forward to serving you in the future. Please feel free to contact us with any
questions or comments.
Sincerely,
Suzanne W. Killea
Portfolio Manager
Franklin Blue Chip Fund
Franklin Blue Chip Fund
Top 10 Holdings
10/31/97
Company % of Total
INDUSTRY, COUNTRY Net Assets
- --------------------------------------------------------------------------------
Novartis, AG 1.6%
HEALTHCARE, SWITZERLAND
HSBC Holding, Plc. 1.6%
FINANCIAL SERVICES,
UNITED KINGDOM
Johnson & Johnson 1.6%
HEALTHCARE, U.S.
Merck & Co., Inc. 1.5%
HEALTHCARE, U.S.
Sony Corp. 1.5%
CONSUMER DURABLES, JAPAN
Royal Dutch Petroleum Co. 1.5%
ENERGY, U.S.
Gillette Co. 1.4%
CONSUMER STAPLES, U.S.
Intel Corp. 1.4%
TECHNOLOGY, U.S.
Roche Holdings, AG 1.3%
HEALTHCARE, SWITZERLAND
Exxon Corp. 1.3%
ENERGY, U.S.
For a complete list of portfolio holdings, please see page 61 of this report.
PERFORMANCE SUMMARY
The Franklin Blue Chip Fund produced a +1.57% cumulative total return for the
six-month period ended October 31, 1997. Cumulative 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.
The price of the fund's shares, as measured by net asset value, increased
$0.17, from $10.85 on April 30, 1997, to $11.02 on October 31, 1997. During
this time, shareholders received no distributions.
Franklin Blue Chip Fund
Periods ended 10/31/97
Since
One- Inception
Year (6/3/96)
- ------------------------------------------------------------------------------
Cumulative Total Return1 8.25% 10.75%
Average Annual Total Return2 3.31% 4.07%
Value of $10,000 Investment3 $10,331 $10,578
1. Cumulative total return represents the change in value of an investment over
the indicated periods and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the indicated 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 periods indicated and include the sales charge.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Investment return and principal value will fluctuate with market
conditions, currency volatility and the social, economic and political climates
of countries where investments are made. Emerging markets involve heightened
risks related to the same factors, in addition to those associated with the
relatively small size and lesser liquidity of these markets. You may have a gain
or loss when you sell your shares.
Past expense reductions by the fund's manager increased the fund's total
returns. Without this waiver, the fund's total return would have been lower.
Past performance is not predictive of future results.
FRANKLIN MIDCAP GROWTH FUND
- --------------------------------------------------------------------------------
Your Fund's Objective: The Franklin MidCap Growth Fund seeks long-term capital
growth by investing primarily in equity securities of medium-capitalization
companies -- those with a market capitalization between $200 million and $5
billion.
- --------------------------------------------------------------------------------
We are pleased to bring you the semi-annual report for the Franklin MidCap
Growth Fund, which covers the six months ended October 31, 1997. During this
period, the U.S. economy was characterized by moderate growth, solid corporate
earnings, and low unemployment. However, inflation remained subdued, and
long-term interest rates, as measured by the 30-year U.S. Treasury bond yield,
declined. Investors reacted favorably, and the stock market rose during most of
the period, with many small and mid-capitalization equities outperforming larger
capitalization stocks due to superior earnings growth. Within this environment,
the Franklin MidCap Growth Fund produced a +24.14% six-month cumulative total
return, as discussed in the Performance Summary on page 38, outperforming the
Dow Jones(R) Industrial Average, which posted a +7.16% total return for the same
period.*
*Dow Jones Industrial Average's total return is calculated by Wilshire
Associates, Inc., and includes reinvested dividends.
GRAPHIC MATERIAL 10 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Seeking to identify midcap companies that we believed were well-positioned
for rapid growth in revenues, earnings, or cash flow, we focused on leaders
in growing industries with diversified product lines and sustainable
competitive advantages. With many share prices reaching all-time highs during
the reporting period, we were equally attentive to finding reasonable stock
valuations.
On October 31, 1997, the financial sector represented a substantial portion
of the fund's total net assets. During the six months under review, this
segment strengthened due to a benign interest-rate environment, and we added
to our holdings in Countrywide Credit Industries, Inc., a mortgage company,
and initiated a position in Providian Financial Group, a provider of
commercial banking and financial services. In our opinion, both firms offer
significant growth potential.
We also discovered attractive investment opportunities in the gaming and
lodging sector, where demand for facilities continued to exceed supply. For
example, we added to our holdings of Host Marriott Corp. and Prime
Hospitality Corp., two hotel operators profiting from higher occupancy and
room rate increases.
Searching for bargain equities outside of traditional growth sectors, we
purchased shares of Arden Realty, Inc., which owns suburban office buildings in
Southern California. We made additional investments in the paging and cellular
segments of the global telecommunications sector, establishing positions in
Paging Network, Inc., a wireless messaging services company, and Millicom
International Cellular, SA, a leading provider of international cellular
telephone service.
Looking forward, we remain optimistic about opportunities for midcap growth
companies. In our opinion, they offer the best features of small- and
large-capitalization stocks. Such firms tend to be more established and stable
than smaller ones, but unlike large-capitalization companies, which can offer
greater stability, they generally are still growing rapidly. Of course, there
are risks associated with investing in a fund seeking long-term capital growth
from small- to medium-size companies that have less-certain growth prospects and
greater sensitivity to changing economic conditions. These and other risks are
further discussed in the prospectus.
Please remember that this discussion accurately reflects our views and
opinions as of October 31, 1997, the end of the reporting period. However,
market and economic conditions are changing which may affect our strategies
and portfolio holdings. Although historic performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
We thank you for your participation in the Franklin MidCap Growth Fund and
look forward to serving you in the future. Please feel free to contact us
with any questions or comments.
Sincerely,
Edward B. Jamieson
Portfolio Manager
Franklin MidCap Growth Fund
Franklin MidCap
Growth Fund
Top 10 Holdings
10/31/97
Company % of Total
INDUSTRY Net Assets
- --------------------------------------------------------------------------------
Varco International, Inc. 2.0%
OIL & GAS
CUC International, Inc. 1.7%
CONSUMER SERVICES
Diamond Offshore Drilling, Inc. 1.6%
OIL & GAS
Transocean Offshore, Inc. 1.5%
OIL & GAS
Expeditors International
of Washington, Inc. 1.5%
TRANSPORTATION
HomeSide, Inc. 1.4%
FINANCE
AES Corp. 1.4%
UTILITIES
Robert Half International, Inc. 1.4%
TEMPORARY STAFFING
Barrett Resources Corp. 1.4%
OIL & GAS
Consolidated Cigar
Holdings, Inc. 1.4%
TOBACCO
For a complete list of portfolio holdings, please see page 82 of this report.
PERFORMANCE SUMMARY
The Franklin MidCap Growth Fund produced a +24.14% cumulative total return
for the six-month period ended October 31, 1997. Cumulative 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.
The price of the fund's shares, as measured by net asset value, increased
$3.22, from $13.34 on April 30, 1997, to $16.56 on October 31, 1997. During
this time, shareholders received no distributions.
Franklin MidCap Growth Fund
Periods ended 10/31/97
Since
One- Three- Inception
Year5 Year5 (8/17/93)5
- ------------------------------------------------------------------------------
Cumulative Total Return1 26.79% 91.32% 99.87%
Average Annual Total Return2 21.06% 22.25% 16.62%
Value of $10,000 Investment3 $12,106 $18,270 $19,090
10/31/94 10/31/95 10/31/96 10/31/97
One-Year Total Return4,5 1.52% 26.81% 19.00% 26.79%
1. Cumulative total return represents the change in value of an investment over
the indicated periods and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the indicated periods. Effective June 1, 1996, the fund
became available to retail investors, and adopted a Rule 12b-1 distribution
plan, which affects subsequent performance. Prior to June 1, 1996, the fund was
offered only to institutional investors and without a sales charge. Average
annual total returns have been restated to reflect the 4.5% maximum initial
sales charge. The institutional fund had relatively lower expenses.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the sales charge.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
5. On January 2, 1996, the fund changed its investment objective, strategy, and
investment adviser.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Investment return and principal value will fluctuate with market
conditions. You may have a gain or loss when you sell your shares.
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.
Past performance is not predictive of future results.
GRAPHIC MATERIAL 11 OMITTED - SEE APPENDIX AT END OF DOCUMENT
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 six months under review has been a rewarding period for investors in
health care companies. Following the signing of a balanced budget agreement
by the U.S. Congress and President Clinton, stocks of hospitals, nursing
homes, physician groups, and health maintenance organizations appreciated
significantly. Stocks of medical products companies also performed well as
the Federal Drug Administration (FDA) reduced approval times for new drugs
and these companies rapidly introduced technologies, raising the quality of
care and reducing total health care costs. Within this environment, the
fund's Class I shares provided a six-month cumulative total return of
+29.24%, as discussed in the Performance Summary on page 43, significantly
outperforming its benchmark, the Standard and Poor's 500(R) Stock Index, which
delivered a total return of +15.15%.*
On October 31, 1997, our portfolio was allocated globally across several
health care sectors. We found a number of attractively valued companies with
excellent growth potential in the medical technology and supplies sector. The
fund's largest holding at the end of the period was ESC Medical Systems,
Ltd., a manufacturer of laser and pulsed-light devices for the cosmetic
enhancement market. The FDA approved the company's Epilight Hair Removal
System and the stock rose more than 45% during the reporting period. In our
opinion, cosmetic surgery may gain popularity as procedures become less
invasive and less costly.
*Source: Bloomberg. Index is unmanaged and includes reinvested dividends. One
cannot invest directly in an index.
The health care information systems sector also contributed to the fund's strong
performance. Believing that expenditures on such systems would continue to grow
rapidly, we substantially added to our existing positions in this sector. Our
three largest holdings in this area -- Access Health, Inc., HBO & Co. and
Transition Systems, Inc. -- performed especially well, with Access Health,
Inc.'s share value rising over 143% from April 30, 1997, to October 31, 1997.
Despite their moderate growth potential, we reduced our weighting in large
capitalization pharmaceutical stocks, which were trading at what we
considered premium valuations.
Looking forward, we are optimistic about prospects for the health care industry
and the Franklin Global Health Care Fund. Demand for health care products and
services is not necessarily affected by cyclical swings in the business cycle.
In our opinion, health care expenditures will benefit from an aging population
and rapidly changing technology, which should result in a wider range of
treatable conditions and increased life expectancy. Our goal will be to seize
upon investment opportunities in a timely and disciplined manner, attempting to
provide our shareholders unique opportunities to invest in rapidly growing,
smaller capitalization companies with exciting technologies, limited
competition, and strong management teams.
GRAPHIC MATERIAL 12 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Global
Health Care Fund
Top 10 Holdings
10/31/97
Company % of Total
INDUSTRY, COUNTRY Net Assets
- ------------------------------------------------------------------------------
ESC Medical Systems, Ltd. 6.17%
MEDICAL TECHNOLOGY
& SUPPLIES, U.S.
Serologicals Corp. 4.47%
BIOTECHNOLOGY, U.S.
Access Health, Inc. 4.41%
SOFTWARE AND INFORMATION
SYSTEMS, U.S.
Total Renal Care
Holdings, Inc. 3.62%
ALTERNATE SITE PROVIDERS, U.S.
Dura Pharmaceuticals, Inc. 3.41%
SPECIALTY PHARMACEUTICALS, U.S.
Inhale Therapeutic Systems 3.22%
SPECIALTY PHARMACEUTICALS, U.S.
Penederm, Inc. 3.20%
SPECIALTY PHARMACEUTICALS, U.S.
Renal Care Group, Inc. 2.95%
ALTERNATE SITE PROVIDERS, U.S.
Algos Pharmaceutical Corp. 2.91%
SPECIALTY PHARMACEUTICALS, U.S.
Novartis, AG 2.89%
PHARMACEUTICALS, SWITZERLAND
For a complete list of portfolio holdings, please see page 73 of this report.
Please remember, this discussion accurately reflects our views and opinions
as of October 31, 1997, the end of the reporting period. However, market and
economic conditions are changing constantly which may affect our strategies
and portfolio holdings. Although historic performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
Of course, there are special risks involved with investing globally
in a non-diversified fund concentrating its investment 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 future.
Sincerely,
Kurt von Emster
Portfolio Manager
Franklin Global Health Care Fund
PERFORMANCE SUMMARY
Class I
Franklin Global Health Care Fund - Class I provided a +29.24% cumulative
total return for the six months ended October 31, 1997. Cumulative 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. We always maintain a long-term perspective when managing the fund,
and encourage shareholders to view their investments in a similar manner. As
you can see from the table on page 44, the fund delivered a cumulative total
return of more than 156% since inception on February 14, 1992.
The price of the fund's Class I shares, as measured by net asset value,
increased $4.71, from $16.11 on April 30, 1997, to $20.82 on October 31,
1997. During the reporting period, shareholders did not received
distributions. Of course, distributions will vary depending on income earned
by the fund and any profits realized from the sale of securities in the
portfolio, as well as the level of the fund's operating expenses.
Franklin Global Health Care Fund - Class I
Periods ended 10/31/97
Since
One- Three- Five- Inception
Year Year Year (2/14/92)
- --------------------------------------------------------------------------------
Cumulative Total Return1 23.73% 103.01% 177.74% 156.17%
Average Annual Total Return2 18.17% 24.69% 21.55% 16.96%
Value of $10,000 Investment3 $11,817 $19,386 $26,532 $24,467
10/31/93 10/31/94 10/31/95 10/31/96 10/31/97
- --------------------------------------------------------------------------------
One-Year Total Return4 10.67% 23.62% 30.17% 26.06% 23.73%
1. Cumulative total returns represent the change in value of an investment over
the indicated periods and do not include the sales charge.
2. Average annual total returns represent the average annual change in value of
an investment over the indicated periods and include the maximum 4.5% initial
sales charge.
3. These figures represent the change in value of a hypothetical $10,000
investment in the fund over the indicated periods and include the sales charge.
4. One-year total returns represent the change in value of an investment over
the periods ended on the specified dates and do not include the 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, currency fluctuations, and the economic, social, and political
climates of countries where investments are made. You may have a gain or loss
when you sell your shares
Past expense reductions by the fund's manager increased the fund's total
returns. Without this reduction, total returns would have been lower.
Class II
Franklin Global Health Care Fund - Class II provided a +28.62% cumulative
total return for the six months ended October 31, 1997. Cumulative total
return measures the change in value of an investment, assuming reinvestment
of dividends and capital gains, and does not include sales charges. We always
maintain a long-term perspective when managing the fund, and encourage
shareholders to view their investments in a similar manner.
The price of the fund's Class II shares, as measured by net asset value,
increased $4.60, from $16.07 on April 30, 1997, to $20.67 on October 31,
1997. During the reporting period, shareholders did not receive
distributions. Of course, distributions will vary depending on income earned
by the fund and any profits realized from the sale of securities in the
portfolio, as well as the level of the fund's operating expenses.
Franklin Global Health Care Fund - Class II
Periods ended 10/31/97
Since
Inception
One-Year (9/3/96)
- --------------------------------------------------------------------------------
Cumulative Total Return1 22.80% 21.87%
Average Annual Total Return2 20.60% 16.74%
Value of $10,000 Investment3 $12,060 $11,963
1. Cumulative total returns represent the change in value of an investment
over the specified periods and do not include sales charges.
2. Average annual total returns represent the average annual change in value
of an investment over the indicated periods and include the 1.0% initial
sales charge and 1.0% contingent deferred sales charge, applicable to shares
redeemed within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the indicated periods and include all sales charges.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Investment return and principal value will fluctuate with market
conditions, currency fluctuations, and the economic, social, and political
climates of countries where investments are made. You may have a gain or loss
when you sell your shares.
Past performance is not predictive of future results.
GRAPHIC MATERIAL 13 OMITTED - SEE APPENDIX AT END OF DOCUMENT
FRANKLIN BIOTECHNOLOGY
DISCOVERY FUND
- --------------------------------------------------------------------------------
Your Fund's Objective: The Franklin Biotechnology Discovery Fund seeks
capital appreciation by investing primarily in equity securities of
biotechnology companies and discovery research firms located in the
U.S. and other countries.
- --------------------------------------------------------------------------------
We are pleased to bring you the first shareholder report of the Franklin
Biotechnology Discovery Fund, which covers the six-week period from inception
on September 15, 1997, through October 31, 1997. During this brief time, the
fund's net asset value per share appreciated +2.60%, from $25.00 on
September 15, 1997, to $25.65 on October 31, 1997.
Because we are positioning the fund primarily in the small capitalization
biotechnology sector, the market capitalization of companies whose stock we
purchase will be mainly in the $200 million to $1 billion range. In our
opinion, the best growth opportunities exist in smaller, more dynamic
companies because they often focus on finding new drugs to treat diseases
that are less researched by traditional pharmaceutical companies. We believe
this sector offers an exciting long-term investment opportunity and may
continue to appreciate as the Federal Drug Administration approves more
biotechnology products.
When the fund's assets reach $150 million, no new accounts (other than
retirement plan accounts) will be accepted. However, shareholders of record
at that time will be able to add to their existing accounts through new
purchases, including purchases through reinvestment of dividends or capital
gain distributions.
Please remember, this discussion accurately reflects our views and opinions
as of October 31, 1997, the end of the reporting period. However, market and
economic conditions are changing constantly which may affect our strategies
and portfolio holdings. Although historic performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
Biotechnology companies are often small, relatively new, or unseasoned. Such
companies can be particularly sensitive to changing economic conditions, and
have less certain growth prospects than larger, more established companies.
And small company stocks are volatile and may not be appropriate for
short-term investors. Also, the fund is non-diversified and concentrates in a
single industry, involving other risks, such as patent considerations,
product liability, government regulatory requirements, and regulatory
approval for new drugs and medical products. The fund may invest in foreign
securities, which involve additional risks, including political uncertainty
and currency volatility. These and other risks, including hedging strategies,
are described more fully in the fund's prospectus.
Sincerely,
Kurt von Emster
Portfolio Manager
Franklin Global Health Care Fund
Franklin Biotechnology Discovery Fund
Top 10 Holdings
10/31/97
Company % of Total
INDUSTRY Net Assets
- ------------------------------------------------------------------------------
Sepracor, Inc. 4.99%
DRUGS
IDEC Pharmaceuticals Corp. 4.97%
BIOMEDICAL
Gilead Sciences, Inc. 4.67%
DRUGS
Aviron 4.54%
BIOMEDICAL
Zonagen, Inc. 4.53%
DRUGS
Cell Therapeutics, Inc. 4.51%
DRUGS
MedImmune, Inc. 4.49%
DRUGS
Technical Chemicals and
Products, Inc. 4.38%
DIAGNOSTICS
Texas Biotechnology Corp. 3.96%
BIOMEDICAL
COR Therapeutics, Inc. 3.82%
THERAPEUTICS
For a complete list of portfolio holdings, please see page 58 of this report.
PERFORMANCE SUMMARY
Franklin Biotechnology Discovery Fund delivered a +2.60% cumulative total
return for the period since inception on September 15, 1997, through
October 31, 1997. Cumulative total return represents the change in value of
an investment, assuming reinvestment of dividends and capital gains, if any,
and does not include the initial sales charge.
As measured by net asset value, the fund's share price increased $0.65, from
$25.00 on September 15, 1997, to $25.65 on October 31, 1997. During the
reporting period, shareholders received no distributions. Distributions will
vary depending on income earned by the fund and any profits realized from the
sale of securities in the portfolio, as well as the level of the fund's
operating expenses.
Franklin Biotechnology Discovery Fund
Period ended 10/31/97
Since
Inception
(9/15/97)
- -------------------------------------------------------------------------------
Cumulative Total Return* 2.60%
Aggregate Total Return* -2.02%
*Total return figures represent the change in value of an investment over the
indicated period. Aggregate total return includes the maximum 4.5% initial
sales charge, and cumulative total return does not include the sales charge.
Since the fund has existed for less than one year, average annual total
returns are not provided.
The fund's manager has agreed in advance to waive a portion of its management
fees and to make certain payments to reduce the fund's expenses, which
increase the fund's total return. Without this agreement, the total return
would have been lower. After April 30, 1998, this arrangement may end at any
time.
Investment return and principal value will fluctuate with market conditions,
currency volatility, and the economic, social, and political climates of the
countries where investments are made. You may have a gain or loss when you
sell your shares.
Past performance is not predictive of future results.
FRANKLIN STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
Your Fund's Objective: The Franklin Strategic Income Fund seeks a high level
of current income, with capital preservation over the long-term as a
secondary objective. The fund uses an active asset allocation process and
invests in securities of foreign governments, U.S. and foreign high-yield
fixed-income securities, asset-backed securities, preferred stock, common
stock that pays dividends, and income-producing securities convertible into
common stock of such companies.
- --------------------------------------------------------------------------------
During the six-month reporting period, steady economic growth in the U.S.
coupled with low inflation contributed to the positive investment environment
that enabled the Franklin Strategic Income Fund to enjoy relatively high
returns. By diversifying across six distinct asset classes, the fund capitalized
on investment opportunities, moving among and maximizing the strengths of
certain sectors, while - at the same time - reducing volatility. Over the
reporting period, we continued to moderately overweight the U.S. high yield bond
sector, while increasing our exposure to emerging markets and convertible bonds.
We also reduced our international bond holdings, and selectively hedged our
positions in order to protect the value of these securities against a rising
U.S. dollar. (Investments denominated in foreign currency lose some of their
dollar value when the dollar strengthens against that currency.) Consequently,
our investment strategy helped the fund achieve a positive 6.72% six-month total
return, as discussed in the Performance Summary on page 55.
High Yield Corporate Bonds
High yield corporate bonds benefited from a moderate growth, low inflation
economic environment, and this sector remained the fund's largest investment,
as detailed by the chart on this page.
Securities in the telecommunications and media/broadcasting sectors
strengthened because of two major industry trends: consolidation and
deregulation. The fund benefited from having positioned itself to take
advantage of these trends. Our investment in Intermedia Communications
appreciated due to mergers in the local telecommunications industry that led
to rising asset valuations. Similarly, Sinclair Capital, one of the country's
largest television broadcasters, has enjoyed strong returns on its preferred
stock, and a strengthening of its credit profile, as it actively participates
in industry consolidation. The fund's bond holdings in Orion Network Systems
were propelled higher with the company's takeover by Loral Space and
Communication. We anticipated escalating demand for electrical equipment by
the telecommunications, industrial, and automotive markets; therefore the
fund also invested in Amphenol, a manufacturer of electrical connectors,
which recently posted double-digit revenue gains.
GRAPHIC MATERIAL 14 OMITTED - SEE APPENDIX AT END OF DOCUMENT
"During the six-month period, we increased our exposure to the emerging markets
sector with a strong focus on Latin America where we continue to find attractive
investment opportunities."
Convertible Securities
During the six-month period, convertible securities benefited from the price
appreciation in the equity markets. The increased value of the common stocks
underlying many convertible securities helped to push up their prices,
helping several of the fund's positions. In seeking to take further advantage
of such appreciation, we increased our position in convertible securities,
from 8.9% of total net assets on April 30, 1997, to 9.2% on October 31, 1997.
The fund's holdings in Rent Way, Inc. performed very well, and
we liquidated much of our position at a profit. Our investment in Dovatron
convertible bonds also performed strongly, rising 35% over the course of the
reporting period. We remained overweighted in the real estate sector, with
convertible security holdings such as Macerich, Hilton and Capstar Hotels, as
we expect increasing demand for real estate to drive up their prices. Because
the replacement cost of many properties is greater than their current market
price, we believe many real estate linked convertible bonds are undervalued.
Emerging Markets
During the six-month period, we increased our exposure to the emerging markets
sector with a strong focus on Latin America where we continue to find attractive
investment opportunities. We added to our holdings in Brazil, Venezuela, Mexico
and Ecuador, while eliminating our exposure to Bulgaria. Because of our
relatively minor holdings in the emerging markets of East Asia, the fund was
able to avoid most of the direct impact from the East Asian currency crisis. We
feel that the recent weakness in the Latin America sector, which was
precipitated by the sell-off of East Asian currencies and securities, may
present selected investment opportunities in Latin America.
International
Anticipating the impact of a strengthening U.S. dollar on our international
investments, we reduced our overall exposure to European securities, and made
greater use of currency hedges in an effort to protect the dollar value of
our remaining investments in this sector. During the reporting period, we
sold modest amounts of our positions in Denmark, Ireland, Spain and the
United Kingdom with some reinvestment into Germany, Italy and Sweden.
U.S. Treasury Securities
We remained underweighted in this sector with our Treasury holdings
representing only 6.9% of total net assets on October 31, 1997, in
anticipation of increased interest-rate risk, largely based on the strength
of the overall economy.
U.S. Mortgage Securities
The fund's agency mortgage positions performed well over the reporting period
as the yield spreads of mortgage securities narrowed relative to U.S.
Treasuries. Going forward, the fund remains underweighted in this sector, due
to its interest-rate sensitivity and less generous yield spreads.
Looking Forward
The fund should continue to perform well, as we anticipate low inflation and
moderate economic growth in the U.S. and most foreign markets. In addition,
expectations for continued long-term growth and proactive government policies
in Latin America should benefit our emerging market holdings in that region
over the long-term. We believe that a modest increase in U.S. interest rates
is possible, and consequently maintained a more conservative position toward
interest-rate sensitive sectors.
Please remember, this discussion accurately reflects our views and opinions
as of October 31, 1997, the end of the reporting period. However, market and
economic conditions are changing constantly which may affect our strategies
and portfolio holdings. Although historic performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
Sincerely,
Christopher J. Molumphy
Portfolio Manager
Franklin Strategic Income Fund
PERFORMANCE SUMMARY
Franklin Strategic Income Fund posted a cumulative total return of +6.72% for
the six months ended October 31, 1997. Cumulative total return measures the
change in value of an investment, assuming reinvestment of dividends and
capital gains, and does not include the sales charge.
The fund's share price, increased 27.0 cents, from $10.86 on April 30, 1997,
to $11.13 on October 31, 1997. During the reporting period, shareholders
received distributions of 45 cents ($0.45) per share in dividend income.
Distributions will vary depending on income earned by the fund and any
profits realized from the sale of securities in the portfolio as well as the
level of the fund's operating expenses.
Based on an annualization of October's monthly dividend of 7.5 cents ($0.075)
per share and the maximum offering price of $11.62 on October 31, 1997, the
fund's distribution rate was 7.75%.
Franklin Strategic Income Fund
Periods ended 10/31/97
Since
One- Inception
Year (6/1/94)
- --------------------------------------------------------------------------------
Cumulative Total Return1 11.00% 51.38%
Average Annual Total Return2 6.27% 11.49%
- --------------------------------------------------------------------------------
Value of a $10,000 Investment3 $10,627 $14,500
Distribution Rate4 7.75%
30-Day Standardized Yield5 6.45%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the specified periods and includes the maximum 4.25%
initial sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the specified periods and include the sales charge.
4. Distribution rate is based on an annualization of the fund's .075 cent per
share October monthly dividend and the maximum offering price of $11.62 on
October 31, 1997.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1997.
The fund's manager has agreed in advance to waive a portion of its management
fees and to make certain payments to reduce expenses, which 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 5.78%. The fee
waiver may be discontinued at any time upon notification to the fund's Board
of Trustees.
All total return calculations assume reinvestment of dividends and capital
gains at net asset value. Your 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 STRATEGIC SERIES
Financial Highlights
Franklin Biotechnology Discovery Fund
CLASS I
-----------------
PERIOD ENDED
OCTOBER 31, 1997
(UNAUDITED)9
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period $25.00
-----------------
Income from investment operations:
Net investment loss (.01)
Net realized and unrealized gains .66
-----------------
Total from investment operations .65
-----------------
Net asset value, end of period 25.65
=================
Total return* 2.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $41,305
Ratio to average net assets:
Expenses 1.48%**
Expenses excluding waiver and payments by affiliate 1.71%**
Net investment loss (.54%)**
Portfolio turnover rate 12.98%
Average commission rate paid*** $ .0298
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
***Relates to purchases and sales of equity securities. 9For the period
September 15, 1997 (effective date) to October 31, 1997.
See notes to financial statements.
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1997 (unaudited)
<TABLE>
<CAPTION>
Franklin Biotechnology Discovery Fund SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
aCommon Stocks 79.8%
aBiomedical 23.3%
<S> <C> <C>
Aviron 85,800 $ 1,876,875
Cell Genesys, Inc. 50,000 484,375
IDEC Pharmaceuticals Corp. 53,800 2,051,125
Inhale Therapeutic Systems 56,200 1,531,450
Synaptic Pharmaceutical Corp. 80,000 1,010,000
Texas Biotechnology Corp. 304,000 1,634,000
Transkaryotic Therapies, Inc. 30,000 1,027,500
---------------
9,615,325
---------------
aDrugs 36.7%
Agouron Pharmaceuticals, Inc. 25,600 1,168,000
Chiroscience Group, Plc. (United Kingdom) 323,000 1,395,417
Cell Therapeutics, Inc. 116,500 1,864,000
Gilead Sciences, Inc. 56,500 1,928,063
MedImmune, Inc. 46,500 1,854,188
PathoGenesis Corp. 42,000 1,512,000
Sepracor, Inc. 57,500 2,062,813
Vertex Pharmaceutical, Inc. 51,300 1,513,350
Zonagen, Inc. 57,100 1,870,025
---------------
15,167,856
---------------
aDelivery Systems 8.1%
Aradigm Corp. 105,100 1,234,924
DepoTech Corp. 112,800 1,565,100
Megabios Corp. 23,300 349,500
Noven Pharmaceuticals, Inc. 29,000 206,625
---------------
3,356,149
---------------
Diagnostics 4.4%
aTechnical Chemicals and Products, Inc. 102,200 1,807,663
---------------
aTherapeutics 7.3%
COR Therapeutics, Inc. 70,800 1,579,725
Neurogen Corp. 71,300 1,443,825
---------------
3,023,550
---------------
Total Long Term Investments (Cost $34,516,600) 32,970,543
---------------
eRepurchase Agreement 19.0%
Joint Repurchase Agreement, 5.671%, 11/03/97, (Maturity Value $7,860,612) (Cost $7,856,899)
Aubrey G. Lanston & Co., Inc., (Maturity Value $107,662)
B.A. Securities, Inc., (Maturity Value $807,599)
Barclays de Zoete Wedd Securities, Inc., (Maturity Value $807,599)
Bear, Stearns & Co., Inc., (Maturity Value $484,559)
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $807,599)
Dresdner Kleinwort Benson North America L.L.C., (Maturity Value $807,599)
Fuji Securities, Inc., (Maturity Value $807,599)
Lehman Brothers, Inc., (Maturity Value $807,599)
Sanwa Securities (USA) Co., L.P., (Maturity Value $807,599)
SBC Warburg, Inc., (Maturity Value $807,599)
UBS Securities L.L.C., (Maturity Value $807,599)
Collateralized by U.S. Treasury Bills & Notes $7,856,899 $7,856,899
---------------
Total Investments (Cost $42,373,499) 98.8% 40,827,442
Securities Sold Short (6.1%) (2,550,625)
Other Assets, less Liabilities 7.3% 3,028,596
---------------
Net Assets 100.0% $41,305,413
===============
aSecurities Sold Short
ISSUER SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Incyte Pharmaceuticals, Inc. 10,000 $ 805,000
Protein Design Labs, Inc. 35,000 1,745,625
---------------
TOTAL (PROCEEDS $2,455,418) $2,550,625
===============
aNon-income producing.
eSee Note 1(c) regarding joint repurchase agreement.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Blue Chip Fund
CLASS I
----------------------------------------
SIX MONTHS ENDED
OCTOBER 31, 1997 YEAR ENDED APRIL 30,
(UNAUDITED) 19975
----------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C>
Net asset value, beginning of period $10.85 $10.00
----------------------------------------
Income from investment operations:
Net investment income .03 .09
Net realized and unrealized gains .14 .82
----------------------------------------
Total from investment operations .17 .91
----------------------------------------
Less distributions from:
Net investment income -- (.06)
----------------------------------------
Net asset value, end of period 11.02 10.85
========================================
Total return* 1.57% 9.14%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $9,422 $5,600
Ratio to average net assets:
Expenses 1.25%** 1.25%**
Expenses excluding waiver and payments by affiliate 2.02%** 2.22%**
Net investment income .95%** 1.07%**
Portfolio turnover rate 17.33% 11.14%
Average commission rate paid*** $.0372 $.0525
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
***Relates to purchases and sales of equity securities.
5For the period June 3, 1996 (effective date) to April 30, 1997.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
STATEMENT OF INVESTMENTS, OCTOBER 31, 1997 (UNAUDITED)
Franklin Blue Chip Fund COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
aCommon Stocks 83.0%
Consumer Durables 4.7%
General Electric Co. United States 1,100 $ 71,019
Matsushita Electric Industrial Co., Ltd., Sponsored ADR Japan 500 84,563
Sony Corp. Japan 1,700 141,113
Tata Engineering and Locomotive Co., Ltd., Sponsored GDR India 3,400 36,295
Toyota Motor Corp. Japan 4,000 111,342
---------
444,332
---------
Consumer Staples 10.6%
Estee Lauder Cos., Class A United States 800 35,550
Gillette Co. United States 1,500 133,594
Kao Corp. Japan 5,000 69,796
L'OREAL France 125 44,294
LVMH (Moet Hennessy Louis Vuitton) France 140 23,785
Nestle, SA, Registered Shares Switzerland 75 105,647
Nike, Inc., Class B United States 1,400 65,800
Panamerican Beverages, Inc., A Shares Mexico 1,700 52,700
PepsiCo, Inc. United States 1,800 66,263
Philip Morris Cos., Inc. United States 2,400 95,100
Procter & Gamble Co. United States 1,000 68,000
PT Hanjaya Mandala Sampoerna Indonesia 28,000 48,738
South African Breweries, Ltd. South Africa 1,611 42,848
The Coca-Cola Co. United States 1,000 56,500
Unilever, NV, New York Shares Netherlands 1,600 85,400
---------
994,015
---------
Energy 5.0%
British Petroleum Co., Plc., Sponsored ADR United Kingdom 1,004 88,101
Exxon Corp. United States 1,900 116,731
Royal Dutch Petroleum Co. Netherlands 2,600 136,825
Total, SA, Sponsored ADR France 1,100 61,050
Williams Cos., Inc. United States 500 25,469
YPF, SA, Sponsored ADR Argentina 1,300 41,600
---------
469,776
---------
Financial Services 14.2%
American International Group, Inc. United States 675 68,892
Ayala Land, Inc., B Shares Philippines 71,500 27,733
Bangkok Bank Public Co., Ltd. Thailand 12,600 43,130
Bank of Tokyo-Mitsubishi, ADR Japan 6,100 81,969
Charles Schwab Corp. United States 600 20,475
Cheung Kong Holdings, Ltd. Hong Kong 6,000 41,712
Citicorp United States 800 100,050
City Developments, Ltd. Singapore 7,000 29,333
Deutsche Bank, AG Germany 1,100 72,682
Federal National Mortgage Association United States 1,500 72,656
Hang Seng Bank, Ltd. Hong Kong 3,100 26,964
HSBC Holding, Plc. United Kingdom 5,933 148,514
J.P. Morgan & Co., Inc. United States 500 54,875
Financial Services (cont.)
Land and House Public Co., Ltd. Thailand 23,676 $ 20,261
Lend Lease Corp., Ltd. Australia 1,300 26,622
Malayan Banking Berhad Malaysia 13,000 50,307
Merrill Lynch & Co., Inc. United States 400 27,050
Metropolitan Bank & Trust Co. Philippines 4,972 34,368
Nomura Securities Co., Ltd. Japan 5,000 58,164
Sanwa Bank Japan 6,000 60,324
Sun Hung Kai Properties, Ltd. Hong Kong 6,000 44,235
Swiss Reinsurance Co. Switzerland 50 75,286
Tokio Marine & Fire Insurance Co., Sponsored ADR Japan 900 46,013
United Overseas Bank, Ltd. Singapore 9,000 49,714
Wells Fargo & Co. United States 200 58,275
---------
1,339,604
---------
Healthcare 9.9%
aAmgen, Inc. United States 1,400 68,950
Baxter International, Inc. United States 1,000 46,250
aBoston Scientific Corp. United States 1,200 54,600
Eli Lilly & Co. United States 1,000 66,875
HBO & Co. United States 800 34,800
Johnson & Johnson United States 2,500 143,438
Merck & Co., Inc. United States 1,600 142,800
Novartis, AG Switzerland 95 149,759
Roche Holding, AG Switzerland 14 122,993
Smithkline Beecham, Plc. United Kingdom 11,116 105,558
---------
936,023
---------
Industrial Cyclicals 9.1%
ABB AB, B Shares Sweden 3,900 45,040
Antofagasta Holdings, Plc. United Kingdom 254 1,619
Avery Dennison Corp. United States 2,300 91,569
Bayer, AG Germany 1,800 64,741
Bridgestone Corp. Japan 3,000 64,811
Cia Vale Do Rio Doce, Sponsored ADR Brazil 2,500 48,302
De Beers Consolidated Mines, AG, ADR South Africa 2,000 48,000
Komatsu, Ltd. Japan 9,000 48,085
Monsanto Co. United States 1,400 59,850
Perez Co., SA, Sponsored ADR Argentina 892 11,175
Pohang Iron & Steel Co., Ltd., Sponsored ADR South Korea 1,800 29,250
Praxair, Inc. United States 1,500 65,344
Rio Tinto, Plc., Sponsored ADR United Kingdom 1,700 88,400
Sandvik AB, B Shares Sweden 1,500 45,661
Siemens, AG Germany 1,200 74,487
Shin-Etsu Chemical Co. Japan 2,000 48,857
Siam Cement Public Co., Ltd. Thailand 2,600 21,741
---------
856,932
---------
Retail 1.9%
Carrefour Supermarche France 110 $ 57,400
Ito-Yokado Co., Ltd., Sponsored ADR Japan 300 59,588
Wal-Mart Stores, Inc. United States 1,700 59,713
---------
176,701
---------
Services 8.9%
Brambles Industries, Ltd. Australia 3,000 57,681
Canon, Inc., Sponsored ADR Japan 600 73,575
Disney (Walt) Co. United States 200 16,450
First Data Corp. United States 2,200 63,938
Genting Berhad Malaysia 5,000 14,099
aHFS, Inc. United States 800 56,400
Hutchison Whampoa, Ltd. Hong Kong 11,000 76,117
McDonald's Corp. United States 1,300 58,256
Reuters Holdings, Plc. United Kingdom 5,400 58,436
SAP, AG Germany 400 114,282
Secom Japan 1,000 64,645
Sime Darby Berhad Malaysia 38,000 54,717
Singapore Airlines, Ltd. Singapore 2,000 14,984
Singapore Press Holdings, Ltd. - Foreign Singapore 3,000 41,333
Wolters Kluwer, NV Netherlands 605 74,289
---------
839,202
---------
Technology 9.3%
aApplied Materials, Inc. United States 1,200 40,050
aCisco Systems, Inc. United States 1,100 90,234
aCompaq Computer Corp. United States 500 31,875
Ericsson (L.M.) Telecommunications, Sponsored ADR Sweden 1,000 44,250
Hewlett-Packard Co. United States 700 43,181
Hitachi, Ltd., Sponsored ADR Japan 700 56,000
Intel Corp. United States 1,700 130,900
Lucent Technologies, Inc. United States 361 29,760
aMicrosoft Corp. United States 600 78,000
Motorola, Inc. United States 1,200 74,100
NEC Corp., Sponsored ADR Japan 800 44,100
aNewbridge Networks Corp. United States 1,000 53,000
aOracle Corp. United States 1,800 64,406
Samsung Electronics Co. South Korea 406 16,727
Toshiba Corp. Japan 8,000 36,228
aXilinx, Inc. United States 1,400 47,775
---------
880,586
---------
Utilities and Telecommunications 9.4%
aAES Corp. United States 2,200 87,175
aAirTouch Communications, Inc. United States 1,800 69,525
AT&T Corp. United States 1,100 53,831
Bellsouth Corp. United States 1,400 66,238
Duke Energy Corp. United States 600 28,950
Utilities and Telecommunications (cont.)
Enersis, SA, Sponsored ADR Chile 1,800 $ 59,400
Enron Corp. United States 1,800 68,400
Hong Kong Telecommunications, Ltd., Sponsored ADR Hong Kong 1,042 19,993
Nippon Telegraph & Telephone, Sponsored ADR Japan 2,000 84,875
Philippine Long Distance Telephone Co., Sponsored ADR Philippines 1,400 33,950
PT Telekomunikasi Indonesia Indonesia 41,000 38,100
SK Telecom Co., Ltd., ADR South Korea 6,812 37,466
Telecom de Argentina, SA, Sponsored ADR Argentina 1,200 30,375
Telecomunicacoes Brasileiras, SA, Sponsored ADR Brazil 400 40,600
Telefonica de Espana, Sponsored ADR Spain 1,000 82,250
Total Access Communication Public Co., Ltd. Thailand 4,000 7,640
VEBA, AG Germany 1,300 73,152
---------
881,920
---------
Total Common Stocks (Cost $7,780,080) 7,819,091
---------
Preferred Stocks .3%
Banco Itau, SA (Cost $31,070) Brazil 63,000 25,430
---------
Total Long Term Investments (Cost $7,811,150) 7,844,521
---------
PRINCIPAL
AMOUNT
-----------
eRepurchase Agreement 14.5%
Joint Repurchase Agreement, 5.671%, 11/03/97, (Maturity Value $1,370,083) (Cost $1,369,436)
Aubrey G. Lanston & Co., Inc., (Maturity Value $18,770)
B.A. Securities, Inc., (Maturity Value $140,762)
Barclays de Zoete Wedd Securities, Inc., (Maturity Value $140,762)
Bear, Stearns & Co., Inc., (Maturity Value $84,455)
Donaldson, Lufkin, & Jenrette Securities Corp., (Maturity Value $140,762)
Dredsner Kleinwort Benson North America L.L.C., (Maturity Value $140,762)
Fuji Securities, Inc., (Maturity Value $140,762)
Lehman Brothers, Inc., (Maturity Value $140,762)
Sanwa Securities (USA) Co., L.P., (Maturity Value $140,762)
SBC Warburg, Inc., (Maturity Value $140,762)
UBS Securities L.L.C., (Maturity Value $140,762)
Collateralized by U.S. Treasury Bills and Notes United States $1,369,436 1,369,436
---------
Total Investments (Cost $9,180,586) 97.8% 9,213,957
Other Assets, less Liabilities 2.2% 208,539
---------
Net Assets 100.0% $9,422,496
---------
aNon-income producing
eSee Note 1(c) regarding joint repurchase agreement.
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin California Growth Fund
Class I
-------------------------------------------------------------------------
Six Months Ended
October 31, 1997 YEAR ENDED APRIL 30,
---------------------------------------------------------
(unaudited) 1997 1996 1995 1994 1993
-------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $19.35 $18.26 $14.03 $12.05 $10.21 $9.87
-------------------------------------------------------------------------
Income from investment operations:
Net investment income .07 .13 .20 .16 .14 .12
Net realized and unrealized gains 4.37 1.51 6.03 3.04 2.43 .34
-------------------------------------------------------------------------
Total from investment operations 4.44 1.64 6.23 3.20 2.57 .46
-------------------------------------------------------------------------
Less distributions from:
Net investment income (.07) (.12) (.23) (.12) (.15) (.12)
Net realized gains -- (.43) (1.77) (1.10) (.58) --
-------------------------------------------------------------------------
Total distributions (.07) (.55) (2.00) (1.22) (.73) (.12)
-------------------------------------------------------------------------
Net asset value, end of period 23.72 19.35 18.26 14.03 12.05 10.21
=========================================================================
Total return* 23.01% 8.94% 47.42% 29.09% 25.55% 4.72%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $537,422 $282,898 $81,175 $13,844 $4,646 $3,412
Ratio to average net assets:
Expenses 1.00%** 1.08% .71% .25% .09% --
Expenses excluding waiver and
payments by affiliate 1.00%** 1.08% 1.09% 1.27% 1.89% 1.99%
Net investment income .76%** .84% 1.42% 1.63% 1.16% 1.23%
Portfolio turnover rate 26.11% 44.81% 61.82% 79.52% 135.12% 38.28%
Average commission rate paid*** $.0544 $.0544 $.0536 -- -- --
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized
***Relates to purchases and sales of equity securities. Prior to fiscal year end
1996 disclosure of average commission rate was not required.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA GROWTH FUND (CONT.)
CLASS II
------------------------------
SIX MONTHS ENDED
OCTOBER 31, 1997 YEAR ENDED APRIL 30,
(UNAUDITED) 19977
------------------------------
PER SHARE OPERATING PERFORMANCE - CLASS II
(for a share outstanding throughout the period)
<S> <C> <C>
Net asset value, beginning of period $19.27 $18.05
------------------------------
Income from investment operations:
Net investment income .02 .05
Net realized and unrealized gains 4.31 1.65
------------------------------
Total from investment operations 4.33 1.70
------------------------------
Less distributions from:
Net investment income (.03) (.05)
In excess of net investment income -- (.43)
Total distributions (.03) (.48)
------------------------------
Net asset value, end of period 23.57 19.27
==============================
Total return* 22.48% 9.32%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $70,052 $24,556
Ratio to average net assets:
Expenses 1.77%** 1.86%**
Net investment income (.04%)** .05%**
Portfolio turnover rate 26.11% 44.81%
Average commission rate paid*** $.0544 $.0544
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
***Relates to purchases and sales of equity securities.
7For the period September 3, 1996 (effective date) to April 30, 1997.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1997 (unaudited)
FRANKLIN CALIFORNIA GROWTH FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------
a,cCommon Stocks 84.8%
aCommercial Services 2.1%
<S> <C> <C>
RemedyTemp, Inc., Class A 275,000 $ 6,325,000
Robert Half International, Inc. 160,000 6,550,000
-------------
12,875,000
-------------
Consumer Durables 2.7%
K2, Inc. 175,000 4,429,688
Mattel, Inc. 280,000 10,885,000
aSignature Eyewear, Inc. 134,200 1,274,900
-------------
16,589,588
-------------
Consumer Non-Durables 1.4%
a,bBeringer Wine Estates Holdings, Inc. 50,000 1,550,000
Clorox Co. 100,000 7,000,000
-------------
8,550,000
-------------
Consumer Services 3.4%
Hilton Hotels Corp. 350,000 10,784,375
McClatchy Newspapers, Inc. 148,000 4,856,250
United Television, Inc. 46,100 4,967,275
-------------
20,607,900
-------------
Electronic Technology 10.0%
aCisco Systems, Inc. 155,000 12,714,852
aCoherent, Inc. 140,000 5,460,000
aComputer Sciences Corp. 110,000 7,803,125
Hewlett-Packard Co. 125,000 7,710,938
aInternational Manufacturing Services, Inc. 100,000 1,087,500
aKomag, Inc. 350,000 6,059,375
Rockwell International Corp. 145,000 7,105,000
a3Com Corp. 195,000 8,080,313
aUniphase Corp. 50,000 3,356,250
aUNOVA, Inc. 65,000 1,218,750
-------------
60,596,103
-------------
Energy/Minerals 6.4%
Atlantic Richfield Co. (ARCO) 130,000 10,700,625
aBenton Oil & Gas Co. 200,000 4,025,000
Chevron Corp. 100,000 8,293,750
Ultramar Diamond Shamrock Corp. 250,000 7,718,750
Unocal Corp. 200,000 8,250,000
-------------
38,988,125
-------------
Finance 6.7%
BankAmerica Corp. 150,000 10,725,000
Countrywide Credit Industries, Inc. 225,000 7,720,313
Providian Financial Corp. 200,000 7,400,000
aSilicon Valley Bancshares 142,500 7,784,063
Zenith National Insurance Corp. 250,000 7,000,000
-------------
40,629,376
-------------
aHealth Services 2.5%
Access Health, Inc. 180,000 $ 6,255,000
gCohr, Inc. 425,000 4,462,500
PacifiCare Health Systems, Inc., Class B 70,000 4,532,500
-------------
15,250,000
-------------
Health Technology 3.9%
aAmgen, Inc. 100,000 4,925,000
a,bInhale Therapeutic Systems 132,700 3,616,075
a,cLynx Therapeutics, Inc. 48 --
Mentor Corp. 260,000 9,473,750
aMolecular Devices Corp. 100,000 2,000,000
aPenederm, Inc. 266,800 3,468,400
-------------
23,483,225
-------------
Industrial Services 3.5%
aEmcon 275,400 1,617,975
Granite Construction, Inc. 220,000 4,647,500
aHexcel Corp. 170,000 4,558,125
aVarco International, Inc. 90,000 5,484,375
aWestern Atlas, Inc. 65,000 4,747,495
-------------
21,055,470
-------------
Process Industries 1.1%
Avery Dennison Corp. 175,000 6,967,188
-------------
Producer Manufacturing .3%
Superior Industries International, Inc. 32,800 875,350
aUS Filter Corp. 25,000 1,003,125
-------------
1,878,475
-------------
Real Estate 5.1%
Alexandria Real Estate Equities, Inc. 115,000 3,155,313
Arden Realty Group, Inc. 275,000 8,387,500
Burnham Pacific Properties, Inc. 250,000 3,656,250
aCatellus Development Corp. 325,000 5,585,937
Innkeepers USA Trust 241,400 4,028,363
Irvine Apartment Communities, Inc. 110,000 3,382,500
cPacific Retail Trust 243,333 2,919,996
-------------
31,115,859
-------------
aRetail 6.6%
Cost Plus, Inc. 280,000 7,595,000
Costco Cos., Inc. 200,000 7,700,000
Federated Department Stores, Inc. 170,000 7,480,000
Guitar Center, Inc. 122,300 2,660,025
Safeway, Inc. 150,000 8,718,750
Viking Office Products, Inc. 237,500 5,685,150
-------------
39,838,925
-------------
Semiconductors/Semiconductor Equipment 3.9%
adaptec, Inc. 165,000 $ 7,992,188
Intel Corp. 50,000 3,850,000
Linear Technology Corp. 55,000 3,458,125
aXilinx, Inc. 250,000 8,531,250
-------------
23,831,563
-------------
Technology Services 19.7%
aActivision, Inc. 390,000 5,703,750
Autodesk, Inc. 275,000 10,175,000
aCheck Point Software Technologies, Ltd. 140,000 5,967,500
aClarify, Inc. 186,200 2,420,600
a,bDocumentum, Inc. 37,600 1,123,300
aElectronic Arts, Inc. 340,000 11,517,500
aInfinity Financial Technology, Inc. 296,700 4,561,763
aIntegrated Systems, Inc. 280,000 4,935,000
aMercury Interactive Corp. 350,000 7,875,000
aMetacreations Corp. 375,000 5,437,500
aOracle Corp. 300,000 10,734,390
aParametric Technology Co. 180,000 7,942,500
aPhoenix Technologies, Ltd. 135,000 2,075,625
aPremenos Technology Corp. 475,500 6,062,625
aRemedy Corp. 215,000 10,105,000
aSterling Commerce, Inc. 200,000 6,637,500
aSynopsys, Inc. 275,000 10,690,625
aVantive Corp. 220,000 5,555,000
-------------
119,520,178
-------------
Transportation 3.1%
Air Express International Corp. 225,000 6,890,625
Circle International Group, Inc. 181,400 4,557,675
Expeditors International of Washington, Inc. 200,000 7,350,000
-------------
18,798,300
-------------
Utilities 2.4%
aAirTouch Communications, Inc. 180,000 6,952,500
California Water Service Co. 90,000 4,460,625
Southern California Water Co. 140,000 3,071,250
-------------
14,484,375
-------------
Total Common Stocks (Cost $450,765,413) 515,059,650
-------------
a,cConvertible Bonds 1.6
Heartport, Inc., cvt. deb., 144A, 7.25%, 5/01/04 $ 3,500,000 $ 3,714,375
Hexcel Corp., cvt. sub. notes, 7.00%, 8/01/03 2,000,000 3,605,000
US Filter Corp., cvt. sub. notes, 4.50%, 12/15/01 2,200,000 2,604,250
-------------
Total Convertible Bonds (Cost $7,891,173) 9,923,625
-------------
Total Long Term Investments (Cost $458,656,586) 524,983,275
-------------
eRepurchase Agreement 13.8%
Joint Repurchase Agreement, 5.671%, 11/03/97 (Maturity Value $83,638,102) (Cost $83,598,595)
Aubrey G. Lanston & Co., Inc., (Maturity Value $1,145,542)
B.A. Securities, Inc., (Maturity Value $8,592,975)
Barclays de Zoete Wedd Securities, Inc., (Maturity Value $8,592,975)
Bear, Stearns & Co., Inc., (Maturity Value $5,155,785)
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $8,592,975)
Dresdner Kleinwort Benson North America L.L.C., (Maturity Value $8,592,975)
Fuji Securities, Inc., (Maturity Value $8,592,975)
Lehman Brothers, Inc., (Maturity Value $8,592,975)
Sanwa Securities (USA) Co., L.P., (Maturity Value $8,592,975)
SBC Warburg, Inc., (Maturity Value $8,592,975)
UBS Securities L.L.C., (Maturity Value $8,592,975)
Collateralized by U.S. Treasury Bills & Notes 83,598,595 83,598,595
-------------
Total Investments (Cost $542,255,181) 100.2% 608,581,870
Other Assets, less Liabilities (.2%) (1,108,232)
-------------
Net Assets 100.0% $607,473,638
=============
aNon-income producing.
bSufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
cSee Note 8 regarding restricted securities.
eSee Note 1(c) regarding joint repurchase agreement.
gSee Note 9 regarding holdings of 5% voting securities.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Global Health Care Fund
CLASS I
----------------------------------------------------------------------
Six Months Ended
October 31, 1997 YEAR ENDED APRIL 30,
---------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $16.11 $19.34 $11.45 $10.43 $8.88 $8.84
----------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.05) (.06) .11 .08 .07 .09
Net realized and unrealized gains (losses) 4.76 (2.75) 8.96 1.56 1.86 .04
----------------------------------------------------------------------
Total from investment operations 4.71 (2.81) 9.07 1.64 1.93 .13
----------------------------------------------------------------------
Less distributions from:
Net investment income -- (.04) (.12) (.06) (.08) (.09)
Net realized gains -- (.38) (1.05) (.56) (.30) --
----------------------------------------------------------------------
Total distributions -- (.42) (1.18) (.62) (.38) (.09)
----------------------------------------------------------------------
Net asset value, end of period 20.82 16.11 19.34 11.45 10.43 8.88
======================================================================
Total return* 29.24% (14.71%) 82.78% 16.33% 21.93% 1.41%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $192,560 $150,653 $108,914 $12,906 $5,795 $3,422
Ratio to average net assets:
Expenses 1.14%** 1.14% .73% .25% .10% --
Expenses excluding waiver and
payments by affiliate 1.14%** 1.14% 1.16% 1.37% 1.74% 2.16%
Net investment income (loss) (.50%)** (.39%) .50% .80% .68% 1.13%
Portfolio turnover rate 47.73% 73.17% 54.78% 93.79% 110.82% 62.74%
Average commission rate paid*** $.0490 $.0368 $.0709 -- -- --
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized
***Relates to purchases and sales of equity securities. Prior to fiscal year end
1996 disclosure of average commission rate was not required.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Global Health Care Fund (cont.)
CLASS II
-------------------------------
Six Months Ended
October 31, 1997 YEAR ENDED APRIL 30,
(UNAUDITED) 19977
-------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C>
Net asset value, beginning of period $ 16.07 $ 17.37
-------------------------------
Income from investment operations:
Net investment loss (.10) (.07)
Net realized and unrealized gains 4.70 (.85)
-------------------------------
Total from investment operations 4.60 (.92)
-------------------------------
Less distributions from:
Net realized gains -- (.38)
-------------------------------
Net asset value, end of period 20.67 16.07
===============================
Total return* 28.62% (5.47%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 20,430 $ 10,099
Ratio to average net assets:
Expenses 1.91%** 1.92%**
Net investment loss (1.28%)** (1.29%)**
Portfolio turnover rate 47.73% 73.17%
Average commission rate paid*** $ .0490 $ .0368
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
***Relates to purchases and sales of equity securities.
7For the period September 3, 1996 (effective date) to April 30, 1997.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1997 (unaudited)
Franklin Global Health Care Fund COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
a,kCommon Stocks 90.3%
<S> <C> <C> <C>
aAlternate Site Providers 6.6%
Renal Care Group, Inc. United States 187,500 $ 6,281,250
Total Renal Care Holdings, Inc. United States 250,000 7,703,125
-------------
13,984,375
-------------
aBiotechnology 12.9%
DepoTech Corp. United States 350,000 4,856,250
Ligand Pharmaceuticals, Class B United States 325,000 4,753,125
Neurogen Corp. United States 165,000 3,341,250
Serologicals Corp. United States 414,100 9,524,300
Vertex Pharmaceuticals, Inc. United States 170,000 5,015,000
-------------
27,489,925
-------------
aHospitals 1.8%
Tenet Healthcare Corp. United States 125,000 3,820,313
-------------
Managed Care and HMOs 1.9%
United Healthcare Corp. United States 85,000 3,936,563
-------------
Medical Technology and Supplies 16.5%
aBoston Scientific Corp. United States 60,000 2,730,000
aCardioGenesis Corp. United States 90,000 810,000
Cochlear, Ltd. Australia 225,000 696,217
aESC Medical Systems, Ltd. Israel 335,000 13,148,750
Mentor Corp. United States 120,000 4,372,500
aMolecular Devices Corp. United States 270,000 5,400,000
aOrthologic Corp. United States 500,000 2,562,500
aPhysiometrix, Inc. United States 50,000 121,875
aTechnical Chemicals and Products, Inc. United States 300,000 5,306,250
-------------
35,148,092
-------------
aNursing Homes 4.1%
Assisted Living Concepts, Inc. United States 200,000 4,100,000
Centennial Healthcare Corp. United States 125,000 2,593,750
Genesis Health Ventures, Inc. United States 85,000 2,082,500
-------------
8,776,250
-------------
aMiscellaneous 7.5%
gCohr, Inc. United States 405,500 4,257,750
Covance, Inc. United States 150,000 2,653,125
Healthcare Recoveries, Inc. United States 210,000 3,885,000
Pharmaceutical Product Development, Inc. United States 150,000 2,662,500
Staff Leasing, Inc. United States 105,000 2,585,625
-------------
16,044,000
-------------
Pharmaceuticals 4.1%
Novartis, AG Switzerland 3,900 6,148,003
Roche Holding, AG Switzerland 300 2,635,562
-------------
8,783,565
-------------
aPhysician Practice Management 4.1%
Advanced Health Corp. United States 257,200 $ 4,533,150
Pediatrix Medical Group, Inc. United States 100,000 4,225,000
-------------
8,758,150
-------------
Software and Information Systems 8.4%
aAccess Health, Inc. United States 270,000 9,382,500
HBO & Co. United States 100,000 4,350,000
aTransitions Systems, Inc. United States 200,000 4,050,000
-------------
17,782,500
-------------
aSpecialty Pharmaceuticals 20.5%
Algos Pharmaceutical Corp. United States 250,000 6,187,500
Anesta Corp. United States 75,000 1,631,250
gCIMA Labs, Inc. United States 625,000 3,710,938
Collagenex Pharmaceuticals, Inc. United States 200,000 2,400,000
Dura Pharmaceuticals, Inc. United States 150,000 7,256,250
Ethical Holdings, Plc., ADR United Kingdom 100,000 587,500
Heska Corp. United States 125,000 1,640,625
Inhale Therapeutic Systems United States 251,400 6,850,650
Matrix Pharmaceutical, Inc. United States 156,200 624,800
Noven Pharmaceutical, Inc. United States 128,700 916,988
gPenederm, Inc. United States 524,000 6,812,000
PT Kalbe Farma Indonesia 1,700,000 1,037,448
Zonagen, Inc. United States 125,000 4,093,750
-------------
43,749,699
-------------
Wholesalers/Distributors 1.9%
aCapstone Pharmacy Services, Inc. United States 225,000 2,390,623
Grupo Casa Autrey, SA de CV, ADR Mexico 100,000 1,712,500
-------------
4,103,123
-------------
Total Long Term Investments (Cost $167,177,555) 192,376,555
-------------
a,eRepurchase Agreement 7.1%
Joint Repurchase Agreement, 5.671%, 11/03/97 (Maturity Value $15,028,550) (Cost $15,021,451)
Aubrey G. Lanston & Co., Inc., (Maturity Value $205,837)
B.A. Securities, Inc., (Maturity Value $1,544,033)
Barclays de Zoete Wedd Securities, Inc., (Maturity Value $1,544,033)
Bear, Stearns & Co., Inc., (Maturity Value 926,416)
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $1,544,033)
Dresdner Kleinwort Benson North America L.L.C., (Maturity Value $1,544,033)
Fuji Securities, Inc., (Maturity Value $1,544,033)
Lehman Brothers, Inc., (Maturity Value $1,544,033)
Sanwa Securities (USA) Co., L.P., (Maturity Value $1,544,033)
SBC Warburg, Inc., (Maturity Value $1,544,033)
UBS Securities L.L.C., (Maturity Value $1,544,033)
Collateralized by U.S. Treasury Bills and Notes United States $15,021,451 $ 15,021,451
-------------
Total Investments (Cost $182,199,006) 97.4% 207,398,006
Other Assets, less Liabilities 2.6% 5,592,464
-------------
Net Assets 100.0% $212,990,470
=============
aNon-income producing.
eNote 1(c) regarding joint repurchase agreements.
gSee Note 9 regarding holdings of 5% voting securities.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Franklin Strategic Series
Financial Highlights
Franklin Global Utilities Fund
CLASS I
------------------------------------------------------------------
Six Months Ended
October 31, 1997 YEAR ENDED APRIL 30,
------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 19931
------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $14.46 $14.28 $12.23 $12.60 $11.36 $10.00
------------------------------------------------------------------
Income from investment operations:
Net investment income .17 .42 .37 .42 .30 .22
Net realized and unrealized gains (losses) 1.59 1.35 2.39 (.07) 1.28 1.27
------------------------------------------------------------------
Total from investment operations 1.76 1.77 2.76 .35 1.58 1.49
------------------------------------------------------------------
Less distributions from:
Net investment income (.23) (.38) (.39) (.36) (.30) (.13)
Net realized gains -- (1.21) (.32) (.36) (.04) --
------------------------------------------------------------------
Total distributions (.23) (1.59) (.71) (.72) (.34) (.13)
------------------------------------------------------------------
Net asset value, end of period 15.99 14.46 14.28 12.23 12.60 11.36
==================================================================
Total return* 12.18% 12.94% 23.27% 3.17% 14.04% 18.08%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $186,221 $174,023 $167,225 $119,250 $124,188 $14,227
Ratio to average net assets:
Expenses 1.05%** 1.00% 1.04% 1.12% .84% --
Expenses excluding waiver and
payments by affiliate 1.05%** 1.00% 1.04% 1.12% 1.28% 1.51%**
Net investment income 2.00%** 2.82% 2.85% 3.47% 2.95% 3.89%**
Portfolio turnover rate 30.24% 47.55% 50.51% 16.65% 16.28% --
Average commission rate paid*** $.0320 $.0150 $.0313 -- -- --
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized
***Relates to purchases and sales of equity securities. Prior to fiscal year end
1996 disclosure of average commission rate was not required.
1For the period July 2, 1992 (effective date) to April 30, 1993.
</TABLE>
<TABLE>
<CAPTION>
Franklin Global Utilities Fund (cont.)
CLASS II
-------------------------------------
Six Months Ended
October 31, 1997 YEAR ENDED APRIL 30,
(UNAUDITED) 1997 1996
-------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C> <C>
Net asset value, beginning of period $14.37 $14.24 $12.23
-------------------------------------
Income from investment operations:
Net investment income .11 .32 .37
Net realized and unrealized gains 1.59 1.33 2.32
-------------------------------------
Total from investment operations 1.70 1.65 2.69
-------------------------------------
Less distributions from:
Net investment income (.18) (.31) (.36)
Net realized gains -- (1.21) (.32)
-------------------------------------
Total distributions (.18) (1.52) (.68)
-------------------------------------
Net asset value, end of period 15.89 14.37 14.24
=====================================
Total return* 11.84% 12.04% 22.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $11,505 $8,467 $2,727
Ratio to average net assets:
Expenses 1.82%** 1.77% 1.81%
Net investment income 1.20%** 1.98% 2.10%
Portfolio turnover rate 30.24% 47.55% 50.51%
Average commission rate paid*** $ .0320 $ .0150 $ .0313
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
***Relates to purchases and sales of equity securities.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1997 (unaudited)
SHARES/
Franklin Global Utilities Fund COUNTRY RIGHTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
aCommon Stocks and Rights 94.6%
Electric & Gas Utilities 52.3%
<S> <C> <C> <C>
aAES Corp. United States 140,000 $ 5,547,500
aBeijing Datang Power Generation Co., Ltd. China 509,000 256,755
BSES, Ltd., 144A United States 21,400 358,450
CINergy Corp. United States 67,000 2,211,000
Companhia Energetica de Minas Gerais, Sponsored ADR Brazil 11,900 474,942
Companhia Paranaense de Energia-Copel, Sponsored ADR Brazil 41,700 497,794
Dominion Resources, Inc. United States 44,700 1,662,281
Duke Energy Corp. United States 155,701 7,512,573
aElectricidade Sao Paulo Brazil 7,500,000 1,278,970
Electricidade Sao Paulo, rights Brazil 1,800,750 6,534
Empresa Nacional de Electricidad, SA, Sponsored ADR Chile 160,000 3,220,000
Enron Corp. United States 127,000 4,826,000
Entergy Corp. United States 77,000 1,881,688
Espoon Sahko Oy, 144A United States 195,000 5,201,762
EVN Energie-Versorgung Niederoesterreich, AG Austria 3,360 389,934
Florida Progress Corp. United States 105,000 3,419,063
FPL Group, Inc. United States 39,000 2,015,813
Hong Kong Electric Holdings, Ltd. Hong Kong 687,500 2,329,755
aHuaneng Power International, Inc., Sponsored ADR China 62,000 1,364,000
Korea Electric Power Corp. South Korea 25,530 362,447
Light Servicos de Eletricidade, SA Brazil 2,750,000 912,967
MCN Corp. United States 26,700 924,488
MidAmerican Energy Holdings Co. United States 43,600 779,350
National Fuel Gas Co. United States 109,000 4,809,625
National Power, Plc. United Kingdom 97,500 807,265
New Century Energies, Inc. United States 50,000 2,087,500
New Jersey Resources Corp. United States 125,400 4,059,825
Northwestern Public Service Co. United States 120,000 2,400,000
aNRG Generating (U.S.), Inc. United States 35,200 686,400
OGE Energy Corp. United States 32,700 1,583,906
Pacific Enterprises United States 126,000 4,118,625
Pacific Gas & Electric Co. United States 100,000 2,556,250
Pinnacle West Capital Corp. United States 60,000 2,088,750
PowerGen, Plc. United Kingdom 102,000 1,132,021
RWE, AG Germany 70,000 3,080,114
Scottish Power, Plc. United Kingdom 180,000 1,342,360
Shandong Huaneng Power Co., Ltd., Sponsored ADR China 45,600 339,150
SIG Corp., Inc. United States 61,800 1,614,525
Sonat, Inc. United States 85,000 3,904,688
Southern Co. United States 146,500 3,360,344
Southern Electric, Plc. United Kingdom 95,446 731,010
TECO Energy, Inc. United States 126,900 3,029,738
Texas Utilities Co. United States 86,400 3,099,600
TNP Enterprises, Inc. United States 140,000 3,552,500
Tokyo Electric Power Co. Japan 48,000 917,324
Tokyo Gas Co., Ltd. Japan 700,000 1,605,318
Transportadora de Gas del Sur, SA, Sponsored ADR Argentina 179,000 1,689,313
Electric & Gas Utilities (cont.)
Viag, AG Germany 2,600 $ 1,214,178
Western Resources, Inc. United States 1,700 63,325
Wing Shan International, Ltd. Hong Kong 340,000 41,777
-------------
103,349,497
-------------
Telecommunications Services 42.3%
aAirTouch Communications, Inc. United States 135,150 5,220,169
Alcatel Alsthom France 5,000 603,303
Ameritech Corp. United States 10,000 650,000
aArch Communications Group, Inc. United States 285,000 2,173,125
aAscend Communications, Inc. United States 13,300 359,100
AT&T Corp. United States 40,000 1,957,500
Bellsouth Corp. United States 50,000 2,365,625
aChina Telecom (Hong Kong), Ltd., Sponsored ADR Hong Kong 109,900 3,558,013
aEsprit Telecom Group, Plc., ADR United Kingdom 173,700 868,500
aFrance Telecom, SA France 34,700 1,313,225
aGrupo Iusacell, SA, Series D Mexico 44,400 56,129
aGrupo Iusacell, SA, Series L, Sponsored ADR Mexico 73,000 1,314,000
GTE Corp. United States 30,000 1,273,125
Hellenic Telecommunications Organization, SA Greece 266,585 5,569,147
Hong Kong Telecommunications, Ltd. Hong Kong 703,000 1,345,716
aICG Communications, Inc. United States 320,000 7,360,000
aItron, Inc. United States 104,500 2,142,250
aLightbridge, Inc. United States 180,000 2,610,000
aNCR Corp. United States 4,375 132,617
aPaging Network, Inc. United States 275,000 3,403,125
Pakistan Telecommunications Corp., Sponsored GDR Pakistan 3,127 257,978
Philippine Long Distance Telephone Co., Sponsored ADR Philippines 10,835 262,758
Portugal Telecom, SA Portugal 119,900 4,919,411
aPrimus Telecommunications Group, Inc. United States 121,500 1,442,813
PT Indosat Indonesia 750,000 1,690,361
PT Indosat, ADR Indonesia 21,200 502,175
aRural Cellular Corp., Class A United States 95,700 1,148,400
SBC Communications, Inc. United States 82,900 5,274,513
Tele Danmark, A/S, Class B Denmark 7,830 459,598
Tele Danmark, A/S, Sponsored ADR Denmark 133,540 3,872,660
aTelecel-Comunicacaoes Pessoais, SA Portugal 15,300 1,383,395
Telecom de Argentina, SA, Sponsored ADR Argentina 139,500 3,531,094
Telecom Italia, SpA Italy 1,004,767 4,046,368
Telecomunicacoes Brasileiras, SA, Sponsored ADR Brazil 16,000 1,624,000
Telefonica de Argentina, ADS Argentina 20,400 573,750
Telefonica de Espana, Sponsored ADR Spain 24,850 2,043,904
Telefonica del Peru, SA, Sponsored ADR Peru 169,000 3,337,750
Total Access Communication Public Co., Ltd. Thailand 600,000 1,146,000
Videsh Sanchar Nigam, Ltd., Sponsored GDR, 144A India 140,000 1,925,000
-------------
83,716,597
-------------
Total Common Stocks and Rights (Cost $162,680,132) 187,066,094
-------------
aConvertible Preferred Stocks 1.1%
Telecommunications
cCMS Energy Corp., cvt. pfd United States 35,000 $ 1,878,692
Compania Inversiones Telecommunications, 7.00%, cvt. pfd., 144A Argentina 6,900 386,400
-------------
Total Convertible Preferred Stock (Cost $2,246,800) 2,265,092
-------------
Total Long Term Investments (Cost $164,926,932) 189,331,186
-------------
PRINCIPAL
AMOUNT
-----------
eRepurchase Agreement 3.9%
Joint Repurchase Agreement, 5.671%, 11/03/97, (Maturity Value $7,695,659) (Cost $7,692,024)
Aubrey G. Lanston & Co., Inc., (Maturity Value $105,431)
B.A. Securities, Inc., (Maturity Value $790,652)
Barclays de Zoete Wedd Securities, Inc., (Maturity Value $790,652)
Bear, Stearns & Co., Inc., (Maturity Value $474,360)
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $790,652)
Dresdner Kleinwort Benson North America L.L.C., (Maturity Value $790,652)
Fuji Securities, Inc., (Maturity Value $790,652)
Lehman Brothers, Inc., (Maturity Value $790,652)
Sanwa Securities (USA) Co., L.P., (Maturity Value $790,652)
SBC Warburg, Inc., (Maturity Value $790,652)
UBS Securities L.L.C., (Maturity Value $790,652)
Collateralized by U.S. Treasury Bills & Notes United States $7,692,024 7,692,024
-------------
Total Investments (Cost $172,618,956) 99.6% 197,023,210
Other Assets, less Liabilities .4% 702,592
-------------
Net Assets 100.0% $197,725,802
=============
aNon-income producing.
cSee Note 8 regarding restricted securities.
eSee Note 1(c) regarding joint repurchase agreement.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin MidCap Growth Fund
CLASS I
---------------------------------------------------------------
Six Months Ended
October 31, 1997 YEAR ENDED APRIL 30,
---------------------------------------------
(UNAUDITED) 1997 1996 1995 19946
---------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $13.34 $14.24 $10.81 $10.05 $10.00
---------------------------------------------------------------
Income from investment operations:
Net investment income (loss) -- (.02) .18 .21 .15
Net realized and unrealized gains 3.22 .93 3.59 .77 .01
---------------------------------------------------------------
Total from investment operations 3.22 .91 3.77 .98 .16
---------------------------------------------------------------
Less distributions from:
Net investment income -- (.05) (.21) (.20) (.08)
Net realized gains -- (1.76) (.13) (.02) (.03)
---------------------------------------------------------------
Total distributions -- (1.81) (.34) (.22) (.11)
---------------------------------------------------------------
Net asset value, end of period 16.56 13.34 14.24 10.81 10.05
===============================================================
Total return* 24.14% 6.31% 35.40% 10.06% 1.62%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $20,528 $12,853 $7,575 $5,591 $5,079
Ratio to average net assets:
Expenses 1.12%** 1.07% .16% -- --
Expenses excluding waiver and payments by affiliate 1.12%** 1.07% .96% .98% .91%**
Net investment income (loss) (.04%)** (.22%) 1.42% 2.12% 2.21%**
Portfolio turnover rate 25.70% 76.35% 102.65% 163.54% 70.53%
Average commission rate paid*** $.0575 $.0550 $.0467 -- --
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
***Relates to purchases and sales of equity securities. Prior to fiscal year end
1996 disclosure of average commission rate was not required.
6For the period August 17, 1993 (effective date) to April 30, 1994.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1997 (unaudited)
Franklin MidCap Growth Fund SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
aCommon Stocks 90.1%
<S> <C> <C>
Consumer Durables 7.1%
Clayton Homes, Inc. 10,875 $ 178,758
Callaway Golf Co. 6,500 209,625
aCannondale Corp. 9,000 199,125
aElectronic Arts, Inc. 5,000 169,375
aJones Apparel Group, Inc. 5,000 254,375
K2, Inc. 8,000 202,500
aTommy Hilfiger Corp. 5,900 233,419
-------------
1,447,177
-------------
Consumer Non-Durables 2.2%
aConsolidated Cigar Holdings, Inc. 7,100 278,675
Estee Lauder Cos., Class A 4,000 177,750
-------------
456,425
-------------
Commercial Services 4.8%
aApplied Graphic Technologies, Inc. 2,200 117,700
Norrell Corp. 6,200 180,575
aRobert Half International, Inc. 6,900 282,469
aSylvan Learning Systems, Inc. 4,800 202,200
aValassis Communications, Inc. 7,000 206,500
-------------
989,444
-------------
Consumer Services 10.6%
aCable & Wireless Communications, Plc., ADR (United Kingdom) 5,481 99,686
aCapStar Hotel Co. 7,700 272,869
aCUC International, Inc. 11,500 339,250
aDeVry, Inc. 8,100 213,638
aEducation Management Corp. 5,500 143,000
aHost Marriott Corp. 13,000 271,375
aMirage Resorts, Inc. 8,400 210,000
McClatchy Newspaper, Inc. 6,000 196,875
aPrime Hospitality Corp. 12,500 254,688
aStarbucks Corp. 5,500 181,500
-------------
2,182,881
-------------
aElectronic Technology 5.2%
Computer Sciences Corp. 2,500 177,344
ICG Communications, Inc. 10,800 248,400
Komag, Inc. 9,600 166,200
Newbridge Networks Corp. 5,100 270,300
Tellabs, Inc. 3,750 202,500
-------------
1,064,744
-------------
Energy Minerals 2.5%
aBarrett Resources Corp. 8,000 281,500
Devon Energy Corp. 5,000 223,750
-------------
505,250
-------------
Financials 8.4%
BankBoston Corp. 2,600 $ 210,763
Countrywide Credit Industries, Inc. 5,500 188,719
aEVEREN Capital Corp. 5,000 188,750
aFirst International Bancorp, Inc. 500 8,125
aFirst USA Paymentech, Inc. 3,900 68,738
Hartford Life, Inc. 4,600 169,913
aHomeSide, Inc. 11,100 297,619
Providian Financial Corp. 6,500 240,500
Republic New York Corp. 1,500 158,719
The PMI Group, Inc. 3,000 181,313
-------------
1,713,159
-------------
aHealthcare Services 1.5%
HEALTH SOUTH Rehabilitation Corp. 5,600 143,150
PacifiCare Health Systems, Inc., Class B 2,700 174,825
-------------
317,975
-------------
Health Technology 1.2%
Mentor Corp. 6,800 247,775
-------------
Industrial Services 9.6%
aAES Corp. 7,200 285,300
aDiamond Offshore Drilling, Inc. 5,400 336,150
aEVI, Inc. 3,200 205,400
Granite Construction, Inc. 5,850 123,581
aIspat International, NV (Netherlands) 3,200 81,000
Transocean Offshore, Inc. 5,800 313,200
aUSA Waste Services, Inc. 5,500 203,500
aVarco International, Inc. 6,800 414,375
-------------
1,962,506
-------------
Process Industries 2.4%
BetzDearborn, Inc. 2,600 166,725
Bowater, Inc. 3,200 133,800
aUCAR International, Inc. 5,000 187,500
-------------
488,025
-------------
Producer Manufacturing 3.3%
aGentex Corp. 8,600 210,700
Mark IV Industries, Inc. 9,850 238,863
aUS Filter Corp. 5,800 232,725
-------------
682,288
-------------
Real Estate Investment Trusts 3.4%
Arden Realty Group, Inc. 8,000 244,000
Charles E. Smith Residential Realty, Inc. 5,800 197,925
Meridian Industrial Trust, Inc. 7,200 166,050
aSecurity Capital Group, Inc., Class B 2,900 92,800
-------------
700,775
-------------
Retail 6.5%
aCost Plus, Inc. 10,000 $ 271,250
aGuitar Center, Inc. 5,000 108,750
aSafeway, Inc. 4,000 232,500
aSaks Holdings, Inc. 11,300 241,538
Talbots, Inc. 10,000 240,000
aWest Marine, Inc. 11,800 247,800
-------------
1,341,838
-------------
Semiconductors 6.2%
aAdaptec, Inc. 5,700 276,094
aAltera Corp. 3,100 137,563
aAnalog Devices, Inc. 6,666 203,730
Linear Technology Corp. 3,700 232,638
aVLSI Technology, Inc. 7,000 207,375
aXilinx, Inc. 6,500 221,803
-------------
1,279,203
-------------
aTechnology Services 5.9%
Affiliated Computer Services, Inc., Class A 4,500 113,063
BMC Software, Inc. 3,000 181,125
Parametric Technology Corp. 5,700 251,513
Remedy Corp. 5,000 235,000
Sterling Commerce, Inc. 4,711 156,346
Synopsys, Inc. 7,000 272,125
-------------
1,209,172
-------------
Transportation 5.9%
aC.H. Robinson Worldwide, Inc. 12,000 264,000
Expeditors International of Washington, Inc. 8,300 305,025
Illinois Central Corp. 5,500 195,938
Pittston Burlington Group 7,800 212,063
Teekay Shipping Corp. 7,300 233,600
-------------
1,210,626
-------------
Utilities 3.4%
aMillicom International Cellular, SA (Luxembourg) 4,800 201,600
aPaging Network, Inc. 22,000 272,250
Sonat, Inc. 5,000 229,688
-------------
703,538
-------------
Total Long Term Investments (Cost $14,618,413) 18,502,801
-------------
eRepurchase Agreement 9.1%
Joint Repurchase Agreement, 5.671%, 11/03/97, (Maturity Value $1,858,119) (Cost $1,857,241)
Aubrey G. Lanston & Co., Inc., (Maturity Value $25,457)
B.A. Securities, Inc., (Maturity Value $190,903)
Barclays de Zoete Wedd Securities, Inc., (Maturity Value $190,903)
Bear, Stearns & Co., Inc., (Maturity Value $114,535)
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $190,903)
Dresdner Kleinwort Benson North America L.L.C., (Maturity Value $190,903)
Fuji Securities, Inc., (Maturity Value $190,903)
Lehman Brothers, Inc., (Maturity Value $190,903)
Sanwa Securities (USA) Co., L.P., (Maturity Value $190,903)
SBC Warburg, Inc., (Maturity Value $190,903)
UBS Securities L.L.C., (Maturity Value $190,903)
Collateralized by U.S. Treasury Bills and Notes $1,857,241 $ 1,857,241
-------------
Total Investments (Cost $16,475,654) 99.2% 20,360,042
Other Assets, less Liabilities .8% 168,433
-------------
Net Assets 100.0% $20,528,475
=============
aNon-income producing.
eSee Note 1(c) regarding joint repurchase agreement.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Natural Resources Fund
Class I
---------------------------------------
Six Months Ended
October 31, 1997 Year Ended April 30,
(unaudited) 1997 19963
---------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C> <C>
Net asset value, beginning of period $14.07 $13.14 $10.00
---------------------------------------
Income from investment operations:
Net investment income .05 .09 .08
Net realized and unrealized gains (losses) 3.04 1.25 3.22
---------------------------------------
Total from investment operations 3.09 1.34 3.30
---------------------------------------
Less distributions from:
Net investment income (.08) (.09) (.06)
Net realized gains -- (.32) (.09)
---------------------------------------
Total distributions (.08) (.41) (.16)
---------------------------------------
Net asset value, end of period 17.08 14.07 13.14
=======================================
Total return* 22.00% 10.23% 33.36%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $61,206 $45,386 $9,909
Ratio to average net assets:
Expenses .96%** .98% .99%
Expenses excluding waiver and payments by affiliate 1.24%** 1.31% 1.77%
Net investment income .56%** .72% 1.16%
Portfolio turnover rate 35.95% 46.31% 59.04%
Average commission rate paid*** $ .0294 $.0331 $.0052
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
***Relates to purchases and sales of equity securities.
3For the period June 5, 1995 (effective date) to April 30, 1996.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights (continued)
Franklin Natural Resources Fund (cont.)
Advisor Class
--------------------------------------
Six Months Ended
October 31, 1997 Year Ended April 30,
(unaudited) 19978
--------------------------------------
Per share operating performance
(for a share outstanding throughout the period)
<S> <C> <C>
Net asset value, beginning of period $14.07 $14.66
--------------------------------------
Income from investment operations:
Net investment income .07 --
Net realized and unrealized gains (losses) 3.05 (.59)
--------------------------------------
Total from investment operations 3.12 (.59)
--------------------------------------
Less distributions from:
Net investment income (.10) --
--------------------------------------
Net asset value, end of period 17.09 14.07
======================================
Total return* 22.26% (4.02%)
Ratios/supplemental data
Net assets, end of period (000's) $1,762 $1,123
Ratio to average net assets:
Expenses .64%** .64%**
Expenses excluding waiver and payments by affiliate 1.02%** .86%**
Net investment income .86%** 1.03%**
Portfolio turnover rate 35.95% 46.31%
Average commission rate paid*** $.0294 $.0331
*Total return is not annualized.
**Annualized
***Relates to purchases and sales of equity securities.
8For the period January 2, 1997 (effective date) to April 30, 1997.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1997 (unaudited)
SHARES,
WARRANTS,
Franklin Natural Resources Fund COUNTRY & RIGHTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
aCommon Stocks, Warrants, and Rights 92.2%
<S> <C> <C> <C>
Chemicals 9.8%
aAirGas, Inc. United States 20,000 $ 311,250
Avery Dennison Corp. United States 16,400 652,925
BetzDearborn, Inc. United States 9,000 577,125
Cabot Corp. United States 16,000 393,000
DuPont (EI) De Nemours & Co. United States 4,000 227,500
Hanna (M.A.) Co. United States 17,000 437,750
IMC Global, Inc. United States 22,500 757,969
Monsanto Co. United States 12,000 513,000
Potash Corp. of Saskatchewan, Inc. Canada 8,885 728,015
Praxair, Inc. United States 18,400 801,550
Sigma-Aldrich United States 22,000 772,750
-------------
6,172,834
-------------
aEngineering & Construction/Basic Materials 1.9%
Atchison Casting Corp. United States 13,500 277,594
Denison Intl Plc., ADR United Kingdom 22,600 426,575
Owens-Illinois, Inc. United States 12,500 431,250
Unova, Inc. United States 4,000 75,000
-------------
1,210,419
-------------
Forest Products and Paper 3.2%
aAsia Pulp & Paper Co., Ltd., ADR Singapore 50,800 577,850
Bowater, Inc. United States 5,600 234,150
Champion International Corp. United States 5,400 298,013
Crown Cork & Seal Co., Inc. United States 15,000 675,938
Willamette Industries, Inc. United States 7,000 231,438
-------------
2,017,389
-------------
Iron/Steel 5.9%
Carpenter Technology Corp. United States 12,200 590,175
Cia Vale Do Rio Doce, Sponsored ADR Brazil 22,000 425,053
aGibraltar Steel Corp. United States 20,500 484,313
aIspat International, NV Netherlands 17,200 435,375
J&L Specialty Steel, Inc. United States 19,000 239,875
Pohang Iron & Steel Co., Ltd., ADR South Korea 23,800 386,750
aUCAR International, Inc. United States 21,400 802,500
Worthington Industries, Inc. United States 18,000 372,375
-------------
3,736,416
-------------
Metal - Diversified 4.0%
aAustral Coal Holdings Australia 1,313,000 378,580
Freeport-McMoran Copper & Gold, Inc., Class A United States 11,700 269,831
Freeport-McMoran Copper & Gold, Inc., Class B United States 8,000 191,000
Orogen Minerals, Inc. Australia 50,000 109,004
aOrogen Minerals, Ltd., ADR Australia 3,800 82,843
Pasminco, Ltd. Australia 140,000 173,281
aPasminco, Ltd., rights Australia 40,000 3,516
Metal - Diversified (cont.)
aRio Tinto, Plc. United Kingdom 40,000 $ 516,073
aRMI Titanium Co. United States 9,000 213,750
aTenke Mining Corp. Canada 30,000 76,631
aTenke Mining Corp., warrants Canada 4,500 --
aTitanium Metals Corp. United States 16,300 509,375
-------------
2,523,884
-------------
Mining - Precious Metals 7.1%
Ashanti Goldfields Co., Ltd., Sponsored GDR Ghana 13,612 134,419
aAsquith Resources, Inc. Canada 385,800 65,698
Barrick Gold Corp. Canada 28,000 575,750
aBema Gold Corp. Canada 34,000 108,561
aCanyon Resources Corp., units United States 14,000 23,625
Compania de Minas Buenaventura, SA Peru 8,500 152,469
Compania de Minas Buenaventure, SA, Class A Peru 3,699 32,153
aCompania de Minas Buenaventure, SA, Class B Peru 1,235 11,417
De Beers Consolidated Mines, AG, ADR South Africa 23,200 556,800
aEquinox Resources, NL Australia 700,000 113,223
aGetchell Gold Corp. United States 17,200 619,200
aMinefinders Corp. Canada 124,300 282,229
Newmont Mining Corp. United States 18,735 655,725
aPangea Goldfields, Inc. Canada 44,400 78,760
Placer Dome, Inc. Canada 42,600 660,300
aRio Narcea Gold Mines, Ltd. Canada 103,000 317,913
William Resources, Inc. Canada 100,000 50,378
-------------
4,438,620
-------------
Oil/Gas Distribution 2.9%
aAES Corp. United States 17,360 687,890
aContinental Natural Gas, Inc. United States 15,000 174,375
Enron Corp. United States 14,000 532,000
MCN Energy Group, Inc. United States 6,000 207,750
Pacific Enterprises United States 6,600 215,738
-------------
1,817,753
-------------
Oil/Gas - Domestic 3.1%
Atlantic Richfield Co. (ARCO) United States 10,000 823,125
Ultramar Diamond Shamrock Corp. United States 15,200 469,300
Unocal Corp. United States 15,400 635,250
-------------
1,927,675
-------------
Oil/Gas - Equipment & Services 22.6%
aAtwood Oceanics, Inc. United States 2,200 243,650
Baker Hughes, Inc. United States 13,000 597,188
aCoflexip, SA, ADR France 12,000 660,000
aComputalog, Ltd. Canada 10,000 202,221
aCore Laboratories, NV Netherlands 12,000 480,000
Diamond Offshore Drilling, Inc. United States 19,800 1,232,550
Oil/Gas - Equipment & Services (cont.)
aDril-Quip United States 10,100 $ 362,338
aEagle Geophysical, Inc. United States 14,200 248,500
aEVI, Inc. United States 15,000 962,813
aFalcon Drilling Cos., Inc. United States 11,800 429,225
aNoble Drilling Corp. United States 8,500 302,281
aNorton Drilling Services, Inc. United States 60,000 230,628
aParker Drilling Co. United States 25,000 370,313
aRowan Cos., Inc. United States 8,500 330,438
aRyan Energy Technologies, Inc. Canada 35,000 320,360
aStolt Comex Seaway, SA United Kingdom 8,300 498,000
aTesco Corp. Canada 27,000 503,849
Tidewater, Inc. United States 10,500 689,719
aTranscoastal Marine Services United States 18,000 447,750
Transocean Offshore, Inc. United States 28,000 1,512,000
aTuboscope Vetco International Corp. United States 26,600 844,550
aUTI Energy Corp. United States 12,000 535,500
aVarco International, Inc. United States 26,600 1,620,938
aWeatherford Enterra, Inc. United States 6,500 331,906
aWestern Atlas, Inc. United States 4,000 291,733
-------------
14,248,450
-------------
Oil/Gas - Exploration 25.1%
aAbacan Resources Corp. Canada 186,500 562,405
aBarrett Resources Corp. United States 45,300 1,593,994
aBasin Exploration, Inc. United States 39,000 770,250
aBenton Oil & Gas Co. United States 40,000 805,000
Devon Energy Corp. United States 27,000 1,208,250
aEncal Energy, Ltd. Canada 131,600 508,901
aGulf Canada Res., Ltd Canada 221,000 1,850,875
aHouston Exploration Co. United States 31,000 751,750
aNational Energy Group, Inc. United States 130,000 706,875
aNewfield Exploration Co. United states 12,000 325,500
aNuevo Energy Co. United States 12,000 497,250
aOryx Energy Co. United States 46,000 1,267,875
aPatina Oil & Gas Corp. United States 69,500 677,625
aPetsec Energy, Ltd., ADR Australia 22,500 506,250
aPinnacle Resources, Ltd. Canada 53,000 864,938
Summit Resources, Ltd. Canada 148,100 683,045
aTitan Exploration, Inc. United States 96,600 1,219,575
aTriton Energy, Ltd. United States 5,000 195,625
aUnited Meridian Corp. United States 24,600 834,863
-------------
15,830,846
-------------
Oil/Gas - International 3.2%
Royal Dutch Petroleum Co., New York Shares United States 8,400 442,050
Total, SA, ADR France 8,640 479,520
YPF, SA, ADR Argentina 33,500 1,072,000
-------------
1,993,570
-------------
Real Estate Investment Trusts 3.4%
Alexandria Real Estate Equities, Inc. United States 16,300 $ 447,231
Arden Realty Group, Inc. United States 15,000 457,500
FelCor Suite Hotels, Inc. United States 10,500 384,563
Omega Healthcare Investors, Inc. United States 3,400 122,400
Storage Trust Realty United States 22,200 567,488
Winston Hotels, Inc. United States 12,200 166,225
-------------
2,145,407
-------------
Total Common Stocks, Warrants and Rights (Cost $49,655,794) 58,063,263
-------------
Convertible Preferred Stocks .9%
Timet Capital Trust $46.50 cvt., pfd., 144A United States 4,600 242,650
USX Corp., $21.00 cvt., pfd. United States 14,000 315,000
-------------
Total Convertible Preferred Stocks (Cost $526,650) 557,650
-------------
PRINCIPAL
AMOUNT*
-----------
Convertible Bonds 1.1%
aDayton Mining Corp., cvt. sub. notes, 144A, 7.00%, 4/01/02 (Cost $800,000) Canada $ 800,000 CAD 664,000
-------------
Total Long Term Investments ($50,982,444) 59,284,913
-------------
eRepurchase Agreement 5.8%
Joint Repurchase Agreements, 5.671%, 11/03/97 (Maturity Value $3,662,000) (Cost $3,660,270)
Aubrey G. Lanston & Co., Inc., (Maturity Value $50,169)
B.A. Securities, Inc., (Maturity Value $376,234)
Barclays de Zoete Wedd Securities, Inc., (Maturity Value $376,234)
Bear, Stearns & Co., Inc., (Maturity Value $225,725)
Donald, Lufkin & Jenrette Securities Corp., (Maturity Value $376,234)
Dresdner Kleinwort Benson North America L.L.C., (Maturity Value $376,234)
Fuji Securities, Inc., (Maturity Value $376,234)
Lehman Brothers, Inc., (Maturity Value $376,234)
Sanwa Securities (USA) Co., L.P., (Maturity Value $376,234)
SBC Warburg, Inc., (Maturity Value $376,234)
UBS Securities L.L.C., (Maturity Value $376,234)
Collateralized by U.S. Treasury Bills and Notes United States 3,660,270 3,660,270
-------------
Total Investments (Cost $54,642,714) 100.0% 62,945,183
Other Assets, less Liabilities 22,695
-------------
Net Assets 100.0% $62,967,878
-------------
Currency Abbreviations
CAD - Canadian Dollar
*Securities traded in U.S. dollars unless otherwise indicated.
aNon-income producing.
eSee Note 1(c) regarding joint repurchase agreement.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Small Cap Growth Fund
CLASS I
----------------------------------------------------------------
Six Months Ended
October 31, 1997 YEAR ENDED APRIL 30,
------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $18.96 $19.75 $14.90 $12.75 $10.22 $9.58
----------------------------------------------------------------
Income from investment operations:
Net investment income .02 .03 .01 .03 .03 .07
Net realized and unrealized gains 5.91 .04 6.23 3.14 2.94 .66
----------------------------------------------------------------
Total from investment operations 5.93 .07 6.24 3.17 2.97 .73
----------------------------------------------------------------
Less distributions from:
Net investment income -- (.07) (.01) (.02) (.04) (.09)
Net realized gains -- (.80) (1.38) (1.00) (.40) --
----------------------------------------------------------------
Total distributions -- (.86) (1.39) (1.02) (.44) (.09)
----------------------------------------------------------------
Net asset value, end of period 24.89 18.96 19.75 14.90 12.75 10.22
================================================================
Total return* 31.28% .14% 44.06% 27.05% 29.26% 7.66%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $2,570,492 $1,071,352 $444,912 $63,010 $23,915 $6,026
Ratio to average net assets:
Expenses .88%** .92% .97% .69% .30% --
Expenses excluding waiver and
payments by affiliate .88%** .92% 1.00% 1.16% 1.58% 1.95%
Net investment income .23%** .10% .09% .25% .24% .84%
Portfolio turnover rate 26.39% 55.27% 87.92% 104.84% 89.60% 63.15%
Average commission rate paid*** $.0466 $.0499 $.0505 -- -- --
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized
***Relates to purchases and sales of equity securities. Prior to fiscal year end
1996 disclosure of average commission rate was not required.
</TABLE>
<TABLE>
<CAPTION>
Franklin Small Cap Growth Fund (cont.)
Class II
---------------------------------------
Six Months Ended
October 31, 1997 Year Ended April 30,
(unaudited) 1997 19964
---------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C> <C>
Net asset value, beginning of period $18.78 $19.66 $17.94
---------------------------------------
Income from investment operations:
Net investment loss (.04) (.05) (.03)
Net realized and unrealized gains (losses) 5.82 (.03) 2.71
---------------------------------------
Total from investment operations 5.78 (.08) 2.68
---------------------------------------
Less distributions from:
Net realized gains -- (.80) (.96)
---------------------------------------
Net asset value, end of period 24.56 18.78 19.66
=======================================
Total return* 30.78% (.65%) 15.98%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $463,802 $146,164 $24,102
Ratio to average net assets:
Expenses 1.67%** 1.69% 1.76%**
Net investment loss (.56%)** (.70%) (.69%)**
Portfolio turnover rate 26.39% 55.27% 87.92%
Average commission rate paid*** $.0466 $.0499 $.0505
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
***Relates to purchases and sales of equity securities.
4For the period October 1, 1995 (effective date) to April 30, 1996.
</TABLE>
<TABLE>
<CAPTION>
Franklin Small Cap Growth Fund (cont.)
Advisor Class
---------------------------------------
Six Months Ended
October 31, 1997 Year Ended April 30,
(unaudited) 19978
---------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C>
Net asset value, beginning of period $18.97 $20.48
---------------------------------------
Income from investment operations:
Net investment income .03 .01
Net realized and unrealized gains (losses) 5.94 (1.52)
---------------------------------------
Total from investment operations 5.97 (1.51)
---------------------------------------
Net asset value, end of period 24.94 18.97
---------------------------------------
Total return* 31.47% (7.37%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $69,221 $18,777
Ratio to average net assets:
Expenses .67%** .69%**
Net investment income .44%** .30%**
Portfolio turnover rate 26.39% 55.27%
Average commission rate paid*** $.0466 $.0499
*Total return is not annualized.
**Annualized
***Relates to purchases and sales of equity securities.
8For the period January 2, 1997 (effective date) to April 30 1997.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, October 31, 1997 (unaudited)
Franklin Small Cap Growth Fund SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
a,cCommon Stocks 88.3%
<S> <C> <C>
Commercial Services 4.3%
aApplied Graphics Technologies, Inc. 330,500 $ 17,681,750
a,gLabor Ready, Inc. 789,850 28,533,331
a,gMarquee Group, Inc. 1,327,500 6,720,469
Norrell Corp. 1,240,000 36,115,000
aRemedyTemp, Inc., Class A 219,300 5,043,900
a,gSOS Staffing Services, Inc. 672,400 13,868,250
aValassis Communications, Inc. 892,900 26,340,550
-------------
134,303,250
-------------
Consumer Durables 3.1%
aBelmont Homes, Inc. 333,400 2,464,026
a,gCannondale Corp. 708,400 15,673,350
Clayton Homes, Inc. 712,500 11,711,719
gK2, Inc. 860,500 21,781,406
Oakwood Homes 500,000 13,156,250
a,gRockShox, Inc. 965,800 8,692,200
aSola International, Inc. 534,800 18,250,050
aSouthern Energy Homes, Inc. 659,500 6,059,156
-------------
97,788,157
-------------
aConsumer Non-Durables 3.0%
gConsolidated Cigar Holdings, Inc. 789,600 30,991,800
Designer Holdings, Ltd. 1,033,300 8,912,213
North Face, Inc. 486,400 11,491,200
Tommy Hilfiger Corp. 748,900 29,628,356
Tropical Sportswear International Corp. 358,200 4,298,400
Vans, Inc. 446,300 7,531,313
-------------
92,853,282
-------------
aConsumer Services 3.5%
CapStar Hotel Co. 1,015,700 35,993,852
DeVry, Inc. 532,400 14,042,050
Prime Hospitality Corp. 1,520,500 30,980,188
Sylvan Learning Systems, Inc. 358,600 15,106,025
Vail Resorts, Inc. 420,100 11,684,031
-------------
107,806,146
-------------
aElectronic Technology 8.1%
gCoherent, Inc. 826,700 32,241,300
H.T.E., Inc. 207,800 3,506,625
gHarmonic Lightwaves, Inc. 961,500 12,018,750
Infinity Financial Technology, Inc. 347,600 5,344,350
Itron, Inc. 358,900 7,357,450
Komag, Inc. 2,535,000 43,887,188
Natural Microsystems Corp. 346,600 16,550,150
Perceptron, Inc. 293,500 7,080,688
Rainbow Technologies, Inc. 232,900 5,735,163
Read-Rite Corp. 431,300 8,572,088
aElectronic Technology (cont.)
gSpectralink Corp. 1,050,000 $ 3,806,250
Tekelec 805,500 33,730,313
Tracor, Inc. 989,500 26,469,125
gTranscrypt International, Inc. 902,400 19,852,800
Uniphase Corp. 375,000 25,171,875
-------------
251,324,115
-------------
Energy Minerals 7.3%
aAbacan Resource Corp. (Canada) 2,356,400 7,105,900
aAbacan Resource Corp. 1,909,600 5,967,500
aAtwood Oceanics, Inc. 283,300 31,375,475
aBarrett Resources Corp. 1,033,900 36,380,356
aTom Brown, Inc. 842,800 20,859,300
Devon Energy Corp. 364,500 16,311,375
Lomak Petroleum, Inc. 740,000 13,736,250
aNewfield Exploration Co. 293,900 7,972,038
aTitan Exploration, Inc. 1,645,700 20,776,963
aVarco International, Inc. 1,081,700 65,916,094
-------------
226,401,251
-------------
Finance 4.1%
aAmerin Corp. 116,500 2,664,938
aE*TRADE Group, Inc. 400,000 12,350,000
EVEREN Capital Corp. 350,000 13,212,500
Executive Risk, Inc. 293,500 19,334,313
aHomeSide, Inc. 1,132,700 30,370,519
aLife USA Holding, Inc. 191,100 3,153,150
aRisk Capital Holdings, Inc. 761,900 17,333,225
Scor (France) 311,000 14,444,051
aSilicon Valley Bancshares 296,800 16,212,700
-------------
129,075,396
-------------
aHealth Services 5.0%
Access Health, Inc. 509,950 17,720,763
gAdvanced Health Corp. 1,259,300 22,195,163
Capstone Pharmacy Services, Inc. 807,500 8,579,688
gHealthcare Recoveries, Inc. 598,700 11,075,950
Medaphis Corp. 1,977,800 11,990,413
Pediatrix Medical Group, Inc. 675,300 28,531,425
Renal Care Group, Inc. 809,700 27,124,950
Total Renal Care Holdings, Inc. 341,666 10,527,604
gTransitions Systems, Inc. 909,200 18,411,300
-------------
156,157,256
-------------
Health Technology 4.3%
a,gDepoTech Corp. 995,700 13,815,338
a,gInhale Therapeutic Systems 811,000 22,099,750
aMegabios Corp. 145,500 2,182,500
Health Technology (cont.)
Mentor Corp. 700,000 $ 25,506,250
aNeurogen Corp. 652,000 13,203,000
aNoven Pharmaceutical, Inc. 12,600 89,775
aOrthoLogic Corp. 1,250,000 6,406,250
a,gPenederm, Inc. 531,200 6,905,600
a,gSerologicals Corp. 1,281,800 29,481,400
aVertex Pharmaceuticals, Inc. 499,200 14,726,400
-------------
134,416,263
-------------
Industrial Services 2.4%
aAmerican Disposal Services, Inc. 179,300 6,320,325
Butler Manufacturing Co. 320,500 10,856,938
gCatalytica, Inc. 1,340,033 16,750,413
aCore Laboratories, NV (Netherlands) 149,400 5,976,000
aU.S. Liquids, Inc. 265,300 4,244,800
aWaters Corp. 719,800 31,671,200
-------------
75,819,676
-------------
Non-Energy Minerals 1.5%
Carpenter Technology Corp. 452,100 21,870,338
a,gGibraltar Steel Corp. 1,012,800 23,927,400
-------------
45,797,738
-------------
Process Industries 1.4%
ChemFirst, Inc. 715,000 18,053,750
aUCAR International, Inc. 651,600 24,435,000
-------------
42,488,750
-------------
Producer Manufacturing 2.8%
Easco, Inc. 378,200 4,585,675
aGentex Corp. 1,175,700 28,804,650
gJLG Industries, Inc. 2,662,700 33,783,006
Roper Industries, Inc. 693,800 18,515,788
-------------
85,689,119
-------------
Real Estate Investment Trusts 3.9%
Arden Realty Group, Inc. 724,300 22,091,150
Camden Property Trust 450,000 13,500,000
FelCor Suite Hotels, Inc. 637,300 23,341,113
gInnkeepers USA Trust 1,946,500 32,482,219
Omega Healthcare Investors, Inc. 150,000 5,400,000
Storage Trust Realty 541,700 13,847,206
aTower Realty Trust, Inc. 120,900 3,052,725
Winston Hotels, Inc. 490,500 6,683,063
-------------
120,397,476
-------------
Retail 2.2%
aAnnTaylor Stores Corp. 170,000 2,433,125
aGuitar Center, Inc. 491,100 10,681,425
Retail (cont.)
Talbots, Inc. 1,154,700 $ 27,712,800
a,gWest Marine, Inc. 1,374,800 28,870,800
-------------
69,698,150
-------------
aSemiconductors and Equipment 6.0%
Advanced Energy Industries, Inc. 870,000 18,052,500
Altera Corp. 138,100 6,128,188
Brooks Automation, Inc. 88,800 1,970,250
C-Cube Microsystems, Inc. 230,000 5,462,500
Etec Systems, Inc. 685,700 30,599,363
FSI International, Inc. 1,000,000 17,250,000
Lattice Semiconductor Corp. 531,500 26,608,219
NeoMagic Corp. 560,500 8,197,313
PMC-Sierra, Inc. 865,300 22,822,288
PRI Automation, Inc. 412,000 15,759,000
gTrident Microsystems, Inc. 1,198,900 15,136,113
Xilinx, Inc. 500,000 17,062,500
-------------
185,048,234
-------------
aTechnology Services 15.8%
gActivision, Inc. 1,344,400 19,661,850
gAffiliated Computer Services, Inc. 1,623,400 40,787,925
Aspen Technologies, Inc. 105,200 3,958,150
Broderbund Software, Inc. 155,200 4,500,800
Check Point Software Technologies, Ltd. 508,700 21,683,338
gClarify, Inc. 1,297,200 16,863,600
Computer Horizons Corp. 146,300 4,443,863
Documentum, Inc. 191,200 5,712,100
Electronic Arts, Inc. 837,600 28,373,700
Envoy Corp. 605,800 16,962,400
HNC Software, Inc. 175,700 6,500,900
Harbinger Corp. 479,400 14,262,150
gIntegrated Systems, Inc. 2,091,300 36,859,163
International Network Services 924,500 20,339,000
Intuit, Inc. 511,000 16,671,375
MetaCreations Corp. 892,800 12,945,600
gOmtool, Ltd. 984,600 12,430,575
Paymentech, Inc. 730,000 12,866,250
Phoenix Technologies, Ltd. 640,000 9,840,000
Remedy Corp. 610,000 28,670,000
Sapient Corp. 305,000 16,241,250
gSoftware Artistry, Inc. 711,500 10,850,375
Sterling Commerce, Inc. 196,849 6,532,926
Synopsys, Inc. 955,000 37,125,625
Transaction Systems Architects, Inc. 858,900 33,604,463
gTrusted Information Systems, Inc. 1,121,700 10,515,938
aTechnology Services (cont.)
gVantive Corp. 1,251,100 $ 31,590,275
gXcelleNet, Inc. 780,100 8,483,588
-------------
489,277,179
-------------
Transportation 3.6%
Air Express International Corp. 711,000 21,774,375
a,gAtlantic Coast Airlines, Inc. 700,000 14,787,500
aC.H. Robinson Worldwide, Inc. 854,000 18,788,000
Circle International Group, Inc. 440,000 11,055,000
Expeditors International of Washington, Inc. 961,700 35,342,475
a,gMesa Air Group, Inc. 1,650,000 8,868,750
-------------
110,616,100
-------------
aUtilities and Communication 6.0%
gArch Communications Group, Inc. 2,000,000 15,250,000
Comnet Cellular, Inc. 626,700 21,699,488
HSN, Inc. 330,100 13,204,000
ICG Communications, Inc. 1,299,100 29,879,300
Millicom International Cellular, SA (Luxembourg) 565,200 23,738,400
Paging Network, Inc. 2,917,200 36,100,350
gPrimus Telecommunications Group, Inc. 913,300 10,845,438
gRural Cellular Corp., Class A 700,800 8,409,600
gWestern Wireless Corp., Class A 1,484,800 26,540,800
-------------
185,667,376
-------------
Total Common Stocks (Cost $2,421,843,436) 2,740,624,914
-------------
PRINCIPAL
AMOUNT
-----------
Convertible Bonds .2%
Atlantic Coast Airlines, 144A, 7.00%, 7/01/04 $ 500,000 647,500
Vantive Corp CNV, 144A, 4.75%, 9/01/02 2,100,000 1,953,000
Wind River Systems, 144A, 5.00%, 8/01/02 3,100,000 3,270,500
-------------
Total Convertible Bonds (Cost $5,791,250) 5,871,000
-------------
Total Long Term Investments (Cost $2,427,634,686) 2,746,495,914
-------------
a,eRepurchase Agreement 12.6%
Joint Repurchase Agreement, 5.671%, 11/03/97 (Maturity $392,297,755) (Cost $392,112,447)
Aubrey G. Lanston & Co., Inc., (Maturity Value $5,374,479)
B.A. Securities, Inc., (Maturity Value $40,304,671)
Barclays de Zoete Wedd Securities, Inc., (Maturity Value $40,304,671)
Bear, Stearns & Co., Inc., (Maturity Value $24,181,237)
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $40,304,671)
Dresdner Kleinwort Benson North America L.L.C., (Maturity Value $40,304,671)
Fuji Securities, Inc., (Maturity Value $40,304,671)
Lehman Brothers, Inc., (Maturity Value $40,304,671)
Sanwa Securities (USA) Co., L.P., (Maturity Value $40,304,671)
SBC Warburg, Inc., (Maturity Value $40,304,671)
UBS Securities L.L.C., (Maturity Value $40,304,671)
Collateralized by U.S. Treasury Bills and Notes $392,112,447 $ 392,112,447
-------------
Total Investments (Cost $2,819,747,133) 101.1% 3,138,608,361
Other Assets, less Liabilities (1.1%) (35,093,939)
-------------
Net Assets 100% $3,103,514,422
=============
aNon-income producing.
eSee Note 1(c) regarding joint repurchase agreement.
gSee Note 9 regarding holding of 5% voting securities
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Strategic Income Fund
Class I
---------------------------------------------
Six Months Ended
October 31, 1997 Year Ended April 30,
(unaudited) 1997 1996 19952
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.86 $10.77 $10.18 $10.00
---------------------------------------------
Income from investment operations:
Net investment income .44 .93 .85 .70
Net realized and unrealized gains .28 .39 .67 .15
---------------------------------------------
Total from investment operations .72 1.32 1.52 .85
---------------------------------------------
Less distributions from:
Net investment income (.45) (.96) (.82) (.67)
Net realized gains -- (.27) (.11) --
Total distributions (.45) (1.23) (.93) (.67)
---------------------------------------------
Net asset value, end of period 11.13 10.86 10.77 10.18
=============================================
Total return* 6.72% 12.64% 15.59% 8.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $79,156 $34,864 $13,022 $6,736
Ratio to average net assets:
Expenses .25%** .23% .25% .25%**
Expenses excluding waiver and payments by affiliate 1.03%** 1.05% 1.08% 1.38%**
Net investment income 7.88%** 8.60% 8.53% 7.93%**
Portfolio turnover rate 40.51% 114.26% 73.95% 68.43%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
2For the period May 24, 1994 (effective date) to April 30, 1995.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Franklin Strategic Series
Statement of Investments, October 31, 1997 (unaudited)
SHARES,
WARRANTS,
Franklin Strategic Income Fund COUNTRY & RIGHTS VALUE
- --------------------------------------------------------------------------------------------------------------------
aCommon Stocks, Warrants, and Rights
<S> <C> <C> <C>
aGulf States Steel, warrants United States 200 $ 1,010
Orion Network Systems, Inc., SA, warrants United States 300 2,700
aSullivan Broadcast Holdings United States 1,600 15,200
aVenezuela Oil Value Recovery Rights Venezuela 3,035 --
Wireless One, Inc., warrants United States 400 4
--------
Total Common Stocks, Warrants, and Rights (Cost $19,735) 18,914
--------
Preferred Stocks 1.2%
Cablevision Systems, 11.125% pfd., PIK United States 1,192 131,790
California Federal Bank, 11.50%, pfd. United States 1,000 115,031
aFresenius Medical Care, pfd. United States 100 102,250
Sinclair Capital, 11.625%, pfd. United States 3,000 325,500
Time Warner, Inc., 10.25%, pfd. United States 229 263,923
--------
Total Preferred Stocks (Cost $830,731) 938,494
--------
Convertible Preferred Stocks 4.5%
CNF Trust I, 5.00%, cvt., pfd. United States 5,700 361,950
Dimon Dec Trust, 8.50%, cvt., pfd. United States 27,400 691,850
Hilton Hotels, 8.00%, cvt., pfd. United States 11,200 330,400
Nortel Inversora, cvt., pfd. Argentina 7,200 334,800
Ralston Purina Co., 7.00%, cvt., pfd. United States 9,300 585,900
Salomon, Inc., 6.25%, cvt., pfd. United States 6,700 361,800
Triathlon Broadcasting, 9.00%, cvt., pfd. United States 20,000 200,000
WBK Strypes Trust, 10.00%, cvt., pfd. United States 21,900 678,900
--------
Total Convertible Preferred Stocks (Cost $3,407,963) 3,545,600
--------
PRINCIPAL
AMOUNT*
High Yield Corporate Bonds 26.2%
Automotive 1.2%
Advanced Accessory/AAS Cap, senior sub. notes, 144A, 9.75%, 10/01/07 United States $ 100,000 99,250
Aetna Industries, Inc., senior notes 144A, 11.875%, 10/01/06 United States 200,000 201,000
Cambridge Industries, Inc., senior sub. notes, 144A, 10.25%, 7/15/07 United Stat 100,000 104,500
Collins & Aikman Products, senior sub. notes, 11.50%, 4/15/06 United States 100,000 114,000
dHarvard Industries, Inc., senior notes, 11.125%, 8/01/05 United States 300,000 100,500
Key Plastics, Inc., senior sub. notes, 10.25%, 3/15/07 United States 100,000 104,000
LDM Technologies, Inc., senior sub. notes, 10.75%, 1/15/07 United States 200,000 219,000
--------
942,250
--------
Broadcasting .9%
Chancellor Media Corp., senior sub. notes, 144A, 8.75%, 6/15/07 United States 500,000 505,000
Jacor Communications Co., senior sub. notes, 9.75%, 12/15/06 United States 100,000 107,000
Sullivan Broadcast Holdings, senior deb., 13.25%, 12/15/06 United States 100,000 106,000
--------
718,0000
--------
Cable Television .6%
Bell Cablemedia, Plc., senior disc. notes, zero coupon to 7/15/99,
11.95% thereafter, 7/15/04 United Kingdom $150,000 $ 140,625
Diamond Cable Communications, senior notes, zero coupon to 12/15/00,
11.75% thereafter, 12/15/05 United Kingdom 150,000 111,375
Diamond Cable Communications, senior notes, zero coupon to 2/15/02,
10.75% thereafter, 2/15/07 United Kingdom 150,000 96,375
Rogers Cablesystems, Inc., guaranteed notes, 9.625%, 8/01/02 Canada 100,000 105,250
--------
453,625
--------
Chemical .7%
Huntsman Corp., senior sub. notes, 144A, 9.50%, 7/01/07 United States 500,000 521,250
--------
Consumer Products .4%
E&S Holdings Corp., senior sub. notes, 144A, 10.375%, 10/01/06 United States 100,000 85,500
Herff Jones, Inc., senior sub. notes, 11.00%, 8/15/05 United States 100,000 108,500
Sealy Corp., senior sub. notes, 9.50%, 5/01/03 United States 100,000 106,500
--------
300,500
--------
Containers and Packaging .8%
Anchor Glass, 144A, 11.25%, 4/01/05 United States 300,000 328,500
Four M Corp., senior notes, Series B, 12.00%, 6/01/06 United States 200,000 212,000
U.S. Can Corp., senior sub. notes, Series B, 144A, 10.125%, 10/15/06 United States 100,000 106,000
--------
646,500
--------
Energy 1.5%
Abraxas Petroleum Corp., senior notes, Series B,144A, 11.50%,11/01/04 United States 200,000 218,000
Dailey Petroleum Service, 144A, 9.75%, 8/15/07 United States 400,000 418,000
Dawson Production Services, senior notes, 9.375%, 2/01/07 United States 100,000 105,500
Forcenergy, Inc., senior sub. notes, 9.50%, 11/01/06 United States 100,000 105,250
Gulf Canada Resources, Ltd., senior sub. deb., 9.25%, 1/15/04 Canada 100,000 105,125
Pride International, Inc., senior notes, 9.375%, 5/01/07 United States 100,000 105,250
Rutherford-Moran Oil, senior sub. notes, 144A, 10.75%, 10/01/04 United States 100,000 99,750
--------
1,156,875
--------
Financial .5%
First Nationwide Escrow Corp.,senior sub.notes, 144A,10.625%,10/01/03 United States 200,000 221,000
HomeSide Finance, Inc., senior notes, 144A, 11.25%, 5/15/03 United States 150,000 178,500
--------
399,500
--------
Food and Beverages 1.4%
Ameriserv Food Co., senior sub. notes, 144A, 10.125%, 7/15/07 United States 400,000 414,000
Ameriserv Food Distribution, senior notes, 144A, 8.875%, 10/15/06 United States 500,000 500,000
Curtice-Burns Foods, Inc., senior sub. notes, 12.25%, 2/01/05 United States 100,000 110,500
Doane Products Co., senior notes, 10.625%, 3/01/06 United States 100,000 107,500
--------
1,132,000
--------
Food Retailing 1.0%
Fleming Cos., Inc., senior sub. notes, 144A, 10.50%, 12/01/04 United States 500,000 522,500
Shoppers Food Warehouse, senior notes, 144A, 9.75%, 6/15/04 United States 250,000 251,250
--------
773,750
--------
Forest and Paper Products 1.0%
Pindo Deli Finance Mauritius, Ltd., 144A, 11.75%, 10/01/17 Indonesia $ 700,000 $ 665,000
S.D. Warren Co., senior sub. notes, 12.00%, 12/15/04 United States 100,000 112,000
--------
777,000
--------
Gaming and Hotels .6%
AMF Group, Inc., senior disc. notes, zero coupon to 3/15/00,
12.25% thereafter, 3/15/06 United States 200,000 152,000
Aztar Corp., senior sub. notes, 13.75%, 10/01/04 United States 100,000 115,500
Players International, Inc., senior notes, 10.875%, 4/15/05 United States 100,000 107,250
Showboat, Inc., senior sub. notes, 13.00%, 8/01/09 United States 100,000 116,500
--------
491,250
--------
Health Care 1.0%
Tenet Healthcare Corp., senior sub. notes, 10.125%, 3/01/05 United States 100,000 109,750
Tenet Healthcare Corp., senior sub. notes, 8.625%, 1/15/07 United States 200,000 204,500
Vencor, Inc., senior sub. notes, 144A, 8.625%, 7/15/07 United States 500,000 488,750
--------
803,000
--------
Industrial 1.8%
Allied Waste Industries, senior disc. notes, 144A, zero coupon to 6/01/02,
11.30% thereafter, 6/01/07 United States 500,000 340,000
American Standard, Inc., senior sub. deb., zero coupon to 6/01/98,
10.50% thereafter, 6/01/05 United States 150,000 150,750
Amphenol Corp., senior sub. notes, 9.875%, 5/15/07 United States 100,000 106,500
Derlan Manufacturing, Inc., senior notes, 10.00%, 1/15/07 Canada 150,000 156,750
Falcon Building Products, Inc., senior disc. notes, 10.50%, 6/15/07 United States 250,000 161,250
Intertek Finance,Plc.,seniorsub.notes,Series B, 144A, 10.25%,11/01/06United Kingdom 100,000 105,500
Nortek, Inc., senior notes, 144A, 9.125%, 9/01/07 United States 300,000 303,000
Safelite Glass Corp., senior sub. notes, 144A, 9.875%, 12/15/06 United States 100,000 108,500
--------
1,432,250
--------
Information Systems and Technology .6%
Celestica International, Inc., senior sub. notes, 10.50%, 12/31/06 Canada 100,000 107,000
Iron Mountain, Inc., senior sub. notes, 144A, 8.75%, 9/30/09 United States 350,000 355,250
--------
462,250
--------
Lodging 1.0%
HMH Properties, Inc., senior notes, 144A, 8.875%, 7/15/07 United States 500,000 511,250
Prime Hospitality Corp., senior sub. notes, Series B, 9.75%, 4/01/07 United States 300,000 312,000
--------
823,250
--------
Media 2.7%
American Media Operation, senior sub. notes, 11.625%, 11/15/04 United States 100,000 109,500
Big Flower Press Holdings, senior sub. notes, 144A, 8.875%, 7/01/07 United States 300,000 300,000
Fox Kids Worldwide, Inc., senior disc. notes, 144A, zero coupon to 11/01/02,
10.25% thereafter, 11/01/07 United States 800,000 458,000
Fox Kids Worldwide, Inc., senior notes, 144A, 9.25%, 11/01/07 United States 200,000 192,000
Fox/Liberty Networks L.L.C., senior disc. notes, 144A, zero coupon to 8/15/02,
9.75% thereafter, 8/15/07 United States 500,000 316,250
Media (cont.)
Hollinger International Publishing, senior sub. notes, 9.25%, 2/01/06 United States $ 100,000 $ 103,250
Outdoor Systems, Inc., senior sub. notes, 8.875%, 6/15/07 United States 500,000 513,750
PanAmSat Corp., L.P., PIK, 12.75%, 4/15/05 United States 133,000 162,426
--------
2,155,176
--------
Metals and Mining 1.1%
Acme Metals, Inc., guaranteed senior secured disc. notes, zero coupon to 8/01/97,
13.50% thereafter, 8/01/04 United States 100,000 114,000
Armco, Inc., senior notes, 144A, 9.00%, 9/15/07 United States 100,000 100,000
LTV Corp., 144A, 8.20%, 9/15/07 United States 500,000 490,000
Neenah Corp., senior sub. notes, Series B, 11.125%, 5/01/07 United States 100,000 109,000
Ucar Global Enterprises, Inc., senior sub. notes, 12.00%, 1/15/05 United States 50,000 56,375
--------
869,375
--------
Retail .3%
Specialty Retailers, Inc., 144A, 8.50%, 7/15/05 United States 250,000 256,250
--------
Telecommunications 1.4%
Intermedia Communication, senior disc. notes, 11.25%, 7/15/07 United States 750,000 495,000
bNetia Holdings B.V., 144A, 10.25%, 11/01/07 Poland 200,000 192,000
bNetia Holdings B.V., 144A, zero coupon to 11/01/01,
11.25% thereafter, 11/01/07 Poland 250,000 143,750
Nextlink Communications, Inc., senior notes, 9.625%, 10/01/07 United States 250,000 251,250
--------
1,082,000
--------
Textiles and Apparel .4%
Collins & AikmanFloorCoverings,seniorsub.notes,SeriesB,10.00%,1/15/07 United States 300,000 304,500
--------
Transportation .4%
Howmet Corp., senior sub. notes, 10.00%, 12/01/03 United States 100,000 108,000
L3 Communications Corp., senior sub. notes, 144A, 10.375%, 5/01/07 United States 100,000 107,750
Loomis Fargo & Co., senior sub. notes, 10.00%, 1/15/04 United States 100,000 99,500
--------
315,250
--------
Utilities - Electric .5%
AES China Generating Co., Ltd., 10.125%, 12/15/06 China 100,000 101,000
AES Corp., senior sub. notes, 144A, 8.50%, 11/01/07 United States 250,000 246,875
El Paso Electric Co., first mortgage, Series E, 9.40%, 5/01/11 United States 100,000 111,000
--------
458,875
--------
Wireless Communications 4.4%
Arch Communications Group, senior discount notes, zero coupon to 3/15/01,
10.875% thereafter, 3/15/08 United States 300,000 192,000
Comcast Cellular, senior notes, 144A, 9.50%, 5/01/07 United States 400,000 414,000
Metrocall, Inc., senior sub. notes, 144A, 9.75%, 11/01/07 United States 600,000 594,000
Millicom International Cellular, SA, senior disc. notes, zero coupon to 6/01/01,
13.50% thereafter, 6/01/06 Luxembourg 300,000 LUF 224,250
Nextel Communications, senior disc. notes, zero coupon to 2/15/99,
9.75% thereafter, 8/15/04 United States 500,000 423,750
Wireless Communications (cont.)
Nextel Communications, senior disc. notes, 144A, zero coupon to 10/31/02,
9.75% thereafter, 10/31/07 United States $ 500,000 $ 275,000
Orion Network Systems, Inc., SA, senior disc. notes, zero coupon to 1/15/02,
12.50% thereafter, 1/15/07 United States 300,000 220,500
Paging Network, Inc., senior sub. notes, 144A, 10.125%, 8/01/07 United States 400,000 410,000
Sprint Spectrum, L.P., senior disc. notes, zero coupon to 8/01/01,
12.50% thereafter, 8/15/06 United States 300,000 228,000
Sygnet Wireless, Inc., senior notes, 11.50%, 10/01/06 United States 500,000 532,500
--------
3,514,0000
--------
Total High Yield Corporate Bonds (Cost $20,078,515) 20,788,676
--------
Convertible Bonds 4.7%
Health Care 1.0%
Assisted Living Concepts, cvt., sub. deb., 6.00%, 11/01/02 United States 400,000 427,000
US Diagnostic Labs, Inc., cvt., sub. deb., 144A, 9.00%, 3/31/03 United States 400,000 404,000
--------
831,000
--------
Information Technology 1.2%
Adaptec, Inc., cvt., sub. notes, 144A, 4.75%, 2/01/04 United States 190,000 221,825
Dovatron International, Inc., cvt., sub. notes, 144A, 6.00%, 10/15/02 United States 300,000 421,500
HMT Technology Corp., cvt., sub. notes, 5.75%, 1/15/04 United States 300,000 290,250
--------
933,575
--------
Lodging .8%
Capstar Hotel Corp., cvt., sub. notes, 4.75%, 10/15/04 United States 600,000 606,000
--------
Real Estate Investment Trusts .9%
Macerich Co., cvt., sub. notes, 144A, 7.25%, 12/15/02 United States 750,000 727,500
--------
Retail .2%
Rent Way, Inc., cvt., sub. notes, 144A, 7.00%, 2/01/07 United States 100,000 143,000
--------
Telecommunications .6%
DSC Communications Corp., sub. notes, 144A, 7.00%, 8/01/04 United States 500,000 475,625
--------
Total Convertible Bonds (Cost $3,589,497) 3,716,700
--------
Emerging Market Bonds 17.2%
Bepensa, SA, senior notes, 144A, 9.75%, 9/30/04 Mexico 150,000 144,750
Bridas Corp., senior notes, 12.50%, 11/15/99 Argentina 100,000 107,750
Cemex, SA, 144A, 10.75%, 7/15/00 Mexico 100,000 104,250
Centrais Eletricas Brasileiras, SA, 144A, 10.00%, 10/30/98 Brazil 120,000 120,000
Industrias Metalurgicas Pescarm, seniornotes,144A, 11.75%,3/27/98 Argentina 100,000 101,800
Pera Financial Services, secured notes, 144A, 9.375%, 10/15/02 Turkey 160,000 160,400
Philippine Long Distance Telephone Co., 9.25%, 6/30/06 Philippines 130,000 124,150
Poland Communications, Inc., senior notes, 9.875%, 11/01/03 Poland 200,000 200,500
Republic of Argentina, 9.25%, 2/23/01 Argentina 275,000 268,813
Republic of Argentina, 11.00%, 10/09/06 Argentina 1,000,000 965,000
Republic of Argentina, 11.75%, 2/12/07 Argentina 150,000 ARS 126,076
Republic of Argentina, 9.75%, 9/19/27 Argentina 730,000 625,063
Republic of Argentina, Bonos Del Tesoro, 8.75%, 5/09/02 Argentina 800,000 728,000
Republic of Argentina, Global, 11.375%, 1/30/17 Argentina $ 160,000 $ 158,200
Republic of Brazil, 8.875%, 11/05/01 Brazil 295,000 268,450
Republic of Brazil, 6.9375%, 4/15/12 Brazil 835,000 582,413
Republic of Brazil, 6.50%, 4/15/24 Brazil 130,000 98,800
Republic of Brazil, 10.125%, 5/15/27 Brazil 1,050,000 832,650
Republic of Brazil, C Bond, 8.00%, 4/15/14 Brazil 112,065 78,734
Republic of Ecuador, Disc., 6.4375%, 2/28/25 Ecuador 375,000 265,781
Republic of Ecuador, unsub., 11.25%, 4/25/02 Ecuador 150,000 152,813
Republic of Ecuador, unsub., 144A, 11.25%, 4/25/02 Ecuador 750,000 764,063
Republic of Turkey, 144A, 10.00%, 9/19/07 Turkey 650,000 614,250
Republic of Venezuela, 6.50%, 12/18/07 Venezuela 500,000 436,250
Republic of Venezuela, 9.25%, 9/15/27 Venezuela 1,710,000 1,471,028
Republic of Venezuela, Disc. W-A, 6.8125%, 3/31/20 Venezuela 250,000 220,000
Republic of Venezuela, senior unsub. notes, 9.125%, 6/18/07 Venezuela 200,000 181,956
Republic of Venezuela, senior unsub. notes, 144A, 9.125%, 6/18/07 Venezuela 100,000 90,978
SEI Holdings IX, Inc., senior notes, 144A, 11.00%, 11/30/00 Trinidad 125,000 125,000
United Mexican States, 9.75%, 2/06/01 Mexico 1,450,000 1,498,938
United Mexican States, 9.875%, 1/15/07 Mexico 215,000 217,419
United Mexican States, 11.375%, 9/15/16 Mexico 500,000 531,875
United Mexican States, 11.50%, 5/15/26 Mexico 950,000 1,024,813
Venezuela Par, Series W-B, 6.75%, 3/31/20 Venezuela 250,000 209,063
--------
Total Emerging Market Bonds (Cost $14,631,936) 13,600,026
--------
Foreign Government Bonds 18.8%
Australian Government, 9.50%, 8/15/03 Australia 1,175,000 AUD 980,419
Bundesobligation, Series 110, 5.375%, 2/22/99 Germany 255,000 DEM 150,237
Bundesobligation, Series 118, 5.25%, 2/21/01 Germany 865,000 DEM 509,275
Bundesschatzanweisungen, 6.875%, 2/24/99 Germany 1,035,000 DEM 620,652
Buoni Poliennali del Tesoro, 8.50%, 8/01/99 Italy 105,000 ITL 64,668
Buoni Poliennali del Tesoro, 10.50%, 7/15/00 Italy 1,665,000 ITL 1,099,903
Buoni Poliennali del Tesoro, 10.00%, 8/01/03 Italy 1,300,000 ITL 916,680
German Unity Fund, 8.75%, 8/20/01 Germany 1,580,000 DEM 1,037,202
Government of Canada, 10.50%, 7/01/00 Canada 935,000 CAD 756,903
Government of Canada, 10.50%, 3/01/01 Canada 1,645,000 CAD 1,365,314
Government of Canada, 10.00%, 5/01/02 Canada 415,000 CAD 352,662
Kingdom of Denmark, 9.00%, 11/15/00 Denmark 1,785,000 DKK 301,097
Kingdom of Denmark, 8.00%, 5/15/03 Denmark 2,715,000 DKK 460,620
Netherlands Government, 7.00%, 3/15/99 Netherlands 155,000 NLG 82,749
New Zealand Government, 6.50%, 2/15/00 New Zealand 1,145,000 NZD 707,480
Spanish Government, 12.25%, 3/25/00 Spain 176,680 ESP 1,406,444
Spanish Government, 10.90%, 8/30/03 Spain 53,300 ESP 460,563
Swedish Government, 13.00%, 6/15/01 Sweden 3,300,000 SEK 542,177
Swedish Government, 10.25%, 5/05/03 Sweden 6,800,000 SEK 1,085,177
Treuhandanstalt, 7.75%, 10/02/02 Germany 980,000 DEM 633,208
U.K. Treasury, 8.00%, 12/07/00 United Kingdom 785,000 GBP 1,360,241
--------
Total Foreign Government Bonds (Cost $14,771,747) 14,893,671
--------
U.S. Government Securities 6.9%
U.S. Treasury Bonds, 7.125%, 2/15/23 United States $ 400,000 $ 444,875
U.S. Treasury Notes, 5.875%, 9/30/02 United States 5,000,000 5,028,130
--------
Total U.S. Government Securities (Cost $5,418,453) 5,473,005
--------
U.S. Government Agencies/Mortgages 6.4%
FHLMC, 7.00%, 1/01/09 United States 20,990 21,336
FHLMC, 6.00%, 4/01/09 United States 21,856 21,586
FHLMC, 6.00%, 1/01/11 United States 21,512 21,173
FHLMC, 6.50%, 4/01/11 United States 35,006 35,034
FHLMC, 7.00%, 9/01/11 United States 46,197 46,920
FHLMC, 7.00%, 4/01/24 United States 48,504 48,953
FHLMC, 7.50%, 4/01/24 United States 39,538 40,548
FHLMC, 8.50%, 12/01/24 United States 26,924 28,315
FHLMC, 9.00%, 12/01/24 United States 16,335 17,494
FHLMC, 7.00%, 11/01/25 United States 27,535 27,738
FHLMC, 8.00%, 11/01/25 United States 26,287 27,307
FHLMC, 6.50%, 12/01/25 United States 37,099 36,617
FHLMC, 7.50%, 1/01/26 United States 33,949 34,770
FHLMC, 8.00%, 1/01/26 United States 23,497 24,409
FHLMC, 6.50%, 3/01/26 United States 48,375 47,700
FHLMC, 7.00%, 9/01/26 United States 26,957 27,135
FHLMC, 7.50%, 1/01/27 United States 75,154 76,962
FNMA, 7.50%, 10/01/07 United States 32,081 33,010
FNMA, 2.125%, 10/09/07 United States50,000,000 JPY 423,099
FNMA, 6.50%, 2/01/09 United States 29,536 29,634
FNMA, 6.50%, 4/01/11 United States 23,280 23,292
FNMA, 6.50%, 1/01/24 United States 36,878 36,413
FNMA, 7.00%, 5/01/24 United States 22,641 22,826
FNMA, 8.00%, 1/01/25 United States 34,024 35,349
FNMA, 9.00%, 3/01/25 United States 20,580 21,976
FNMA, 9.00%, 5/01/25 United States 9,359 9,994
FNMA, 8.50%, 7/01/25 United States 21,990 23,122
FNMA, 7.00%, 1/01/26 United States 46,873 47,189
FNMA, 7.00%, 3/01/26 United States 57,406 57,706
FNMA, 7.50%, 3/01/26 United States 39,258 40,175
FNMA, 8.00%, 5/01/26 United States 23,862 24,753
FNMA, 8.00%, 6/01/26 United States 21,610 22,416
FNMA, 7.50%, 8/01/26 United States 38,640 39,542
FNMA, 7.50%, 10/01/26 United States 24,438 25,009
FNMA, 8.00%, 1/01/27 United States 58,202 60,355
FNMA, 7.00%, 4/01/27 United States 998,730 1,002,895
FNMA, 8.00%, 9/15/27 United States 989,285 1,025,869
GNMA, SF, 7.50%, 9/15/23 United States 19,115 19,639
GNMA, SF, 6.50%, 3/15/24 United States 48,143 47,794
GNMA, SF, 8.00%, 6/15/24 United States 42,767 44,518
GNMA, SF, 8.50%, 8/15/24 United States 15,851 16,687
GNMA, SF, 9.00%, 1/15/25 United States 4,929 5,274
GNMA, SF, 8.00%, 2/15/25 United States 20,973 21,798
GNMA, SF, 9.50%, 6/15/25 United States $ 11,930 $ 12,966
GNMA, SF, 7.50%, 1/15/26 United States 23,832 24,409
GNMA, SF, 7.50%, 1/15/26 United States 22,852 23,406
GNMA, SF, 7.50%, 2/15/26 United States 23,825 24,401
GNMA, SF, 7.00%, 3/15/26 United States 24,199 24,366
GNMA, SF, 9.00%, 3/15/26 United States 39,898 42,612
GNMA, SF, 8.00%, 6/15/26 United States 73,365 76,264
GNMA, SF, 8.50%, 7/15/26 United States 23,771 24,966
GNMA, SF, 7.50%, 9/15/27 United States 989,278 1,012,873
GNMA 2, 7.00%, 9/20/25 United States 54,171 54,209
--------
Total U.S. Government Agencies/Mortgages (Cost $4,968,016) 5,064,803
--------
Total Long Term Investments (Cost $67,716,593) 68,039,889
--------
eRepurchase Agreement 12.4%
Joint Repurchase Agreement, 5.671%, 11/03/97 (Maturity Value $9,807,533) (Cost $9,802,901)
Aubrey G. Lanston & Co., Inc., (Maturity Value $134,324)
B.A. Securities, Inc., (Maturity Value $1,007,626)
Barclays de Zoete Wedd Securities, Inc., (Maturity Value $1,007,626)
Bear, Stearns & Co., Inc., (Maturity Value $604,575)
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $1,007,626)
Dresdner Kleinwort Benson North America L.L.C., (Maturity Value $1,007,626)
Fuji Securities, Inc., (Maturity Value $1,007,626)
Lehman Brothers, Inc., (Maturity Value $1,007,626)
Sanwa Securities (USA) Co., L.P., (Maturity Value $1,007,626)
SBC Warburg, Inc., (Maturity Value $1,007,626)
UBS Securities L.L.C., (Maturity Value $1,007,626)
Collateralized by U.S. Treasury Bills & Notes United States 9,802,901 9,802,901
--------
Total Investments (Cost $77,519,494) 98.3% 77,842,790
Other Assets, less Liabilities 1.7% 1,313,530
--------
Net Assets 100.0% $79,156,320
========
Currency Abbreviations
ARS -Argentina Peso
AUD -Australian Dollar
CAD -Canadian Dollar
DEM -German Mark
DKK -Danish Krone
ESP -Spanish Peseta
GBP -British Pound
ITL -Italian Lira
JPY -Japanese Yen
LUF -Luxembourg Franc
NLG -Dutch Guilder
NZD -New ZealandDollar
SEK -Swedish Krone
*Securities traded in U.S. dollars, unless otherwise indicated.
aNon-income producing.
bSufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
dSee Note 7 regarding defaulted securities.
eSee Note 1(c) regarding joint repurchase agreement.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements
Statement of Assets and Liabilities
October 31, 1997 (unaudited)
Franklin Franklin Franklin
Biotechnology Blue Chip California
Discovery Fund Fund Growth Fund
-----------------------------------------------------------
Assets:
Investments in securities:
<S> <C> <C> <C>
Cost - Unaffiliated issuers $34,516,600 $7,811,150 $451,349,772
Cost - Affiliated issuers -- -- 7,306,814
-----------------------------------------------------------
Value - Unaffiliated issuers 32,970,543 7,844,521 520,520,775
Value - Affiliated issuers -- -- 4,462,500
Repurchase agreements, at value and cost 7,856,899 1,369,436 83,598,595
Cash 506,078 165,570 3,946,166
Receivables:
Investment securities sold 2,842,905 35,520 4,682,064
Capital shares sold 735,125 123,135 3,202,570
Dividends and interest -- 7,770 413,463
Deposits with brokers for securities sold short 500,000 -- --
Other assets 44,918 -- --
-----------------------------------------------------------
Total assets 45,456,468 9,545,952 620,826,133
-----------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 1,519,100 88,940 12,397,364
Capital shares redeemed -- -- 88,990
Affiliates 31,595 7,793 710,460
Shareholders -- 18,852 147,496
Securities sold short, at value (Proceeds $2,455,418) 2,550,625 -- --
Other liabilities 49,735 7,871 8,185
-----------------------------------------------------------
Total liabilities 4,151,055 123,456 13,352,495
-----------------------------------------------------------
Net assets, at value $41,305,413 $9,422,496 $607,473,638
===========================================================
Net assets consist of:
Undistributed net investment income (loss) $ (16,664) $ 50,165 $ 967,061
Net unrealized appreciation (depreciation) (1,641,264) 33,040 66,326,689
Accumulated net realized gain 118,958 78,116 23,091,521
Capital shares 42,844,383 9,261,175 517,088,367
-----------------------------------------------------------
Net assets, at value $41,305,413 $9,422,496 $607,473,638
===========================================================
Franklin Franklin Franklin
Biotechnology Blue Chip California
Discovery Fund Fund Growth Fund
-----------------------------------------------------------
Class I:
<S> <C> <C> <C>
Net assets, at value $41,305,413 $9,422,496 $537,421,523
===========================================================
Shares outstanding 1,610,036 854,906 22,658,121
===========================================================
Net asset value per share* $25.65 $11.02 $23.72
===========================================================
Maximum offering price per share
(net asset value per share / 95.50%) $26.86 $11.54 $24.84
===========================================================
Class II:
Net assets, at value -- -- $ 70,052,115
===========================================================
Shares outstanding -- -- 2,971,555
===========================================================
Net asset value per share* -- -- $23.57
===========================================================
Maximum offering price per share
(net asset value per share / 99.00%) -- -- $23.81
===========================================================
*Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statement of Assets and Liabilities (cont.)
October 31, 1997 (unaudited)
Franklin Franklin Franklin
Global Health Global MidCap
Care Fund Utilities Fund Growth Fund
-----------------------------------------------------------
Assets:
Investments in securities:
<S> <C> <C> <C>
Cost - Unaffiliated issuers $148,732,650 $164,926,932 $14,618,413
Cost - Affiliated issuers 18,444,905 -- --
-----------------------------------------------------------
Value - Unaffiliated issuers 177,595,867 189,331,186 18,502,801
Value - Affiliated issuers 14,780,688 -- --
Repurchase agreements, at value and cost 15,021,451 7,692,024 1,857,241
Cash 183,384 49,956 76,859
Receivables:
Investment securities sold 8,203,763 610,450 217,299
Capital shares sold 384,134 117,854 93,841
Dividends and interest -- 357,373 6,245
Affiliates 98,254 -- --
-----------------------------------------------------------
Total assets 216,267,541 198,158,843 20,754,286
-----------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 2,271,505 -- 203,695
Capital shares redeemed 577,740 29,571 --
Affiliates 300,131 258,588 21,350
Shareholders 101,968 102,478 349
Other liabilities 25,727 42,404 417
-----------------------------------------------------------
Total liabilities 3,277,071 433,041 225,811
-----------------------------------------------------------
Net assets, at value $212,990,470 $197,725,802 $20,528,475
===========================================================
Net assets consist of:
Undistributed net investment income (loss) $ (573,805) $ 1,079,399 $ (3,613)
Net unrealized appreciation 25,199,000 24,401,244 3,884,388
Accumulated net realized gain 13,732,206 21,631,894 784,957
Capital shares 174,633,069 150,613,265 15,862,743
-----------------------------------------------------------
Net assets, at value $212,990,470 $197,725,802 $20,528,475
===========================================================
Franklin Franklin Franklin
Global Health Global MidCap
Care Fund Utilities Fund Growth Fund
-----------------------------------------------------------
Class I:
<S> <C> <C> <C>
Net assets, at value $192,560,328 $186,220,796 $20,528,475
===========================================================
Shares outstanding 9,249,249 11,649,519 1,239,918
===========================================================
Net asset value per share* $20.82 $15.99 $16.56
===========================================================
Maximum offering price per share
(net asset value per share / 95.50%) $21.80 $16.74 $17.34
===========================================================
Class II:
Net assets, at value $ 20,430,142 $11,505,006 --
===========================================================
Shares outstanding 988,254 724,022 --
===========================================================
Net asset value per share* $20.67 $15.89 --
===========================================================
Maximum offering price per share
(net asset value per share / 99.00%) $20.88 $16.05 --
===========================================================
*Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statement of Assets and Liabilities (cont.)
October 31, 1997 (unaudited)
Franklin Franklin Franklin
Natural Resources Small Cap Strategic
Fund Growth Fund Income Fund
-----------------------------------------------------------------
Assets:
Investments in securities:
<S> <C> <C> <C>
Cost - Unaffiliated issuers $50,982,444 $1,720,544,481 $67,716,593
Cost - Affiliated issuers -- 707,090,205 --
-----------------------------------------------------------------
Value - Unaffiliated issuers 59,284,913 2,004,636,179 68,039,889
Value - Affiliated issuers -- 741,859,735 --
Repurchase agreements, at value and cost 3,660,270 392,112,447 9,802,901
Cash 919,977 28,909,494 597,215
Receivables:
Investment securities sold 874,765 68,160,516 --
Capital shares sold 211,686 29,586,170 821,903
Dividends and interest 98,767 952,045 1,315,048
Affiliates 44,003 -- 37,922
Unrealized gain on forward exchange contracts (Note 6) -- -- 54,421
-----------------------------------------------------------------
Total assets 65,094,381 3,266,216,586 80,669,299
-----------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 1,783,444 101,918,485 1,366,892
Capital shares redeemed 12,378 761,306 854
Affiliates 67,616 3,596,927 33,044
Shareholders 39,537 7,790,125 14,684
Distributions to shareholders -- -- 1,310
Payable upon return of securities loaned (Note 10) -- 48,424,300 --
Unrealized loss on forward exchange contracts (Note 6) -- -- 96,195
Due to broker - variation margin -- 134,102 --
Other liabilities 223,528 76,919 --
-----------------------------------------------------------------
Total liabilities 2,126,503 162,702,164 1,512,979
-----------------------------------------------------------------
Net assets, at value $62,967,878 $3,103,514,422 $79,156,320
=================================================================
Net assets consist of:
Undistributed net investment income $ 100,977 $ 1,336,870 $ 244,617
Net unrealized appreciation 8,302,433 318,861,228 292,135
Accumulated net realized gain 3,126,108 132,005,463 527,949
Capital shares 51,438,360 2,651,310,861 78,091,619
-----------------------------------------------------------------
Net assets, at value $62,967,878 $3,103,514,422 $79,156,320
=================================================================
Franklin Franklin Franklin
Natural Resources Small Cap Strategic
Fund Growth Fund Income Fund
-----------------------------------------------------------------
Class I:
<S> <C> <C> <C>
Net assets, at value $61,206,225 $2,570,491,546 $79,156,320
=================================================================
Shares outstanding 3,582,555 103,289,694 7,111,594
=================================================================
Net asset value per share* $17.08 $24.89 $11.13
=================================================================
Maximum offering price per share
(net asset value per share / 95.50%, 95.50%, 95.75%, respectively)$17.88 $26.06 $11.62
=================================================================
Class II:
Net assets, at value -- $463,801,577 --
=================================================================
Shares outstanding -- 18,885,622 --
=================================================================
Net asset value per share* -- $24.56 --
=================================================================
Maximum offering price per share
(net asset value per share / 99.00%) -- $24.81 --
=================================================================
Advisor Class:
Net assets, at value $ 1,761,653 $ 69,221,299 --
=================================================================
Shares outstanding 103,061 2,775,217 --
=================================================================
Net asset value and maximum offering price per share $17.09 $24.94 --
=================================================================
*Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Operations
for the six months ended October 31, 1997 (unaudited)
Franklin Franklin Franklin
Biotechnology Blue Chip California
Discovery Fund** Fund Growth Fund
-----------------------------------------------------
Investment income:*
<S> <C> <C> <C>
Dividends $-- $ 36,181 $ 1,982,928
Interest 28,296 51,871 2,054,943
-----------------------------------------------------
Total investment income 28,296 88,052 4,037,871
-----------------------------------------------------
Expenses:
Management fees (Note 3) 19,473 30,265 1,159,813
Administrative fees (Note 3) 1,590 -- --
Distribution fees (Note 3)
Class I 10,491 9,342 479,982
Class II -- -- 235,503
Transfer agent fees (Note 3) 12,088 11,980 353,738
Custodian fees 988 905 2,032
Reports to shareholders 1,251 3,612 114,250
Registration and filing fees 330 15,855 51,662
Professional fees 118 1,626 4,945
Trustees' fees and expenses 140 17 2,116
Amortization of offering costs (Note 1) 5,983 -- --
Other 599 7,099 74,574
-----------------------------------------------------
Total expenses 53,051 80,701 2,478,615
Expenses waived/paid by affiliate (Note 3) (8,091) (30,520) --
-----------------------------------------------------
Net expenses 44,960 50,181 2,478,615
-----------------------------------------------------
Net investment income (loss) (16,664) 37,871 1,559,256
-----------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments 122,224 64,214 20,580,715
Foreign currency transactions (3,266) (1,617) --
-----------------------------------------------------
Net realized gain 118,958 62,597 20,580,715
-----------------------------------------------------
Net unrealized appreciation (depreciation) on:
Investments (1,641,264) (253,685) 56,741,700
Translation of assets and liabilities denominated in foreign currencies -- (295) --
-----------------------------------------------------
Net unrealized appreciation (depreciation) (1,641,264) (253,980) 56,741,700
-----------------------------------------------------
Net realized and unrealized gain (loss) (1,522,306) (191,383) 77,322,415
-----------------------------------------------------
Net increase (decrease) in net assets resulting from operations $(1,538,970) $(153,512) $78,881,671
=====================================================
*Net of foreign taxes $6,411 for the Franklin Blue Chip Fund.
**For the period September 15, 1997 (effective date) to October 31, 1997.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Operations (cont.)
for the six months ended October 31, 1997 (unaudited)
Franklin Franklin Franklin
Global Health Global MidCap
Care Fund Utilities Fund Growth Fund
-----------------------------------------------------
Investment income:*
<S> <C> <C> <C>
Dividends $ 150,301 $ 2,718,513 $ 41,771
Interest 505,181 326,952 50,976
-----------------------------------------------------
Total investment income 655,482 3,045,465 92,747
-----------------------------------------------------
Expenses:
Management fees (Note 3) 573,815 561,709 56,461
Distribution fees (Note 3)
Class I 220,072 216,160 17,307
Class II 79,694 52,508 --
Transfer agent fees (Note 3) 212,476 143,290 8,420
Custodian fees 8,115 13,109 95
Reports to shareholders 64,044 61,253 2,446
Registration and filing fees 61,308 26,792 9,535
Professional fees 4,549 6,269 1,252
Trustees' fees and expenses 2,091 2,167 186
Other 3,123 9,204 658
-----------------------------------------------------
Total expenses 1,229,287 1,092,461 96,360
-----------------------------------------------------
Net investment income (loss) (573,805) 1,953,004 (3,613)
-----------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments 6,678,827 10,695,498 600,443
Foreign currency transactions (34,298) (11,538) (1,488)
-----------------------------------------------------
Net realized gain 6,644,529 10,683,960 598,955
-----------------------------------------------------
Net unrealized appreciation (depreciation) on:
Investments 40,987,524 9,325,927 2,689,967
Translation of assets and liabilities denominated in foreign currencies 826 (2,685) --
-----------------------------------------------------
Net unrealized appreciation 40,988,350 9,323,242 2,689,967
-----------------------------------------------------
Net realized and unrealized gain 47,632,879 20,007,202 3,288,922
-----------------------------------------------------
Net increase in net assets resulting from operations $47,059,074 $21,960,206 $3,285,309
=====================================================
*Net of foreign taxes $22,392, $86,287, and $1,486 for the Franklin Global
Health Care Fund, the Franklin Global Utilities Fund, and the Franklin MidCap
Growth Fund, respectively.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Operations (cont.)
for the six months ended October 31, 1997 (unaudited)
Franklin Franklin Franklin
Natural Resources Small Cap Strategic
Fund Growth Fund Income Fund
----------------------------------------------------
Investment income:*
<S> <C> <C> <C>
Dividends $ 263,230 $ 3,887,808 $ 118,468
Interest 173,839 7,988,350 2,101,224
----------------------------------------------------
Total investment income 437,069 11,876,158 2,219,692
----------------------------------------------------
Expenses:
Management fees (Note 3) 178,278 4,940,780 170,718
Distribution fees (Note 3)
Class I 86,680 1,931,899 56,068
Class II -- 1,466,145 --
Transfer agent fees (Note 3) 44,131 1,338,608 18,123
Custodian fees 3,124 13,647 2,577
Reports to shareholders 9,023 314,582 9,514
Registration and filing fees 28,420 428,404 16,610
Professional fees 433 18,610 1,181
Trustees' fees and expenses 621 13,020 312
Other 2,020 73,593 7,575
----------------------------------------------------
Total expenses 352,730 10,539,288 282,678
Expenses waived/paid by affiliate (Note 3) (79,034) -- (214,135)
----------------------------------------------------
Net expenses 273,696 10,539,288 68,543
----------------------------------------------------
Net investment income 163,373 1,336,870 2,151,149
----------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments 3,679,651 108,987,992 385,056
Foreign currency transactions 16,262 1,316 (21,241)
----------------------------------------------------
Net realized gain 3,695,913 108,989,308 363,815
----------------------------------------------------
Net unrealized appreciation (depreciation) on:
Investments 6,678,243 333,736,163 145,558
Translation of assets and liabilities denominated in foreign currencies (19) -- 16,281
----------------------------------------------------
Net unrealized appreciation 6,678,224 333,736,163 161,839
----------------------------------------------------
Net realized and unrealized gain 10,374,137 442,725,471 525,654
----------------------------------------------------
Net increase in net assets resulting from operations $10,537,510 $444,062,341 $2,676,803
====================================================
*Net of foreign taxes of $3,747 and $133,122 for the Franklin Natural Resources
Fund and the Franklin Small Cap Growth Fund, respectively.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Changes in Net Assets
for the six months ended October 31, 1997 (unaudited)
and the year ended April 30, 1997
Franklin Biotechnology Franklin
Discovery Fund* Blue Chip Fund
-----------------------------------------------------
Six Months Six Months Year Ended
Ended 10/31/97 Ended 10/31/97 4/30/97**
-----------------------------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C>
Net investment income (loss) $ (16,664) $ 37,871 $ 35,615
Net realized gain from investments and
foreign currency transactions 118,958 62,597 15,018
Net unrealized appreciation (depreciation) on investments
and translation of assets and liabilities denominated
in foreign currencies (1,641,264) (253,980) 287,020
-----------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (1,538,970) (153,512) 337,653
Distributions to shareholders from:
Net investment income:
Class I -- -- (22,820)
Capital share transactions (Note 2)
Class I 42,844,383 3,976,064 5,285,111
-----------------------------------------------------
Net increase in net assets 41,305,413 3,822,552 5,599,944
Net assets:
Beginning of period -- 5,599,944 --
-----------------------------------------------------
End of period $41,305,413 $9,422,496 $5,599,944
=====================================================
Undistributed net investment income (loss) included in net assets:
End of period $ (16,664) $ 50,165 $ 12,294
=====================================================
*For the period September 15, 1997 (effective date) to October 31, 1997.
**For the period June 3, 1996 (effective date) to April 30, 1997.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
for the six months ended October 31, 1997 (unaudited)
and the year ended April 30, 1997
Franklin Franklin
California Growth Fund Global Health Care Fund
-------------------------------------------------------------------------
Six Months Year Ended Six Months Year Ended
Ended 10/31/97 4/30/97 Ended 10/31/97 4/30/97
-------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income (loss) $ 1,559,256 $ 1,347,123 $ (573,805) $ (615,092)
Net realized gain from investments and
foreign currency transactions 20,580,715 5,419,170 6,644,529 9,002,325
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies 56,741,700 (1,845,799) 40,988,350 (33,436,572)
-------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 78,881,671 4,920,494 47,059,074 (25,049,339)
Distributions to shareholders from:
Net investment income:
Class I (1,212,378) (856,516) -- (288,917)
Class II (47,438) (15,424) -- --
Net realized gains:
Class I (499) (3,662,883) -- (3,142,405)
Class II -- (130,572) -- (90,072)
-------------------------------------------------------------------------
Total distributions to shareholders (1,260,315) (4,665,395) -- (3,521,394)
Capital share transactions (Note 2)
Class I 184,039,069 200,527,555 (2,053,548) 69,202,314
Class II 38,358,707 25,497,086 7,232,872 11,206,101
-------------------------------------------------------------------------
Total capital share transactions 222,397,776 226,024,641 5,179,324 80,408,415
-------------------------------------------------------------------------
Net increase in net assets 300,019,132 226,279,740 52,238,398 51,837,682
Net assets:
Beginning of period 307,454,506 81,174,766 160,752,072 108,914,390
-------------------------------------------------------------------------
End of period $607,473,638 $307,454,506 $212,990,470 $160,752,072
=========================================================================
Undistributed net investment income (loss)
included in net assets:
End of period $ 967,061 $ 667,621 $ (573,805) $--
=========================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
for the six months ended October 31, 1997 (unaudited)
and the year ended April 30, 1997
Franklin Franklin
Global Utilities Fund MidCap Growth Fund
-------------------------------------------------------------------
Six Months Year Ended Six Months Year Ended
Ended 10/31/97 4/30/97 Ended 10/31/97 4/30/97
-------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income (loss) $ 1,953,004 $ 4,919,700 $ (3,613) $ (22,588)
Net realized gain from investments
and foreign currency transactions 10,683,960 20,104,534 598,955 545,132
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies 9,323,242 (3,808,807) 2,689,967 (3,730)
-------------------------------------------------------------------
Net increase in net assets resulting
from operations 21,960,206 21,215,427 3,285,309 518,814
Distributions to shareholders from:
Net investment income:
Class I (2,686,134) (4,357,887) -- (26,689)
Class II (111,960) (103,773) -- --
Net realized gains:
Class I -- (13,464,544) -- (1,366,521)
Class II -- (541,655) -- --
-------------------------------------------------------------------
Total distributions to shareholders (2,798,094) (18,467,859) -- (1,393,210)
Capital share transactions (Note 2)
Class I (6,080,667) 4,024,519 4,390,547 6,152,403
Class II 2,154,172 5,766,591 -- --
-------------------------------------------------------------------
Total capital share transactions (3,926,495) 9,791,110 4,390,547 6,152,403
-------------------------------------------------------------------
Net increase in net assets 15,235,617 12,538,678 7,675,856 5,278,007
Net assets:
Beginning of period 182,490,185 169,951,507 12,852,619 7,574,612
-------------------------------------------------------------------
End of period $197,725,802 $182,490,185 $20,528,475 $12,852,619
-------------------------------------------------------------------
Undistributed net investment income (loss)
included in net assets:
End of period $ 1,079,399 $ 1,924,489 $ (3,613) $--
-------------------------------------------------------------------
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
for the six months ended October 31, 1997 (unaudited)
and the year ended April 30, 1997
Franklin Franklin
Natural Resources Fund Small Cap Growth Fund
-----------------------------------------------------------------
Six Months Year Ended Six Months Year Ended
Ended 10/31/97 4/30/97 Ended 10/31/97 4/30/97
-----------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income $ 163,373 $ 201,953 $ 1,336,870 $ 176,656
Net realized gain from investments and
foreign currency transactions 3,695,913 52,954 108,989,308 40,556,983
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies 6,678,224 442,249 333,736,163 (72,391,160)
-----------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 10,537,510 697,156 444,062,341 (31,657,521)
Distributions to shareholders from:
Net investment income:
Class I (249,249) (151,754) -- (2,394,320)
Advisor Class (8,897) -- -- --
Net realized gains:
Class I (604) (678,900) -- (28,319,877)
Class II -- -- -- (3,174,405)
-----------------------------------------------------------------
Total distributions to shareholders (258,750) (830,654) -- (33,888,602)
Capital share transactions (Note 2)
Class I 5,885,680 36,733,835 1,118,683,383 681,937,816
Class II -- -- 262,531,632 130,927,016
Advisor Class 294,233 -- 41,943,320 19,961,079
-----------------------------------------------------------------
Total capital share transactions 6,179,913 36,733,835 1,423,158,335 832,825,911
-----------------------------------------------------------------
Net increase in net assets 16,458,673 36,600,337 1,867,220,676 767,279,788
Net assets:
Beginning of period 46,509,205 9,908,868 1,236,293,746 469,013,959
-----------------------------------------------------------------
End of period $62,967,878 $46,509,205 $3,103,514,422 $1,236,293,746
==================================================================
Undistributed net investment income included
in net assets:
End of period $ 100,977 $ 227,995 $ 1,336,870 $--
==================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
for the six months ended October 31, 1997 (unaudited)
and the year ended April 30, 1997
Franklin
Strategic Income Fund
----------------------------------------------
Six Months Year Ended
Ended 10/31/97 4/30/97
----------------------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C>
Net investment income $ 2,151,149 $ 1,782,592
Net realized gain from investments and foreign currency transactions 363,815 632,481
Net unrealized appreciation (depreciation) on investments and translation
of assets and liabilities denominated in foreign currencies 161,839 (329,459)
----------------------------------------------
Net increase in net assets resulting from operations 2,676,803 2,085,614
Distributions to shareholders from:
Net investment income:
Class I (2,047,716) (1,770,285)
Net realized gains:
Class I -- (519,339)
----------------------------------------------
Total distributions to shareholders (2,047,716) (2,289,624)
Capital share transactions (Note 2)
Class I 43,663,334 22,046,373
----------------------------------------------
Net increase in net assets 44,292,421 21,842,363
Net assets:
Beginning of period 34,863,899 13,021,536
----------------------------------------------
End of period $79,156,320 $34,863,899
==============================================
Undistributed net investment income included in net assets:
End of period $ 244,617 $ 141,184
==============================================
See notes to financial statements.
</TABLE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements (unaudited)
<TABLE>
<CAPTION>
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (the Trust) is registered under the Investment Company
Act of 1940 as an open-ended investment company, consisting of nine separate
series (the Funds). All Funds are non-diversified except the Franklin Blue Chip
Fund, the Franklin MidCap Growth Fund, and the Franklin Small Cap Growth Fund.
The Funds and their investment policies are:
Capital Growth Growth and Income Total Return
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Biotechnology Discovery Fund Strategic Income Fund Global Utilities Fund
Blue Chip Fund Natural Resources Fund
California Growth Fund
Global Health Care Fund
MidCap Growth Fund
Small Cap Growth Fund
</TABLE>
On July 25, 1997, the Franklin MidCap Securities Fund (a fund of the Trust)
ceased operations pursuant to a resolution approved by the Board of Trustees.
The following summarizes the Funds' significant accounting policies.
a. Security Valuation:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Trustees.
b. Foreign Currency Translation:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, the difference between the recorded amounts of
dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. Joint Repurchase Agreement:
The Funds may enter into a joint repurchase agreement whereby its uninvested
cash balance is deposited into a joint cash account to be used to invest in one
or more repurchase agreements. The value and face amount of the joint repurchase
agreement are allocated to the Funds based on their pro-rata interest. A
repurchase agreement is accounted for as a loan by the Fund to the seller,
collateralized by securities which are delivered to the Fund's custodian. The
market value, including accrued interest, of the initial collateralization is
required to be at least 102% of the dollar amount invested by the Funds, with
the value of the underlying securities marked to market daily to maintain
coverage of at least 100%. At October 31, 1997, all outstanding repurchase
agreements held by the Funds had been entered into on that date.
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)
d. Forward Exchange Contracts:
The Strategic Income Fund may enter into forward exchange contracts to hedge
against foreign exchange risks. These contracts are valued daily and the Fund's
equity therein is included in the Statement of Assets and Liabilities. Realized
and unrealized gains and losses are included in the Statement of Operations.
e. Securities Sold Short:
The Biotechnology Discovery Fund is engaged in selling securities short, which
obligates the Fund to replace a security borrowed by purchasing the same
security at the current market value. The Fund would incur a loss if the price
of the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund would realize a gain if
the price of the security declines between those dates.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit with the broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short.
f. Income Taxes:
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
distribute all of its taxable income.
g. Security Transactions, Investment Income, Expenses and Distribution:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount is
amortized on an income tax basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets. Other expenses are
charged to each Fund on a specific identification basis.
Distributions received by the Trust from securities may be a return of capital
(ROC). Such distributions reduce the cost basis of the securities, and any
distributions in excess of the cost basis are recognized as capital gains.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
h. Offering Costs:
Offering costs are amortized on a straight-line basis over twelve months.
i. Accounting Estimates:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
2. CAPITAL STOCK
The class of shares offered within each of the Funds are indicated below. The
shares have the same rights, except for their initial sales load, distribution
fees, voting rights on matters affecting a single class and the exchange
privilege of each class.
<TABLE>
<CAPTION>
Class I, Class II,
Class I Class I & Class II Class I & Advisor Class & Advisor Class
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Biotechnology Discovery Fund California Growth Fund Natural Resources Fund Small Cap Growth Fund
Blue Chip Fund Global Health Care Fund
MidCap Growth Fund Global Utilities Fund
Strategic Income Fund
</TABLE>
At October 31, 1997, there were an unlimited number of shares authorized ($.01
par value). Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
Franklin Franklin Franklin
Biotechnology Discovery Fund Blue Chip Fund California Growth Fund
- ---------------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------
Class I
Six months ended October 31, 19971
<S> <C> <C> <C> <C> <C> <C>
Shares sold 1,629,763 $43,362,691 440,785 $5,199,969 10,381,139 $236,914,280
Shares issued in reinvestment
of distributions -- -- -- -- 51,526 1,095,275
Shares redeemed (19,727) (518,308) (102,047) (1,223,905) (2,392,342) (53,970,486)
-----------------------------------------------------------------------------------------
Net increase 1,610,036 $42,844,383 338,738 $3,976,064 8,040,323 $184,039,069
=========================================================================================
Year ended April 30, 19972
Shares sold 612,646 $6,294,403 13,366,627 $262,790,549
Shares issued in reinvestment of distributions 2,160 22,245 210,190
4,152,217
Shares redeemed (98,638) (1,031,537) (3,404,453) (66,415,211)
-----------------------------------------------------------
Net increase 516,168 $5,285,111 10,172,364 $200,527,555
===========================================================
Class II
Six months ended October 31, 1997
Shares sold 1,794,206 $ 40,543,836
Shares issued in reinvestment of distributions 2,064
43,747
Shares redeemed (98,805) (2,228,876)
----------------------------------
Net increase 1,697,465 $ 38,358,707
==================================
Year ended April 30, 19973
Shares sold 1,316,359 $ 26,332,041
Shares issued in reinvestment of distributions 6,813
135,235
Shares redeemed (49,082) (970,190)
-----------------------------------
Net increase 1,274,090 $ 25,497,086
===================================
1For the Biotechnology Fund, for the period September 15, 1997 (effective date)
to October 31, 1997.
2For the Blue Chip Fund, for the period June 3, 1996 (effective date) to April
30, 1997.
3For the California Growth Fund, for the period September 3, 1996 (effective
date) to April 30, 1997.
</TABLE>
<TABLE>
<CAPTION>
2. CAPITAL STOCK (cont.)
Franklin Franklin Franklin
Global Health Care Fund Global Utilities Fund MidCap Growth Fund
- ---------------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------
Class I
Six months ended October 31, 1997
<S> <C> <C> <C> <C> <C> <C>
Shares sold 3,759,798 $ 74,729,960 1,605,435 $25,676,571 444,795 $7,035,374
Shares issued in reinvestment
of distributions -- -- 138,049 2,190,837 -- --
Shares redeemed (3,859,534) (76,783,508) (2,130,695) (33,948,075) (168,062) (2,644,827)
-----------------------------------------------------------------------------------------
Net increase (decrease) (99,736) $ (2,053,548) (387,211) $ (6,080,667) 276,733 $4,390,547
=========================================================================================
Year ended April 30, 1997
Shares sold 9,894,341 $179,514,277 2,133,940 $31,224,215 436,500 $6,261,329
Shares issued in reinvestment
of distributions 173,822 3,042,776 1,052,925 14,710,262 99,179 1,337,419
Shares redeemed (6,350,088) (113,354,739) (2,859,257) (41,909,958) (104,275) (1,446,345)
-----------------------------------------------------------------------------------------
Net increase 3,718,075 $ 69,202,314 327,608 $ 4,024,519 431,404 $6,152,403
=========================================================================================
Class II
Six months ended October 31, 1997
Shares sold 450,792 $9,052,521 185,463 $2,950,651
Shares issued in reinvestment
of distributions -- -- 5,813 91,896
Shares redeemed (91,119) (1,819,649) (56,287) (888,375)
-----------------------------------------------------------
Net increase 359,673 $7,232,872 134,989 $2,154,172
===========================================================
Year ended April 30, 19974
Shares sold 642,015 $ 11,438,930 476,121 $ 6,947,138
Shares issued in reinvestment
of distributions 4,570 79,609 38,768 539,298
Shares redeemed (18,004) (312,438) (117,318) (1,719,845)
-----------------------------------------------------------
Net increase 628,581 $ 11,206,101 397,571 $ 5,766,591
===========================================================
4For the Global Health Care Fund, for the period September 3, 1996 (effective
date) to April 30, 1997.
</TABLE>
<TABLE>
<CAPTION>
2. CAPITAL STOCK (cont.)
Franklin Franklin Franklin
Natural Resources Fund Small Cap Growth Fund Strategic Income Fund
- ---------------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------
Class I
Six months ended October 31, 1997
<S> <C> <C> <C> <C> <C> <C>
Shares sold 1,684,865 $27,628,410 63,058,394 $1,503,113,511 4,348,326 $48,653,530
Shares issued in reinvestment
of distributions 15,083 227,563 -- -- 119,549 1,328,473
Shares redeemed (1,343,429) (21,970,293) (16,278,950) (384,430,128) (566,673) (6,318,669)
------------------------------------------------------------------------------------------------
Net increase 356,519 $ 5,885,680 46,779,444 $1,118,683,383 3,901,202 $43,663,334
================================================================================================
Year ended April 30, 1997
Shares sold 4,011,712 $57,583,589 53,625,870 $1,076,021,349 2,512,297 $27,651,501
Shares issued in reinvestment
of distributions 53,467 756,742 1,361,841 27,277,285 157,746 1,730,372
Shares redeemed (1,593,404) (22,755,471) (21,003,120) (421,360,818) (668,531) (7,335,500)
-----------------------------------------------------------------------------------------------
Net increase 2,471,775 $35,584,860 33,984,591 $ 681,937,816 2,001,512 $22,046,373
===============================================================================================
Class II
Six months ended October 31, 1997
Shares sold 11,867,216 $ 280,719,560
Shares redeemed (765,987) (18,187,928)
-------------------------------
Net increase 11,101,229 $ 262,531,632
===============================
Year ended April 30, 1997
Shares sold 7,092,087 $ 141,500,263
Shares issued in reinvestment of distributions 141,513 2,814,592
Shares redeemed (674,976) (13,387,839)
-------------------------------
Net increase 6,558,624 $ 130,927,016
===============================
Advisor Class
Six months ended October 31, 1997
Shares sold 242,557 $ 3,830,825 1,975,951 $ 46,666,321
Shares issued in reinvestment
of distributions 590 8,897 -- --
Shares redeemed (219,882) (3,545,489) (190,364) (4,723,001)
------------------------------------------------------------
Net increase 23,265 $ 294,233 1,785,587 $ 41,943,320
============================================================
Year ended April 30, 19975
Shares sold 147,426 $ 2,125,208 1,065,131 $ 22,124,188
Shares redeemed (67,630) (976,233) (75,501) (2,163,109)
------------------------------------------------------------
Net increase 79,796 $ 1,148,975 989,630 $ 19,961,079
============================================================
5For the Natural Resources Fund and the Small Cap Growth Fund, for the period
January 2, 1997 (effective date) to April 30, 1997.
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers and/or directors of
Franklin Advisers, Inc. (Advisers), Franklin/Templeton Distributors, Inc.
(Distributors), Franklin Templeton Services, Inc. (FT Services), and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Funds'
investment manager, principal underwriter, administrative manager and transfer
agent, respectively.
All Funds, except the Blue Chip Fund and the MidCap Growth Fund, pay an
investment management fee to Advisers based on the average net assets of the
Funds as follows:
Annualized
Fee Rate Average Daily Net Assets
- --------------------------------------------------------------------------------
0.625% First $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million, up to and including $10 billion
Fees are further reduced on net assets over $10 billion.
The Blue Chip Fund pays an investment management fee to Advisers based on the
average net assets of the Fund as follows:
Annualized
Fee Rate Average Daily Net Assets
- --------------------------------------------------------------------------------
0.750% First $500 million
0.625% Over $500 million, up to and including $1 billion
0.500% Over $1 billion
The MidCap Growth Fund pays an investment management fee to Advisers of 0.650%
per year of the average daily net assets of the Fund.
The Biotechnology Discovery Fund pays an administrative fee to FT Services based
on the Fund's average net assets as follows:
Annualized
Fee Rate Average Daily Net Assets
- -------------------------------------------------------------------------------
0.150% First $200 million
0.135% Over $200 million, up to and including $700 million
0.100% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
Under a subadvisory agreement, Templeton Investment Counsel, Inc. (Investment
Counsel) provides subadvisory services to the Strategic Income Fund and receives
from Advisers fees based on the average daily net assets of the Fund.
Under an agreement with Advisers, FT Services provides administrative services
to the Funds, except the Biotechnology Discovery Fund. The fee is paid by
Advisers based on the average daily net assets, and is not an additional expense
of the Funds.
Advisers agreed in advance to waive management fees and assume payment of other
expenses for the Biotechnology Discovery Fund, the Blue Chip Fund, the Natural
Resources Fund, and the Strategic Income Fund, as noted in the Statements of
Operations.
<TABLE>
<CAPTION>
3. TRANSACTIONS WITH AFFILIATES (cont.)
The Funds reimburse Distributors annually based on their average daily net
assets for the costs incurred in marketing the Funds' shares as follows:
CALIFORNIA GROWTH FUND
BIOTECHNOLOGY DISCOVERY FUND GLOBAL HEALTH CARE FUND
MIDCAP GROWTH FUND GLOBAL UTILITIES FUND
STRATEGIC INCOME FUND NATURAL RESOURCES FUND SMALL CAP GROWTH FUND
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class I 0.25% 0.35% 0.25%
Class II -- -- 1.00%
</TABLE>
Distributors received (paid) net commission on sales of the Funds' shares, and
received contingent deferred sales charges for the period as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
BIOTECHNOLOGY BLUE CALIFORNIA GLOBAL HEALTH GLOBAL
DISCOVERY FUND CHIP FUND GROWTH FUND CARE FUND UTILITIES FUND
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net commissions received (paid) $162,954 $11,425 $(269,623) $(15,609) $(10,985)
Contingent deferred sales charges $-- $-- $ 8,314 $-- $ 2,584
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
MIDCAP NATURAL RESOURCES SMALL CAP STRATEGIC
GROWTH FUND FUND GROWTH FUND INCOME FUND
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net commissions received (paid) $11,004 $32,837 $(2,335,229) $18,070
Contingent deferred sales charges $-- $-- $ 47,271 $--
</TABLE>
The Funds paid transfer agent fees of $2,305,227, of which $1,942,392 was paid
to Investor Services.
At October 31, 1997, Franklin Resources, Inc. owned 8% of the Biotechnology
Discovery Fund, 24% of the Blue Chip Fund, 49% of the MidCap Growth Fund, and
10% of the Strategic Income Fund.
4. INCOME TAXES
At April 30, 1997, the Natural Resources Fund has deferred capital losses
occurring subsequent to October 31, 1996 of $394,033. For tax purposes, such
losses will be reflected in the year ending April 30, 1998.
At October 31, 1997, the net unrealized appreciation (depreciation) based on the
cost of investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
BIOTECHNOLOGY BLUE CALIFORNIA GLOBAL HEALTH GLOBAL
DISCOVERY FUND CHIP FUND GROWTH FUND CARE FUND UTILITIES FUND
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at cost $39,918,081 $9,181,886 $542,428,994 $182,199,006 $172,716,287
==================================================================================
Unrealized appreciation $ 1,080,056 $ 811,172 $ 82,669,456 $ 38,518,024 $ 35,650,561
Unrealized depreciation (2,721,320) (779,101) (16,516,580) (13,319,024) (11,343,638)
----------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) $(1,641,264) $ 32,071 $ 66,152,876 $ 25,199,000 $ 24,306,923
==================================================================================
</TABLE>
4. INCOME TAXES (cont.)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
MIDCAP NATURAL RESOURCES SMALL CAP STRATEGIC
GROWTH FUND FUND GROWTH FUND INCOME FUND
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments at cost $16,478,272 $54,712,655 $2,821,686,479 $77,520,858
================================================================
Unrealized appreciation $ 4,343,867 $11,170,995 $ 439,790,686 $ 1,942,942
Unrealized depreciation (462,097) (2,868,527) (122,868,804) (1,621,010)
----------------------------------------------------------------
Net unrealized appreciation $ 3,881,770 $ 8,302,468 $ 316,921,882 $ 321,932
================================================================
</TABLE>
Net investment income differs for financial statement and tax purposes primarily
due to differing treatment of foreign currency transactions and passive foreign
investment company shares.
Net realized capital gains differ for financial statements and tax purposes
primarily due to differing treatment of wash sales, foreign currency
transactions, and passive foreign investment company shares.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended October 31, 1997 were as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
BIOTECHNOLOGY BLUE CALIFORNIA GLOBAL HEALTH GLOBAL
DISCOVERY FUND* CHIP FUND GROWTH FUND CARE FUND UTILITIES FUND
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases $37,194,236 $4,271,060 $288,442,975 $88,403,374 $56,188,892
Sales $ 2,799,859 $1,153,118 $101,890,618 $86,111,058 $57,161,214
Franklin Franklin Franklin Franklin
MidCap Natural Resources Small Cap Strategic
Growth Fund Fund Growth Fund Income Fund
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases $8,357,750 $32,837 $1,700,631,793 $57,690,829
Sales $3,910,958 $-- $ 496,588,381 $18,098,222
*For the period September 15, 1997 (effective date) to October 31, 1997.
</TABLE>
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Strategic Income Fund has been a party to financial instruments with
off-balance sheet risk, primarily forward exchange contracts, in order to
minimize the impact on the Fund from adverse changes in the relationship between
the U.S. dollar and foreign currencies and interest rates. These instruments
involve market risk in excess of the amount recognized on the Statement of
Assets and Liabilities. Some of these risks have been minimized by offsetting
contracts. Risks arise from the possible inability of counterparties to meet the
terms of their contracts, future movement in currency values and interest rates
and contract positions that are not exact offsets. The contract amount indicates
the extent of the Fund's involvement in such contracts.
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. At October 31,
1997, the Strategic Income Fund has outstanding forward exchange contracts for
the sale of a currency as set out below. The contracts are reported in the
financial statements at the Fund's net equity, as measured by the difference
between the forward exchange rates at the reporting date and the forward
exchange rates at the day of entry into the contract.
<TABLE>
<CAPTION>
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (cont.)
Unrealized
Contracts to Sell (Foreign exchange currency) In Exchange for Settlement Date Gain (loss)
<S> <C> <C> <C> <C> <C>
517,000 Australian Dollar U.S. $ 375,364 11/26/97 U.S. $11,593
431,000 Australian Dollar 313,563 11/26/97 10,303
------- ------
U.S. $ 688,927 21,896
====== ======
Contracts to Buy (Foreign exchange currency)
1,800,000 Deutschemark U.S.$1,024,063 11/06/97 20,403
900,000 Deutschemark 512,660 11/10/97 9,703
900,000 Deutschemark 521,029 11/10/97 1,334
900,000 Deutschemark 521,800 11/26/97 1,085
------- -------
U.S.$2,579,552 32,525
======= -------
Unrealized gain on forward foreign currency contracts 54,421
-------
Contracts to Sell (Foreign exchange currency)
323,000 Australian Dollar U.S. $ 223,947 12/02/97 (3,355)
1,800,000 Deutschemark 1,016,949 11/06/97 (27,517)
900,000 Deutschemark 512,528 11/07/97 (9,737)
900,000 Deutschemark 513,113 11/10/97 (9,250)
900,000 Deutschemark 513,113 11/10/97 (9,250)
900,000 Deutschemark 508,245 11/26/97 (14,640)
50,000,000 Japanese Yen 413,976 11/26/97 (3,011)
187,000 New Zealand Dollar 115,444 12/15/97 (667)
------- -------
U.S.$3,817,315 (77,427)
======= -------
Contracts to Buy (Foreign exchange currency)
517,000 Australian Dollar U.S. $ 375,763 11/26/97 (11,992)
431,000 Australian Dollar 309,286 11/26/97 (6,025)
900,000 Deutschemark 523,016 11/07/97 (751)
------- -------
U.S.$1,208,065 (18,768)
======= -------
Unrealized loss on forward foreign currency contracts (96,195)
-------
Net unrealized loss on forward foreign currency contracts U.S. $(41,774)
=======
</TABLE>
7. CREDIT RISK AND DEFAULTED SECURITIES
The Strategic Income Fund has 52.4% of its portfolio invested in lower rated and
comparable quality unrated high yield securities, which tend to be more
sensitive to economic conditions than higher rated securities. The risk of loss
due to default by the issuer may be significantly greater for the holders of
high yielding securities because such securities are generally unsecured and are
often subordinated to other creditors of the issuer. At October 31, 1997, the
Fund held defaulted securities issued with a value aggregating $100,500
representing 0.13% of the Fund's net assets. For information as to specific
securities, see the accompanying Statement of Investments.
7. CREDIT RISK AND DEFAULTED SECURITIES (cont.)
For financial reporting purposes, the Fund discontinues accruing income on
defaulted bonds and provides an estimate for losses on interest receivable.
The Strategic Income Fund has investments in excess of 10% of its total net
assets in Emerging Market Bonds and Foreign Government Bonds. Such concentration
may subject the Fund more significantly to economic changes occurring within
those sectors.
8. RESTRICTED SECURITIES
The Funds may purchase securities through a private offering that generally
cannot be sold to the public without prior registration under the Securities Act
of 1933. The cost of registering such securities are paid by the issuer.
Restricted securities held at October 31, 1997 were as follows:
<TABLE>
<CAPTION>
Acquisition
Shares Issuer Date Cost Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Franklin California Growth Fund
48 Lynx Therapeutics, Inc. 10/19/92 $ 326 $--
243,333 Pacific Retail Trust 8/30/96 - 4/30/97 2,766,772 2,919,996
---------
Total Restricted Securities (.48% of Net Assets) $2,919,996
=========
Franklin Global Utilities Fund
35,000 CMS Energy Corp., cvt. pfd. (.95% of Net Assets) 6/18/97 $1,750,000 $1,878,692
=========
</TABLE>
9. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" as investments
in portfolio companies in which the Fund owns 5% or more of the outstanding
voting securities. Investments in "affiliated companies" at October 31, 1997
were as shown below. For the period ended October 31, 1997, dividends and
interest income from "affiliated companies" were $16,124 and net realized gains
from disposition of "affiliated companies" were $96,711.
<TABLE>
<CAPTION>
Number of Shares Number of Shares
Held At Gross Gross Held At Value At Dividend
Name of Issuer Beginning of Period Additions Reductions End of Period End of Period Income
- ---------------------------------------------------------------------------------------------------------------------------
California Growth Fund:
<S> <C> <C> <C> <C> <C> <C>
Cohr, Inc. -- 425,000 -- 425,000 $ 4,462,500 --
====================================
Franklin Global Health Care Fund:
CIMA Labs, Inc. 575,000 50,000 -- 625,000 3,710,938 --
Cohr, Inc. -- 405,500 -- 405,500 4,257,750 --
Penederm, Inc. 410,000 114,000 -- 524,000 6,812,000 --
------------------------------------
Total Affiliated Issuers $ 14,780,688 --
====================================
</TABLE>
<TABLE>
<CAPTION>
9. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES (cont.)
Number of Shares Number of Shares
Held At Gross Gross Held At Value At Dividend
Name of Issuer Beginning of Period Additions Reductions End of Period End of Period Income
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Franklin Small Cap Growth Fund:
Activison, Inc. -- 1,344,400 -- 1,344,400 $ 19,661,850 $--
Advanced Health Corp. -- 1,259,300 -- 1,259,300 22,195,163 --
Affiliated Computer Services, Inc. 430,600 1,192,800 -- 1,623,400 40,787,925
- --
Arch Communications Group, Inc. -- 2,000,000 -- 2,000,000 15,250,000 --
Atlantic Coast Airlines, Inc. 280,500 448,000 28,500 700,000 14,787,500 --
Cannondale Corp. 509,300 199,100 -- 708,400 15,673,350 --
Catalytica, Inc. -- 1,340,033 -- 1,340,033 16,750,413 --
Clarifying, Inc. -- 1,297,200 -- 1,297,200 16,863,600 --
Coherent, Inc. 360,000 466,700 -- 826,700 32,241,300 --
Consolidated Cigar Holdings, Inc. 574,000 215,600 -- 789,600 30,991,800
- --
DepoTech Corp. 537,800 457,900 -- 995,700 13,815,338 --
Gibraltar Steel Corp. 663,800 349,000 -- 1,012,800 23,927,400 --
Harmonic Lightwaves, Inc. -- 961,500 -- 961,500 12,018,750 --
Healthcare Recoveries, Inc. -- 598,700 -- 598,700 11,075,950 --
Inhale Therapeutic Systems 399,200 411,800 -- 811,000 22,099,750 --
Innkeepers USA Trust -- 1,946,500 -- 1,946,500 32,482,219 --
Integrated Systems, Inc. 611,300 1,480,000 -- 2,091,300 36,859,163 --
JLG Industries, Inc. 678,600 1,391,000 -- 2,662,700 33,783,006 16,124
K2, Inc. 405,000 455,500 -- 860,500 21,781,406 --
Labor Ready, Inc. 432,250 357,600 -- 789,850 28,533,331 --
Marquee Group, Inc. -- 1,327,500 -- 1,327,500 6,720,469 --
Mesa Air Group, Inc. -- 1,650,000 -- 1,650,000 8,868,750 --
Omtool, Ltd. -- 984,600 -- 984,600 12,430,575 --
Penederm, Inc. 531,200 -- -- 531,200 6,905,600 --
Primus Telecommunications Group, Inc. 513,300 400,000 -- 913,300 10,845,438 --
RockShox, Inc. 435,500 530,300 -- 965,800 8,692,200 --
Rural Cellular Corp., Class A 528,000 172,800 -- 700,800 8,409,600 --
Serologicals Corp. 738,900 542,900 -- 1,281,800 29,481,400 --
Software Artistry, Inc. 100,000 611,500 -- 711,500 10,850,375 --
SOS Staffing Services, Inc. -- 672,400 -- 672,400 13,868,250 --
Spectralink Corp. 1,050,000 -- -- 1,050,000 3,806,250 --
Transition Systems, Inc. 975,000 -- 65,800 909,200 18,411,300 --
Transcrypt International, Inc. -- 902,400 -- 902,400 19,852,800 --
Trident Microsystems, Inc. -- 1,198,900 -- 1,198,900 15,136,113 --
Trusted Information Systems, Inc. -- 1,236,700 115,000 1,121,700 10,515,938 --
Vantive Corp. -- 1,251,100 -- 1,251,100 31,590,275 --
West Marine, Inc. -- 1,374,800 -- 1,374,800 28,870,800 --
Western Wireless Corp., Class A 1,094,800 700,000 310,000 1,484,000 26,540,800 --
XcelleNet, Inc. 75,000 705,100 -- 780,100 8,483,588 --
-------------------------
Total Affiliated Issuers $741,859,735 $16,124
=========================
</TABLE>
10. LENDING OF PORTFOLIO SECURITIES
The Small Cap Growth Fund loans securities to certain brokers for which it
receives cash collateral against the loaned securities in an amount equal to at
least 102% of the market value of the loaned securities. Net interest income
from the investment of the cash collateral received was $464,330 for the period
ended October 31, 1997. The value of the loaned securities was $48,424,300 at
October 31, 1997.
Franklin Strategic Series Semi-Annual Report October 31, 1997.
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM 304
(a) OF REGULATION S-T)
GRAPHIC MATERIAL (1)
This chart shows in pie format the portfolio breakdown of the Franklin
California Growth Fund on October 31, 1997, based on total net assets.
<TABLE>
<CAPTION>
Portfolio Breakdown on October 31, 1997
<S> <C>
Technology Services 19.7%
Electronic Technology 10.0%
Finance 6.7%
Retail 6.6%
Energy/Minerals 6.4%
Real Estate 5.1%
Health Technology 3.9%
Semiconductors 3.9%
Other 24.1%
Cash & Equivalents 13.6%
</TABLE>
GRAPHIC MATERIAL (2)
This chart shows in pie format the geographic distribution of the Franklin
Global Utilities Fund on October 31, 1997, based on total net assets.
<TABLE>
<CAPTION>
Geographic Distribution on October 31, 1997
<S> <C>
United States 60.0%
Continental Europe 14.6%
Latin America 9.6%
Asia 9.1%
United Kingdom 2.5%
Cash & Equivalents 4.2%
</TABLE>
GRAPHIC MATERIAL (3)
This graph shows in bar format the six-month total return of the Franklin Small
Cap Growth Fund (31.28%) compared with the six-month total return of the S&P 500
Stock Index (15.15%) and the Dow Jones Industrial Average (7.16%) for the period
ended October 31, 1997.
GRAPHIC MATERIAL (4)
This graph shows in bar format the portfolio breakdown of the Franklin Small Cap
Growth Fund on October 31, 1997, based on total net assets.
<TABLE>
<CAPTION>
Portfolio Breakdown on October 31, 1997
<S> <C>
Technology Services 15.8%
Electronic Technology 8.1%
Energy 7.3%
Semiconductors and Equipment 6.0%
Utilities and Communication 6.0%
Health Services 5.0%
Commercial Services 4.3%
Health Technology 4.3%
Finance 4.1%
Real Estate 3.9%
Other 23.5%
Cash & Equivalents 11.7%
</TABLE>
GRAPHIC MATERIAL (5)
This graph shows in bar format the six-month total return of the Franklin
Natural Resources Fund (22.00%) compared with the six-month total return of the
S&P 500 Stock Index (15.15%).
GRAPHIC MATERIAL (6)
This chart shows in pie format the portfolio breakdown of the Franklin Natural
Resources Fund on October 31, 1997, based on total net assets.
<TABLE>
<CAPTION>
Portfolio Breakdown on October 31, 1997
<S> <C>
Energy 56.9%
Chemicals 9.8%
Gold & Precious Metals 8.2%
Iron/Steel 5.9%
Base Metals 4.9%
REITs 3.4%
Forest Products and Paper 3.2%
Service/Related Industries 1.9%
Cash & Equivalents 5.8%
</TABLE>
GRAPHIC MATERIAL (7)
This chart shows in bar format the geographic distribution of the Franklin
Natural Resources Fund on October 31, 1997, based on total net assets.
<TABLE>
<CAPTION>
Geographic Distribution on October 31, 1997
<S> <C>
United States 78.5%
Canada 12.7%
Europe 1.6%
Australia 1.3%
South America 0.1%
Cash & Equivalents 5.8%
</TABLE>
GRAPHIC MATERIAL (8)
This chart shows in pie format the geographic distribution of the Franklin Blue
Chip Fund on October 31, 1997, based on total net assets.
<TABLE>
<CAPTION>
Geographic Distribution on October 31, 1997
<S> <C>
United States 34.2%
Europe 21.7%
Japan 13.1%
Pacific Rim (excluding Japan) 8.3%
Latin America 3.0%
Other 2.7%
Cash & Equivalents 17.0%
</TABLE>
GRAPHIC MATERIAL (9)
This chart shows in bar format the portfolio breakdown of the Franklin Blue Chip
Fund on October 31, 1997, based on total net assets.
<TABLE>
<CAPTION>
Portfolio Breakdown on October 31, 1997
<S> <C>
Financial Services 14.2%
Consumer Staples 10.6%
Healthcare 9.9%
Utilities and Telecommunications 9.4%
Technology 9.3%
Industrial Cyclicals 9.1%
Services 8.9%
Energy 5.0%
Consumer Durables 4.7%
Retail 1.9%
Cash & Equivalents 17.0%
</TABLE>
GRAPHIC MATERIAL (10)
This chart shows in bar format the portfolio breakdown of the Franklin MidCap
Growth Fund on October 31, 1997, based on total net assets.
<TABLE>
<CAPTION>
Portfolio Breakdown on October 31, 1997
<S> <C>
Consumer Services 10.6%
Industrial Services 9.6%
Financials 8.4%
Consumer Durables 7.1%
Retail 6.5%
Semiconductors 6.2%
Transportation 5.9%
Technology Services 5.9%
Electronic Technology 5.2%
Commercial Services 4.8%
Other 19.9%
Cash & Equivalents 9.9%
</TABLE>
GRAPHIC MATERIAL (11)
This chart shows in bar format the geographic distribution of the Franklin
Global Health Care Fund on October 31, 1997, based on total net assets.
<TABLE>
<CAPTION>
Geographic Distribution on October 31, 1997
<S> <C>
United States 78.1%
Israel 6.2%
Switzerland 4.1%
Mexico 0.8%
Indonesia 0.5%
Australia 0.3%
United Kingdom 0.3%
Cash & Equivalents 9.7%
</TABLE>
GRAPHIC MATERIAL (12)
This chart shows in bar format the portfolio sector breakdown of the Franklin
Global Health Care Fund on October 31, 1997, based on total net assets.
<TABLE>
<CAPTION>
Portfolio Secotr Breakdown on October 31, 1997
<S> <C>
Specialty Pharmaceuticals 20.5%
Medical Technology and Supplies 16.5%
Biotechnology 12.9%
Software and Information Systems 8.4%
Miscellaneous 7.5%
Alternate Site Providers 6.6%
Pharmaceuticals 4.1%
Nursing Homes 4.1%
Physician Practice Management 4.1%
Wholesalers/Distributors 1.9%
Managed Care and HMOs 1.9%
Hospitals 1.8%
Cash & Equivalents 9.7%
</TABLE>
GRAPHIC MATERIAL (13)
This chart shows in pie format the portfolio industry breakdown of the Franklin
Biotechnology Discovery Fund on October 31, 1997, based on total net assets.
<TABLE>
<CAPTION>
Portfolio Industry Breakdown on October 31, 1997
<S> <C>
Drugs 36.7%
Biomedical 23.3%
Delivery Systems 8.1%
Therapeutics 7.3%
Diagnostics 4.4%
Cash & Equivalents 20.2%
</TABLE>
GRAPHIC MATERIAL (14)
This chart shows in bar format the portfolio breakdown of the Franklin Strategic
Income Fund on October 31, 1997, based on total net assets.
<TABLE>
<CAPTION>
Portfolio Breakdown on October 31, 1997
<S> <C>
High Yield Corporate Bonds 26.2%
International Bonds 18.8%
Emerging Markets Bonds 17.2%
Convertible Securities 9.2%
U.S. Government Bonds 6.9%
Mortgage Securities 6.4%
Preferred Stock (Non-Convertible) 1.2%
Cash & Equivalents 14.1%
</TABLE>
