ANNUAL
REPORT
FRANKLIN STRATEGIC SERIES
Franklin Biotechnology Discovery Fund
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin Global Health Care Fund
Franklin Global Utilities Fund
Franklin MidCap Growth Fund
Franklin Natural Resources Fund
Franklin Small Cap Growth Fund
Franklin Strategic Income Fund
Technology Update:
Franklin Templeton Combats
the Year 2000 Problem
By Charles B. Johnson,
President of Franklin Resources, Inc.
As we near the 21st century, Franklin Templeton is taking important steps to
tackle the computer glitch dubbed the Year 2000 Problem, Y2K, or the
Millennium Bug. The problem originated from the software designers' attempt
to save memory by recording years in a two-digit format -- "98" instead of
"1998," for example -- but didn't take into account that the year 2000 or
"00," could also be interpreted as 1900. Uncorrected, this problem could
prevent computers from accurately processing date-sensitive data after 1999.
Franklin Templeton's Information Services & Technology division established a
Year 2000 Project Team that has already begun making the necessary software
changes to help our computer systems, which service the funds and their
shareholders, be Year 2000 Compliant. As changes reach completion, we plan to
conduct comprehensive tests to verify their effectiveness. We will also seek
reasonable assurances from all of our major software or data-services
suppliers that they will be Year 2000 Compliant.
In addition, with an estimated 80% of businesses facing the Year 2000
Problem, mutual fund managers appreciate the impact it potentially could have
on companies. That's why Franklin Templeton managers are aware of this issue
when managing fund portfolios.
Rupert H. Johnson, Jr.
President
Franklin Strategic Series
CONTENTS
Shareholder Letter ............................. 1
Fund Reports
Franklin Biotechnology
Discovery Fund ................................ 3
Franklin Blue Chip Fund ....................... 8
Franklin California
Growth Fund ................................... 14
Franklin Global
Health Care Fund .............................. 24
Franklin Global
Utilities Fund ................................ 36
Franklin MidCap
Growth Fund ................................... 46
Franklin Natural
Resources Fund ................................ 52
Franklin Small Cap
Growth Fund ................................... 64
Franklin Strategic
Income Fund ................................... 78
Financial Highlights &
Statement of Investments ....................... 88
Financial Statements ........................... 141
Notes to
Financial Statements ........................... 155
Independent
Auditors' Report ............................... 167
Tax Designation ................................ 168
SHAREHOLDER LETTER
Dear Shareholder:
We are pleased to bring you the Franklin Strategic Series annual report for
the fiscal year ended April 30, 1998.
A Volatile `97
The 12 months covered by this report proved to be a positive year for many
investors. On April 30, 1997, the Dow Jones(R) Industrial Average (the Dow)
closed at 7008.99, and by July 16, it had pushed through the 8000-point mark.
However, during the following months, securities markets experienced severe
volatility, and on October 27, the Dow plunged 7.18% due to investor concerns
about currency crises in Asia. But it regained more than half its losses the
very next day, and at the end of 1997, the Dow stood at 7908.25.*
*Source: Unmanaged Dow Jones Industrial Average total return calculated by
Wilshire Associates, Inc. includes reinvested dividends.
A Surprising `98
The beginning of 1998 was as eventful as the end of 1997. Rather than being
slowed down by Asia's financial problems, the U.S. economy actually picked up
speed, and grew at a surprisingly strong, 4.2% annualized rate during the
first three months of the year. Just as surprising, instead of drifting
higher, inflation dropped to its lowest rate since 1964, and at the close of
the reporting period, the Dow stood at 9063.37, up 31.61% from 12 months
earlier.
What's Next?
After such an impressive rise in the Dow, many investors wondered how long we
would continue to enjoy this remarkable combination of strong economic
growth, low inflation and relatively stable interest rates. The question on
everyone's mind was: would the market drop again in the near future, or would
it soar to new heights?
We, of course, cannot answer that -- and neither can anyone else. But we do
know that markets always have, and always will, fluctuate. That's why prudent
investors view their funds as long-term investments, and realize that
short-term volatility usually has minimal impact upon their long-term
financial goals. They understand that patience, discipline and
diversification are keys to successful investing, and that mutual funds offer
a level of diversification almost impossible for individuals to achieve on
their own.
Regardless of the market's direction, Franklin Templeton's management teams
will strive to provide shareholders careful selection, broad diversification,
and constant professional supervision. We encourage you to speak with your
investment representative about your financial goals, diversify your
investments, and remember that it is time -- not timing -- that makes the
difference.
As always, we appreciate your support, welcome your comments, and look
forward to serving your future investment needs.
Sincerely,
Rupert H. Johnson, Jr.
President
Franklin Strategic Series
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal value, beginning on page 89 of
this report.
FRANKLIN BIOTECHNOLOGY
DISCOVERY FUND
Your Fund's Objective: Franklin Biotechnology Discovery Fund seeks capital
appreciation by investing primarily in equity securities of biotechnology
companies and discovery research firms located in the U.S. and other
countries.
We are pleased to bring you this report of Franklin Biotechnology Discovery
Fund, which covers the period since the fund's inception on September 15,
1997, through April 30, 1998. During this seven and one-half months, the fund
produced a +7.78% cumulative total return, as discussed in the Performance
Summary on page 6, outperforming the fund's benchmark, the Amex Biotechnology
Index, which returned 6.97% for the same period.
As you know, the fund intends to invest in the small capitalization
biotechnology sector and will not likely own many large capitalization stocks
because we believe the best growth opportunities exist in smaller, more
dynamic companies. These companies typically focus on finding new drugs to
treat diseases that are less researched by larger pharmaceutical companies.
We expect the average market capitalization of the fund's holdings will be in
the $200 million to $800 million range. By the end of the reporting period,
the fund had investments in 32 securities representing 6 industries, and
total net assets reached $73 million.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
The fund's holdings are highly volatile stocks and therefore experienced
dramatic swings during the period. On the negative side, shares of Cell
Therapeutics, Inc. and Alteon, Inc. fell 50% or more each during the last
quarter of the reporting period as key products produced disappointing
results in clinical studies. Partially offsetting this decline was
outstanding performance in the shares of Chiroscience Group, Plc. and Heska
Corp., both of which gained significantly during the same period. We expect
these types of returns (both positive and negative) to continue regularly
throughout the fund's life. In an attempt to reduce this high volatility and
diversify the portfolio, we increased the number of positions in the fund and
established short positions in stocks of companies which, in our opinion,
were selling at prices that exceeded their true value.
Looking forward, we believe the outlook for biotechnology companies is
strong, with a record number of approved drugs expected from the Federal Drug
Administration in 1998. Biotechnology-related sales exceeded $12 billion in
1997, with a steady increase in profitable companies in this sector over the
past several years. As a reminder, no new accounts (other than retirement
plan accounts) will be accepted into the fund once its assets reach $150
million. However, shareholders of record at that time will be able to add to
their existing accounts or through reinvestment of dividends and capital
gains.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of April 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected
to affect our strategies and the fund's portfolio composition. Although
historic performance is no guarantee of future results, these insights may
help you understand our investment and management philosophy.
Biotechnology companies are often small, relatively new, or unseasoned. Such
companies can be particularly sensitive to changing economic conditions, and
have less certain growth prospects than larger, more established companies.
And since small company stocks are volatile, they may not be appropriate for
short-term investors. Also, the fund is non-diversified and concentrates in a
single industry, involving other risks, such as patent considerations,
product liability, government regulatory requirements, and regulatory
approval for new drugs and medical products. The fund may invest in foreign
securities, which involve additional risks, including political uncertainty
and currency volatility. These and other risks, including hedging strategies,
are described more fully in the fund's prospectus.
We thank you for your participation in Franklin Biotechnology Discovery Fund
and look forward to serving your investment needs in the future.
Sincerely,
Kurt von Emster
Portfolio Manager
Franklin Biotechnology Discovery Fund
FRANKLIN BIOTECHNOLOGY
DISCOVERY FUND
Top 10 Holdings
4/30/98
Company, % of Total
Industry Net Assets
- - -----------------------------------
PathoGenesis Corp.,
Drugs 5.66%
Chiroscience Group, Plc.,
Drugs 4.64%
Inhale Therapeutic Systems,
Delivery Systems 4.57%
Texas Biotechnology Corp.,
Drugs 4.25%
Aviron,
Delivery Systems 4.04%
Zonagen, Inc.,
Drugs 4.02%
Ligand Pharmaceutical Inc.,
Class B,
Drugs 4.02%
Neurex Corp.,
Drugs 3.66%
IDEC Pharmaceuticals Corp.,
Biomedical 3.42%
Chiron Corp.,
Therepeutics 3.29%
PERFORMANCE SUMMARY
Franklin Biotechnology Discovery Fund provided a +7.78% cumulative total
return since inception on September 15, 1997, through April 30, 1998.
Cumulative total return measures the change in value of an investment,
assuming reinvestment all distributions, and does not include the initial
sales charge.
The fund's share price, as measured by net asset value, increased $1.89, from
$25.00 on September 15, 1997, to $26.89 on April 30, 1998. During the
reporting period, shareholders received per-share distributions of 4.7 cents
($0.0470) in short-term capital gains. Distributions will vary depending on
income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
Franklin Biotechnology Discovery Fund
Period ended 4/30/98
Since
Inception
(9/15/97)
Cumulative Total Return1 7.78%
Aggregate Total Return1 2.92%
Value of $10,000 Investment2 $10,292
1. Total return represents the change in value of an investment over the
period indicated. Cumulative total return does not include the sales charge,
and aggregate total return includes the maximum 4.5% initial sales charge.
Since the fund has existed for less than one year, average annual total
returns are not provided.
2. This figure represents the value of a hypothetical $10,000 investment in
the fund over the period indicated and includes the sales charge.
Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, currency volatility, and the
economic, social and political climates of countries where investments are
made. You may have a gain or loss when you sell your shares. Past expense
reductions by the fund's manager increased total return.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 92
of this report.
FRANKLIN BLUE CHIP FUND
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Your Fund's Objective: Franklin Blue Chip Fund seeks long-term capital
appreciation by investing primarily in high quality, blue chip companies with
market capitalization of $1 billion or more, that the managers believe are
leaders in their industries and are positioned for stable, long-term growth
potential.
This annual report of Franklin Blue Chip Fund covers the 12 months ended
April 30, 1998. Early in the period, share prices rose in many countries
around the globe as a result of low inflation and strong corporate profits.
However, Thailand's currency devaluation in July sparked a series of currency
crises in Asia, pushing the region's stock prices sharply lower. This led to
increased volatility in most of the world's equity markets, but some
rebounded toward the end of the period, and finished the fiscal year with
significant gains. Within this environment, Franklin Blue Chip Fund delivered
a +16.41% one-year cumulative total return, as discussed in the Performance
Summary on page 11.
Seeking to take advantage of the volatility described above, we added to many
of our existing positions, and on April 30, 1998, our holdings were
diversified across more than 75 companies. Consumer staples, healthcare,
technology and financial services were the largest groups represented in the
fund.
During the reporting period, the technology and consumer staples sectors
strengthened considerably, and our holdings of Cisco Systems Inc., Nestle,
SA, and Gillette Co. contributed positively to the fund's performance. Riding
the wave of industry consolidation, our shares of Citicorp, Wells Fargo &
Co., and HSBC Holding Plc. also appreciated substantially in value. However,
we believed that other financial companies had high stock valuations, and
maintained a relatively low weighting in this sector. Although this may
penalize us in the short term, it is consistent with our long-term
conservative investment discipline. During the fiscal year, we initiated a
position in Xerox Corp., a major manufacturer of document processing
products, when the price of its shares were temporarily depressed due to
investor concerns about the company's Asian exposure. And we sold our
holdings of Starbucks at a profit due to high valuations.
When the energy sector experienced severe volatility due to the Asian
currency crisis, we took advantage of price declines and established a
position in Schlumberger, Ltd., the world's premier oilfield services
company. We also added to our existing positions in Royal Dutch Petroleum Co.
and Exxon Corp. because we believed that their shares were undervalued. In
our opinion, this industry continues to have growth potential due to steadily
rising energy consumption around the world.
Despite Asia's financial problems and the lofty valuations of the U.S. equity
market, we believe that prospects remain bright for companies with quality
assets, solid management, sound competitive strategies, and the potential to
generate strong earnings in the future. It is important to remember, however,
that investing in the fund involves the special risks of global, and
especially emerging market, investing related to market and currency
volatility, and adverse social and political developments.
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
This discussion reflects our views, opinions and portfolio holdings as of
April 30, 1998, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the fund's portfolio composition. Although historic
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
We thank you for your participation in Franklin Blue Chip Fund and look
forward to serving you in the future. Please feel free to contact us with
your questions or comments.
FRANKLIN BLUE CHIP FUND
Top 10 Holdings
4/30/98
Company % of Total
Industry, Country Net Assets
- - -----------------------------------------
Nestle SA, 2.1%
Registered Shares
Consumer Staples,
Switzerland
Hewlett-Packard Co. 2.0%
Technology, U.S.
American International
Group, Inc. 2.0%
Financial Services, U.S.
Exxon Corp. 2.0%
Energy, U.S.
Royal Dutch Petroleum Co.,
New York Shares 2.0%
Energy, U.S.
General Electric Co. 1.9%
Consumer Durables, U.S.
HSBC Holding Plc. 1.9%
Financial Services
United Kingdom
Intel Corp. 1.9%
Technology, U.S.
Eli Lilly & Co. 1.8%
Healthcare, U.S.
The Coca Cola Co. 1.8%
Consumer Staples, U.S.
Sincerely,
Suzanne W. Killea
Portfolio Manager
Franklin Blue Chip Fund
PERFORMANCE SUMMARY
Franklin Blue Chip Fund produced a +16.41% cumulative total return for the
one-year period ended April 30, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of all distributions,
and does not include the initial sales charge.
The fund's share price, as measured by net asset value, increased $1.61, from
$10.85 on April 30, 1997, to $12.46 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 6.4 cents ($0.064)
in dividend income, 7 cents ($0.07) in short-term capital gains, and 1.5
cents ($0.015) in long-term capital gains. Distributions will vary depending
on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
The graph on page 12 compares the fund's performance since inception with the
unmanaged Morgan Stanley Capital International(R) (MSCI) World Index, which
includes approximately 1,500 companies representing the stock markets of 22
countries, including the U.S., Canada, the United Kingdom, and Japan. Of
course, such an unmanaged market index has inherent performance differentials
over any fund. The index does not pay management fees to cover salaries of
securities analysts or portfolio managers, or pay commissions or market
spreads to buy and sell securities. Unlike the index, mutual funds are never
100% invested because they need cash on hand to redeem shares. In addition,
the performance shown for the fund includes the maximum initial sales charge,
all fund expenses and account fees. If operating expenses such as the fund's
had been applied to the index, its performance would have been lower. Please
remember that an index is simply a measure of performance and one cannot
invest in it directly.
GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Blue Chip Fund
Periods ended 4/30/98
Since
Inception
1-Year (6/3/96)
Cumulative Total Return1 16.41% 27.05%
Average Annual Total Return2 11.18% 10.69%
Value of $10,000 Investment3 $11,118 $12,134
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the maximum 4.5%
initial sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the sales charge.
Past expense reductions by the fund's manager increased the fund's total
return to shareholders. Without this waiver, the fund's total returns would
have been lower.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, currency volatility
and the social, economic and political climates of countries where
investments are made. Emerging markets involve heightened risks related to
the same factors, in addition to those associated with their relatively small
size and lesser liquidity. You may have a gain or loss when you sell your
shares.
The Franklin Blue Chip Fund paid distributions derived from long-term capital
gains of 1.5 cents ($0.015) per share in December 1997. The fund hereby
designates such distributions as capital gain dividends per Section 852
(b)(3) of the Internal Revenue Code.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 97
of this report.
FRANKLIN CALIFORNIA GROWTH FUND
Your Fund's Objective: Franklin California Growth Fund seeks capital
appreciation through a policy of investing at least 65% of its assets in the
securities of companies either headquartered or conducting a majority of
their operations in the state of California.
During the fiscal year ended April 30, 1998, the severe devaluation of
several Asian currencies adversely affected many California companies,
especially those in the high-tech sector. However, a decline in long-term
U.S. interest rates helped spur growth in other sectors of the state's
economy, and California's gross state product grew at an estimated rate of
4.8% during 1997, exceeding $1 trillion for the first time. Within this
environment, Franklin California Growth Fund - Class I produced a +34.98%
one-year cumulative total return, as discussed in the Performance Summary on
page 17.
Although the Asian currency crisis created volatility in securities markets
throughout the world, it also created opportunities for the fund. During the
last several months of the reporting period, we attempted to take advantage
of short-term weakness in the share prices of companies in the semiconductor
equipment and computer peripheral industries by purchasing positions in
Seagate Technology Inc., Applied Materials Inc., Integrated Process Equipment
Corp. and KLA-Tencor Corp. We also added shares of electronic manufacturing
service companies Flextronics International Ltd., Sanmina Corp. and Solectron
Corp. to the fund.
Fund holdings that contributed greatly to our performance during the fund's
fiscal year included Mercury Interactive Corp., Uniphase Corp., Airtouch
Communications Inc. and Cisco Systems Inc. Total returns on each of these
stocks exceeded 100% for the period. In our opinion, these companies still
possessed good growth prospects, even after these gains, and we maintained
our weighting in their shares.
During the reporting period, the fund's performance relative to the S&P 500
was hurt by our technology and real estate holdings. We were heavily weighted
in the various technology sectors when these stocks declined substantially in
the fourth quarter of 1997, and our holdings in the real estate sector also
failed to live up to expectations. While many real estate companies continued
to benefit from California's strong economy, their total return lagged that
of the overall market. However, we believe that given their healthy dividend
yields and cash flows from operations, the relative performance of these
sectors could reverse themselves.
Looking forward, we believe that the financial turmoil in Asia may remain the
most important variable confronting investors this year and next. On the
bright side, the Asian situation may actually help induce a reform of the
region's banks and reduce the corruption of some Asian companies. It may also
help slow the U.S. economy enough so that the Federal Reserve Board would not
have to raise interest rates. However, in our opinion, Asia still represents
a major growth opportunity for many California companies in the long term.
GRAPHIC MATERIAL 5 OMITTED - SEE APPENDIX AT END OF DOCUMENT
FRANKLIN CALIFORNIA
GROWTH FUND
Top 10 Holdings on 4/30/98
Company % of Total
Industry Net Assets
- - ----------------------------------------
Cisco Systems Inc. 2.0%
Electronic Technology
Varco International Inc. 1.8%
Industrial Services
Synopsys Inc. 1.7%
Technology Services
Atlantic Richfield Co. (ARCO) 1.6%
Energy/Minerals
Computer Sciences Corp. 1.6%
Electronic Technology
BankAmerica Corp. 1.5%
Financial Services
Chevron Corp. 1.5%
Energy/Minerals
Arden Realty Inc. 1.5%
Real Estate
Avery Dennison Corp. 1.4%
Process Industries
Safeway Inc. 1.4%
Retail
As we continue to scan the investment horizon for what we perceive to be
bargain-priced companies, we find that there is no shortage of potential
investments for Franklin California Growth Fund. With almost 1,400 publicly
traded companies, California is fertile soil for investment opportunity, and
we will continue to use our professional staff of research analysts to help
us take advantage of this fact.
Of course, there are risks involved with investing in a non-diversified fund
concentrating in securities associated with a single state, such as increased
susceptibility to adverse economic or regulatory developments. The fund also
invests a portion of its assets in small or relatively new or unseasoned
companies, which involves the additional risks related to relatively small
revenues, limited product lines and small market share. These and other risks
are described in the prospectus.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of April 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected
to affect our strategies and the fund's portfolio composition. Although
historic performance is no guarantee of future results, these insights may
help you understand our investment and management philosophy.
Thank you for your participation in Franklin California Growth Fund. We
welcome any comments or suggestions you may have.
Sincerely,
Conrad B. Herrmann
Portfolio Manager
Franklin California Growth Fund
PERFORMANCE SUMMARY
Class I
Franklin California Growth Fund - Class I produced a +34.98% cumulative total
return for the one-year period ended April 30, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge. We always
maintain a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner. As you can see
from the table on page 19, the fund's Class I shares delivered a +266.77%
cumulative total return since inception on October 30, 1991.
The fund's share price, as measured by net asset value, increased $5.62, from
$19.35 on April 30, 1997, to $24.97 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 14 cents ($0.14) in
dividend income, 55.7 cents ($0.557) in short-term capital gains, and 30.5
cents ($0.305) in long-term capital gains. Distributions will vary depending
on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
The graph on page 18 compares the performance of the fund's Class I shares
since inception with that of the Standard and Poor's(R) 500 (S&P 500(R)) Stock
Index and the Franklin California 250 Growth Index as of April 30, 1998. The
S&P 500 Stock Index is a domestic broad market index consisting of companies
of various sizes, whereas the Franklin California 250 Growth Index is
equally-weighted, representing 250 of the largest corporations headquartered
in California.
GRAPHIC MATERIAL 6 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Of course, such unmanaged market indices have inherent performance
differentials over any fund. They do not pay management fees to cover
salaries of securities analysts or portfolio managers, or pay commissions or
market spreads to buy and sell securities. Unlike unmanaged indices, mutual
funds are never 100% invested because they need cash on hand to redeem
shares. In addition, the performance shown for the fund includes the maximum
initial sales charge, all fund expenses and account fees. If operating
expenses such as the fund's had been applied to the index, its performance
would have been lower. Please remember that an index is simply a measure of
performance and one cannot invest in it directly.
Franklin California Growth Fund - Class I
Periods ended 4/30/98
Since
Inception
1-Year 5-Year (10/30/91)
Cumulative Total Return1 34.98% 251.46% 266.77%
Average Annual Total Return2 28.92% 27.40% 21.27%
Value of $10,000 Investment3 $12,892 $33,568 $35,028
4/30/94 4/30/95 4/30/96 4/30/97 4/30/98
One-Year Total Return4 25.55% 29.09% 47.50% 8.88% 34.98%
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the maximum 4.5%
initial sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the initial sales charge.
4. One-year total return represents the change in value of an investment over
the indicated periods ended on the specified dates and does not include the
initial sales charge.
Past expense reductions by the fund's manager increased the fund's total
return to shareholders. Without this waiver, the fund's total return would
have been lower.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
Franklin California Growth Fund - Class I paid distributions derived from
long-term capital gains of 30.5 cents ($0.305) per share in December 1997.
The fund hereby designates such distributions as capital gain dividends per
Section 852(b)(3) of the Internal Revenue Code.
Class II
Franklin California Growth Fund - Class II produced a +34.02% cumulative
total return for the one-year period ended April 30, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment
of all distributions, and does not include sales charges.
The fund's share price, as measured by net asset value, increased $5.54, from
$19.27 on April 30, 1997, to $24.81 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 2.91 cents ($0.0291)
in dividend income, 55.7 cents ($0.557) in short-term capital gains, and 30.5
cents ($0.305) in long-term capital gains. Distributions will vary depending
on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses.
The graph on page 22 compares the performance of the fund's Class II shares
since inception with that of the Standard and Poor's 500 (S&P 500) and the
Franklin California 250 Growth Index. The S&P 500 Stock Index is a domestic
broad market index consisting of companies of various sizes, whereas the
Franklin California 250 Growth Index is equally-weighted, representing 250 of
the largest corporations headquartered in California.
Of course, such unmanaged market indices have inherent performance
differentials over any fund. They do not pay management fees to cover
salaries of securities analysts or portfolio managers, or pay commissions or
market spreads to buy and sell securities. Unlike unmanaged indices, mutual
funds are never 100% invested because they need cash on hand to redeem
shares. In addition, the performance shown for the fund includes the maximum
initial sales charge, all fund expenses and account fees. If operating
expenses such as the fund's had been applied to the index, its performance
would have been lower. Please remember that an index is simply a measure of
performance and one cannot invest in it directly.
GRAPHIC MATERIAL 7 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin California Growth Fund - Class II
Periods ended 4/30/98
Since
Inception
1-Year (9/3/96)
Cumulative Total Return1 34.02% 46.34%
Average Annual Total Return2 31.72% 25.14%
Value of $10,000 Investment3 $13,172 $14,490
1. Cumulative total return represents the change in value of an investment
over the indicated periods and does not include sales charges.
2. Average annual total return represents the average annual change in value
of an investment over the indicated periods and includes the 1.0% initial
sales charge and the 1.0% contingent deferred sales charge applicable to
shares redeemed within 18 months of purchase.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the indicated periods and include sales charges.
All calculations assume reinvestment of dividends and capital gains at net
asset value.
Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, and you may have a gain or loss
when you sell your shares.
Franklin California Growth Fund - Class II paid distributions derived from
long-term capital gains of 30.5 cents ($0.305) per share in December 1997.
The fund hereby designates such distributions as capital gain dividends per
Section 852(b)(3) of the Internal Revenue Code.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 104
of this report.
FRANKLIN GLOBAL HEALTH CARE FUND
Your Fund's Objective: Franklin Global Health Care Fund seeks capital
appreciation by investing primarily in the equity securities of health care
companies located throughout the world.
Securities markets in general, and health care stocks in particular, experienced
volatility during the reporting period. Small capitalization (cap) stocks
enjoyed a favorable environment during the first six months of the fiscal year,
but corrected sharply in late 1997 and continued to lag their large cap
counterparts through the end of the reporting period. Within this environment,
the fund's Class I shares provided a +28.22% one-year cumulative total return,
as discussed in the Performance Summary on page 28. During the same period, the
unmanaged Standard & Poor's 500(R) (S&P 500(R)) Stock Index returned +38.74%.1
Of course, securities in the health care sector are notoriously volatile, and we
have always maintained a long-term perspective on investments, as we encourage
our shareholders to do. As the Performance Summary also shows, the Franklin
Global Health Care Fund - Class I provided a +183.52% cumulative total return
over the past five years, outperforming the S&P 500, which provided a +179.33%
total return over the same period.
1. Source: Standard & Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
During the period, we continued to reduce our weighting in large cap
pharmaceutical companies because this group traded at what, in our opinion,
were premium prices despite moderate growth. We found what we believed was
better value and greater growth potential among smaller cap stocks. Although
they fell out of favor during the period, we felt that over the long term,
shares of small cap companies could significantly outperform those of large
cap firms. In view of the high prices being paid for shares of some of the
large pharmaceutical companies during the fiscal year, we felt more positive
about small caps' potential.
Medical technology was one of the fund's largest sectors throughout the
reporting period. In our opinion, a number of companies in this group
possessed excellent growth potential and attractive valuations, and we added
to our holdings of ESC Medical Systems, Ltd., a manufacturer of laser and
pulsed-light devices for the cosmetic enhancement market. The price of this
stock, our largest holding, rose significantly following Federal Drug
Administration approval of its Epilight Hair Removal system and successful
acquisition of Laser Industries, one of its leading competitors. We believe
that cosmetic surgery may gain popularity as procedures become less invasive
and less costly.
Our best performing sector was the health care software and information
systems group. Following earnings disappointments, Access Health, Inc.,
Transitions Systems, Inc., and HBO & Co., our three largest holdings in the
sector, enjoyed strong rebounds in value during the reporting period.
Believing that expenditures on information systems may grow rapidly, we added
to some existing positions in this group.
GRAPHIC MATERIAL 9 OMITTED - SEE APPENDIX AT END OF DOCUMENT
FRANKLIN GLOBAL
HEALTH CARE FUND
Top 10 Holdings
4/30/98
Company, % of Total
Industry, Country Net Assets
- - ----------------------------------------
ESC Medical Systems, Ltd.,
Medical Technology
and Supplies, U.S. 7.8%
Serologicals Corp.
Biotechnology, U.S. 6.1%
Total Renal Care Holdings, Inc.,
Alternate Site Providers, U.S. 4.5%
Renal Care Group, Inc.
Alternate Site Providers, U.S. 4.5%
Zonagen, Inc.
Specialty Pharmaceuticals,
U.S. 4.5%
Algos Pharmaceutical Corp.,
Specialty Pharmaceuticals,
U.S. 4.1%
Boston Scientific Corp.,
Medical Technology
and Supplies, U.S. 3.6%
Inhale Therepeutic Systems,
Specialty Pharmaceuticals,
U.S. 3.5%
United Healthcare Corp.,
Managed Care
and HMOs, U.S. 3.5%
Novartis, AG,
Pharmaceuticals, Switzerland 3.2%
We also increased our exposure to alternate site health care providers
because we were encouraged by strong market growth in this sector. We added
to our holdings in Renal Care Group, Inc. and Total Renal Care Holdings,
Inc., companies that provide dialysis and related services to patients with
chronic kidney failure, and initiated a position in National Surgery Centers,
Inc., which owns and operates a network of freestanding ambulatory surgery
centers. With health maintenance organizations attempting to treat patients
in lower cost settings, we believe that surgery centers will benefit from
increased volume at the expense of hospitals.
Looking forward, we are confident about future prospects for investors in
health care stocks. In our opinion, overall health care expenditures will be
driven by an aging population and rapidly changing technology, both of which
may result in a wider range of treatable conditions and increasing life
expectancy. In addition, demand for health care products and services is not
necessarily affected by the cyclical swings of the business cycle. Our goal,
as always, is to seize upon investment opportunities in a timely and
disciplined manner in an attempt to provide our shareholders unique
opportunities to invest in today's newest and fastest-growing health care
companies.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of April 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected
to affect our strategies and the fund's portfolio composition. Although
historic performance is no guarantee of future results, these insights may
help you understand our investment and management philosophy.
Of course, there are special risks involved with investing globally in a
non-diversified fund concentrating its investments in a single industry.
These risks, which include currency fluctuations and increased susceptibility
to adverse economic, political, social, and regulatory developments, are
further discussed in the fund's prospectus.
We appreciate your participation in Franklin Global Health Care Fund and look
forward to serving your investment needs in the future.
Sincerely,
Kurt von Emster
Portfolio Manager
Franklin Global Health Care Fund
PERFORMANCE SUMMARY
Class I
Franklin Global Health Care Fund - Class I provided a +28.22% cumulative
total return for the one-year period ended April 30, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment
of all distributions, and does not include the initial sales charge. We
always maintain a long-term perspective when managing the fund, and encourage
shareholders to view their investments in a similar manner. As you can see
from the table on page 31, the fund's Class I shares delivered a +154.17%
cumulative total return since inception on February 14, 1992.
The fund's share price, as measured by net asset value, increased $3.17, from
$16.11 on April 30, 1997, to $19.28 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 9.2 cents ($0.0920)
in dividend income, 99.2 cents ($0.9920) in short-term capital gains, and
19.0 cents ($0.1900) in long-term capital gains. Distributions will vary
depending on income earned by the fund and any profits realized from the sale
of securities in the portfolio, as well as the level of the fund's operating
expenses.
The graph on page 30 compares the performance of Franklin Global Health Care
Fund - Class I since inception with that of the Standard & Poor's 500 (S&P
500) Stock Index. The S&P 500 is a domestic broad market index, which
includes a variety of securities issued by companies not associated with the
health care industry. Of course, such unmanaged indices have inherent
performance differentials over any fund. They do not pay management fees to
cover salaries of securities analysts or portfolio managers or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need cash on hand to redeem
shares. In addition, the performance shown for the fund includes the maximum
initial sales charge, all fund expenses and account fees. If operating
expenses such as the fund's had been applied to the index, its performance
would have been lower. Please remember that an index is simply a measure of
performance, and one cannot invest in it directly.
GRAPHIC MATERIAL 10 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Global Health Care Fund - Class I
Periods ended 4/30/98
Since
Inception
1-Year 3-Year 5-Year (2/14/92)
Cumulative Total Return1 28.22% 99.88% 183.52% 154.17%
Average Annual Total Return2 22.45% 24.05% 22.04% 15.36%
Value of $10,000 Investment3 $12,245 $19,088 $27,072 $24,276
4/30/95 4/30/96 4/30/97 4/30/98
One-Year Total Return4 16.33% 82.68% -14.67% 28.22%
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the maximum 4.5%
initial sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the sales charge.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales
charge.
Past expense reductions by the fund's manager increased the fund's total
returns. Without this waiver, the fund's total returns would have been lower.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, currency volatility
and the economic, social and political climates of countries where
investments are made. You may have a gain or loss when you sell your shares.
Franklin Global Health Care Fund - Class I paid distributions derived from
long-term capital gains of 19.0 cents ($0.1900) per share in December 1997.
The fund hereby designates such distributions as capital gain dividends per
Section 852(b)(3) of the Internal Revenue Code.
Class II
Franklin Global Health Care Fund - Class II provided a +27.22% cumulative
total return for the one-year period ended April 30, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment
of all distributions and does not include sales charges.
The fund's Class II share price, as measured by net asset value, increased
$3.10, from $16.07 on April 30, 1997, to $19.17 on April 30, 1998. During the
reporting period, shareholders received per-share distributions of 99.2 cents
($0.9920) in short-term capital gains and 19.0 cents ($0.1900) in long-term
capital gains. Distributions will vary depending on income earned by the fund
and any profits realized from the sale of securities in the portfolio, as
well as the level of the fund's operating expenses.
The graph on page 34 compares the performance of Franklin Global Health Care
Fund - Class II since inception with that of the Standard & Poor's 500 (S&P
500) Stock Index. The S&P 500 is a domestic broad market index, which
includes a variety of securities issued by companies not associated with the
health care industry. Of course, such unmanaged market indices have inherent
performance differentials over any fund. They do not pay management fees to
cover salaries of securities analysts or portfolio managers or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need cash on hand to redeem
shares. In addition, the performance shown for the fund includes the sales
charges, all fund expenses and account fees. If operating expenses such as
the fund's had been applied to the index, its performance would have been
lower. Please remember that an index is simply a measure of performance, and
one cannot invest in it directly.
GRAPHIC MATERIAL 11 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Global Health Care Fund - Class II
Periods ended 4/30/98
Since
Inception
1-Year (9/3/96)
Cumulative Total Return1 27.22% 20.54%
Average Annual Total Return2 24.98% 11.26%
Value of $10,000 Investment3 $12,498 $11,931
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the 1.0% initial
sales charge and 1.0% contingent deferred sales charge applicable to shares
redeemed within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include sales charges.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, currency volatility
and the economic, social and political climates of countries where
investments are made. You may have a gain or loss when you sell your shares.
Franklin Global Health Care Fund - Class II paid distributions derived from
long-term capital gains of 19.0 cents ($0.1900) per share in December 1997.
The fund hereby designates such distributions as capital gain dividends per
Section 852(b)(3) of the Internal Revenue Code.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 108
of this report.
FRANKLIN GLOBAL UTILITIES FUND
Your Fund's Objective: Franklin Global Utilities Fund seeks to provide total
return by investing in the equity and debt securities of utility companies
located in the United States and around the world.
GRAPHIC MATERIAL 12 OMITTED - SEE APPENDIX AT END OF DOCUMENT
FRANKLIN GLOBAL UTILITIES FUND
Top 10 Holdings
4/30/98
Company % of Total
Industry, Country Net Assets
- - -----------------------------------------
Duke Energy Corp. 3.7%
Electric & Gas Utilities, U.S.
ICG Communications Inc. 3.5%
Telecommunications
Services & Equipment, U.S.
The AES Corp. 3.2%
Electric & Gas Utilities, U.S.
AirTouch Communications Inc. 3.0%
Telecommunications
Services & Equipment, U.S.
Pacific Enterprises 2.8%
Electric & Gas Utilities, U.S.
Portugal Telecom, SA 2.7%
Telecommunications
Services & Equipment, Portugal
Enron Corp. 2.6%
Electric & Gas Utilities, U.S.
Tele Danmark A/S, 2.3%
Sponsored ADR
Telecommunications
Services & Equipment, Denmark
Telecom Italia, SpA 2.2%
Telecommunications
Services & Equipment, Italy
Nortel Inversora SA, 2.1%
10.00%, cvt., pfd.
Telecommunications, Argentina
During the 12 months under review, electric companies generally benefited
from cost cutting and more clearly defined regulations, while
telecommunications firms experienced better-than-expected demand for cellular
services and higher traffic volume. As a result, many global utility shares
rose in value. Although U.S. and European utility stocks led the way, those
in Latin America also performed well. However, most Asian utility stocks were
weaker. Within this environment, Franklin Global Utilities Fund - Class I
produced a +37.02% one-year cumulative total return, as discussed in the
Performance Summary on page 41, outperforming the utility fund average return
of +35.76% for the same period, as measured by Lipper Analytical Services.*
*Source: Lipper Analytical Services, Inc. There are 95 funds in the Lipper
Utility Funds Category. Lipper calculations do not include sales charges. The
fund's performance relative to the category may have differed if sales
charges had been considered. Past performance does not guarantee future
results.
United States
Strong corporate profits and subdued inflation enabled the U.S. equity market
to continue setting records during the reporting period. Although U.S.
utility shares generally underperformed broad market indices, many advanced
because of declining interest rates and an improving regulatory outlook.
Telephone stocks performed particularly well, and our holdings of Ameritech
Corp., Airtouch Communications Inc., and ICG Communications Inc. appreciated
considerably in value.
The electric power industry experienced significant regulatory changes during
the fiscal year. California and Massachusetts announced plans to restructure
the electric generation business, and a number of other states came close to
completing similar plans. These could help make electric utility companies
more competitive, and in some cases, also improve their balance sheets. In
our opinion, complete resolution of regulatory issues should enhance the
earnings of electric utility companies and make their stocks more attractive
to investors.
Europe
During the reporting period, European economies continued to recover, as
government attempts to meet European Monetary Union criteria generally led to
lower interest rates and benign inflation. In addition, many of the region's
utility companies restructured, reduced costs, and consolidated, which
contributed to the advance of many utility stock prices. Portugal, Italy,
Spain and Germany were among the best performing utility markets for the
fund. Taking advantage of this strength, we sold our shares of Electricidade
de Portugal and Telecel-Comunicacoes Pessoais, SA at a profit.
In our opinion, many European companies are now positioned to benefit from a
large, pent-up demand for telecommunications services, and we believe that
our holdings of Telefonica de Espana (Spain) and Hellenic Telecommunications
Organization, SA (Greece) could experience extensive growth for several years
to come.
Latin America
Our Latin American weighting remained relatively stable during the reporting
period. Although the region experienced strong economic growth and low
inflation, the Asian currency crisis in late 1997 sent a shock wave
throughout Latin America because many investors feared that Asia's economic
difficulties could spread. However, the international investment community
regained confidence when Brazil responded with monetary and fiscal measures
designed to quell concerns. And many Latin American markets recovered in
early 1998, as investors began viewing this area on its own economic merits.
During the fiscal year, Latin American countries continued to privatize
state-owned telephone and electric utility companies. Consortiums from all
over the world participated in the process that will create 12 different
telecommunications companies in Brazil, constituting one of the largest
privatizations ever. Brazil has substantial demand for telecommunications
services, and we initiated a position in Telecomunicacoes Brasileiras, SA,
the Brazilian national phone company that is in the process of being
privatized. We view the region's evolution towards a more market-oriented
economic environment positively and believe it will continue to provide
attractive investment opportunities.
Asia
The Asian financial crisis made headlines around the world in late 1997 and
early 1998. Fortunately, we had maintained a low Asian weighting because we
felt that most utility stock valuations there were too high. However, stock
prices fell dramatically once the crisis started, and we will scrutinize
Asian markets for any possible investments.
Looking forward, we are optimistic about prospects for global utility
companies. Worldwide demand for telecommunications, electric power, gas,
water and other utility services is accelerating, and many foreign countries
are now building infrastructures that could produce high levels of revenue
growth for many years to come. As always, we remain committed to our
long-term objective of maximizing total return through investing in a
portfolio of utility stocks from around the world. Utilities provide services
that are an essential part of peoples' lives, and we believe that their
stocks play an important role in a well-diversified investment portfolio. Of
course, there are special risks involved with investing globally in a
non-diversified fund concentrating in a single industry. These risks, which
include currency fluctuations and increased susceptibility to adverse
economic, political, social and regulatory developments, are further
discussed in the fund's prospectus.
This discussion reflects our views, opinions and portfolio holdings as of
April 30, 1998, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the fund's portfolio composition. Although historic
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
We thank you for your participation in Franklin Global Utilities Fund and
look forward to serving you in the future. Please feel free to contact us
with your questions or comments.
Sincerely,
Sally E. Haff
Portfolio Manager
Franklin Global Utilities Fund
PERFORMANCE SUMMARY
Class I
Franklin Global Utilities Fund - Class I produced a +37.02% cumulative total
return for the one-year period ended April 30, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge. We always
maintain a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner. As you can see
from the table on page 43, the fund's Class I shares delivered a +158.14%
cumulative total return since inception on July 2, 1992.
The fund's share price, as measured by net asset value, increased $2.90, from
$14.46 on April 30, 1997, to $17.36 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 37 cents ($0.37) in
dividend income, 57.32 cents ($0.5732) in short-term capital gains, and
$1.1778 in long-term capital gains. Distributions will vary depending on
income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
GRAPHIC MATERIAL 13 OMITTED - SEE APPENDIX AT END OF DOCUMENT
The graph on page 42 compares the performance of Franklin Global Utilities
Fund - Class I since inception with that of the unmanaged Standard and Poor's
500 (S&P 500) Stock Index. The S&P 500 is a domestic, broad market index
consisting of companies of various sizes. Of course, such unmanaged market
indices have inherent performance differentials over any fund. They do not
pay management fees to cover salaries of securities analysts or portfolio
managers, or pay commissions or market spreads to buy and sell securities.
Unlike unmanaged indices, mutual funds are never 100% invested because they
need cash on hand to redeem shares. In addition, the performance shown for
the fund includes the maximum initial sales charge, all fund expenses and
account fees. If operating expenses such as the fund's had been applied to
the index, its performance would have been lower. Please remember that an
index is simply a measure of performance and one cannot invest in it directly.
Franklin Global Utilities Fund - Class I
Periods ended 4/30/98
Since
Inception
1-Year 3-Year 5-Year (7/2/92)
Cumulative Total Return1 37.02% 90.77% 124.44% 158.14%
Average Annual Total Return2 30.86% 22.12% 16.46% 16.75%
Value of $10,000 Investment3 $13,086 $18,213 $21,146 $24,655
4/30/94 4/30/95 4/30/96 4/30/97 4/30/98
One-Year Total Return4 14.04% 3.17% 23.27% 12.94% 37.02%
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the maximum 4.5%
initial sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the sales charge.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales
charge.
Past expense reductions by the fund's manager increased the fund's total
return to shareholders. Without this waiver, the fund's total returns would
have been lower.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, currency volatility
and the economic, social and political climates of countries where
investments are made. Emerging markets involve heightened risks related to
the same factors, in addition to those associated with their relatively small
size and lesser liquidity. You may have a gain or loss when you sell your
shares.
The Franklin Global Utilities Fund - Class I paid distributions derived from
long-term capital gains of $1.1778 per share in December 1997. The fund
hereby designates such distributions as capital gain dividends per Section
852 (b)(3) of the Internal Revenue Code.
Class II
Franklin Global Utilities Fund - Class II produced a +36.21% cumulative total
return for the one-year period ended April 30, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include sales charges.
The fund's share price, as measured by net asset value, increased $2.88, from
$14.37 on April 30, 1997, to $17.25 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 26.59 cents
($0.2659) in dividend income, 57.32 cents ($0.5732) in short-term capital
gains, and $1.1778 in long-term capital gains. Distributions will vary
depending on income earned by the fund and any profits realized from the sale
of securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
The graph on page 45 compares the performance of Franklin Global Utilities
Fund - Class II since inception with that of the Standard and Poor's 500 (S&P
500) Stock Index. The S&P 500 is a domestic, broad market index consisting of
companies of various sizes. Of course, such unmanaged market indices have
inherent performance differentials over any fund. They do not pay management
fees to cover salaries of securities analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike unmanaged
indices, mutual funds are never 100% invested because they need cash on hand
to redeem shares. In addition, the performance shown for the fund includes
the maximum initial sales charge, all fund expenses and account fees. If
operating expenses such as the fund's had been applied to the index, its
performance would have been lower. Please remember that an index is simply a
measure of performance and one cannot invest in it directly.
GRAPHIC MATERIAL 14 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Global Utilities Fund - Class II
Periods ended 4/30/98
Since
Inception
1-Year (5/1/95)
Cumulative Total Return1 36.21% 87.90%
Average Annual Total Return2 33.81% 23.01%
Value of $10,000 Investment3 $13,381 $18,607
1. Cumulative total return represents the change in value of an investment
over the indicated periods and does not include sales charges.
2. Average annual total return represents the average annual change in value
of an investment over the indicated periods and includes the 1.0% initial
sales charge and the 1.0% contingent deferred sales charge applicable to
shares redeemed within 18 months of purchase.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the indicated periods and include sales charges.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, currency volatility
and the economic, social and political climates of countries where
investments are made. Emerging markets involve heightened risks related to
the same factors, in addition to those associated with their relatively small
size and lesser liquidity. You may have a gain or loss when you sell your
shares.
The Franklin Global Utilities Fund - Class II paid distributions derived from
long-term capital gains of $1.1778 per share in December 1997. The fund
hereby designates such distributions as capital gain dividends per Section
852 (b)(3) of the Internal Revenue Code.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 112
of this report.
FRANKLIN MIDCAP GROWTH FUND
Your Fund's Objective: Franklin MidCap Growth Fund seeks long-term capital
growth by investing primarily in equity securities of medium-capitalization
companies -- those with a market capitalization between $200 million and $5
billion.
We are pleased to present the annual report of Franklin MidCap Growth Fund,
which covers the 12 months ended April 30, 1998. During this period,
inflation remained subdued despite moderate economic growth and healthy
corporate profits. Interest rates were relatively stable, and U.S. equity
markets performed impressively. However, Asia's financial turmoil in October
1997 adversely effected domestic financial markets, particularly the
technology sector. Fortunately, the market resumed its upward ascent in the
first quarter of 1998, as investor concerns about the impact of the Asian
currency crisis waned. Within this environment, Franklin MidCap Growth Fund
delivered a 12-month cumulative total return of +35.53%, as discussed in the
Performance Summary on page 49, outperforming the Dow Jones Industrial
Average, which provided a total return of +31.61% for the same period.*
*Source: Standard & Poor's Micropal. Dow Jones Industrial Average's total
return is calculated by Wilshire Associates, Inc. Index is unmanaged and
includes reinvested dividends. One cannot invest directly in an index.
The fund benefited from the considerable rise in value of many of its
positions in the financial services sector. A number of companies providing
educational services also performed well, and our holdings of Apollo Group
Inc. (which offers higher-education programs to working adults), DeVry Inc.
(a leading developer of higher education), and Sylvan Learning Systems Inc.
(a provider of private educational and testing services), also contributed
positively to the fund's return. However, the fund's performance was hindered
by our exposure to energy stocks, whose value fell due to a drop in oil
prices.
Throughout the reporting period, we focused on investing in companies with
diversified product lines and sustainable competitive advantages. In
searching for these firms, we also looked for reasonable stock valuations,
and sold positions when valuations appeared excessive or fundamentals seemed
to be deteriorating.
Taking advantage of market volatility, we initiated positions in a number of
industry leaders. For example, we purchased shares of Viking Office Products
Inc., a major supplier to small and medium-sized businesses; Starwood Hotels
& Resorts, a large, U.S. real estate investment trust specializing in hotel
properties; and Providian Financial Corp., a domestic issuer of secured
credit cards.
Looking forward, we remain optimistic about growth opportunities for midcap
companies. In our opinion, the midcap sector brings together the best
features of small and large cap stocks, combining above-average growth
potential with greater stability.
Because of the U.S. economic expansion and high stock market appreciation of
the last two years, we are increasingly conscious of maintaining our
valuation criteria and discipline in the investment decision process. Of
course, there are risks associated with investing in a fund seeking long-term
capital growth from small-to-medium size companies that have less certain
growth prospects and greater sensitivity to changing economic conditions than
large cap companies. These and other risks are further discussed in the
fund's prospectus.
GRAPHIC MATERIAL 15 OMITTED - SEE APPENDIX AT END OF DOCUMENT
This discussion reflects our views, opinions and portfolio holdings as of
April 30, 1998, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the fund's portfolio composition. Although historic
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
FRANKLIN MIDCAP GROWTH FUND
Top 10 Holdings
4/30/98
Company % of Total
Industry Net Assets
- - ----------------------------------------
Transocean Offshore Inc. 2.2%
Industrial Services
Sylvan Learning Systems, Inc. 2.1%
Commercial Services
Apollo Group, Inc., Class A 2.1%
Consumer Services
DeVry Inc. 2.0%
Consumer Services
Tellabs Inc. 2.0%
Electronic Technology
Jones Apparel Group Inc. 2.0%
Consumer Non-Durables
The Estee Lauder
Cos., Inc. Class A 1.8%
Consumer Non-Durables
Clayton Homes Inc. 1.8%
Consumer Durables
Expeditors International
of Washington Inc. 1.7%
Transportation
Viking Office Products Inc. 1.7%
Retail
We thank you for your participation in the Franklin MidCap Growth Fund and
look forward to serving you in the future. Please feel free to contact us
with your questions or comments.
Sincerely,
Edward B. Jamieson
Portfolio Manager
Franklin MidCap Growth Fund
PERFORMANCE SUMMARY
Franklin MidCap Growth Fund produced a +35.53% cumulative total return for
the one-year period ended April 30, 1998. Cumulative total return measures
the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge. We always
maintain a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner. As you can see
from the table on page 51, the fund's shares delivered a +118.22% cumulative
total return since inception on August 17, 1993.
The fund's share price, as measured by net asset value, increased $4.10, from
$13.34 on April 30, 1997, to $17.44 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 22.30 cents
($0.2230) in short-term capital gains, and 33.50 cents ($0.3350) in long-term
capital gains. Distributions will vary depending on income earned by the fund
and any profits realized from the sale of securities in the portfolio, as
well as the level of the fund's operating expenses. Past distributions are
not indicative of future trends.
The graph on page 50 compares the fund's performance since its inception on
August 17, 1993, with that of the unmanaged Standard and Poor's MidCap 400
Index (S&P MidCap 400). On June 1, 1996, the fund became available to retail
investors. Prior to that date, it was only offered to institutional investors
(without a sales charge or 12b-1 fees). The S&P MidCap 400 is a market value
weighted index consisting of 400 domestic stocks chosen for market size,
liquidity, and industry group representation. Of course, such an unmanaged
market index has inherent performance differentials over any fund. The index
does not pay management fees to cover salaries of securities analysts or
portfolio managers, or pay commissions or market spreads to buy and sell
securities. Unlike the index, mutual funds are never 100% invested because
they need cash on hand to redeem shares. In addition, the performance shown
for the fund includes the maximum initial sales charge, all fund expenses and
account fees. If operating expenses such as the fund's had been applied to
the index, its performance would have been lower. Please remember that an
index is simply a measure of performance and one cannot invest in it directly.
GRAPHIC MATERIAL 16 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin MidCap Growth Fund
Periods ended 4/30/98
Since
Inception
1-Year5 3-Year5 (8/17/93)5
Cumulative Total Return1 35.53% 95.10% 118.22%
Average Annual Total Return2 29.42% 23.05% 16.91%
Value of $10,000 Investment3 $12,942 $18,631 $20,842
4/30/95 4/30/96 4/30/97 4/30/98
One-Year Total Return4 10.06% 35.40% 6.47% 35.53%
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the maximum 4.5%
initial sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the sales charge.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales
charge.
5. On January 2, 1996, the fund changed its investment objective, strategy,
and investment adviser.
Past expense reductions by the fund's manager increased the fund's total
return to shareholders. Without this waiver, the fund's total returns would
have been lower. All calculations assume reinvestment of dividends and
capital gains at net asset value. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions,
and you may have a gain or loss when you sell your shares.
The Franklin MidCap Growth Fund paid distributions derived from long-term
capital gains of 33.50 cents ($0.3350) per share in December 1997. The fund
hereby designates such distributions as capital gain dividends per Section
852 (b)(3) of the Internal Revenue Code.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 118
of this report.
FRANKLIN NATURAL RESOURCES FUND
Your Fund's Objective: Franklin Natural Resources Fund seeks long-term
capital appreciation by investing at least 65% of its total assets in
securities of companies that own, produce, refine, process or market natural
resources, as well as those that provide support services for natural
resources companies.
GRAPHIC MATERIAL 17 OMITTED - SEE APPENDIX AT END OF DOCUMENT
This annual report of Franklin Natural Resources Fund covers the 12 months
ended April 30, 1998. Led by technology, financial services, and health care
companies, the U.S. stock market performed well during the fiscal year.
However, economic and political turmoil in Asia during late 1997 raised
investor concerns about future demand for a wide range of commodities
including energy, chemicals, steel, and paper.
As a result, the natural resources sector underperformed the overall domestic
market. Although many commodity markets performed poorly during the reporting
period, Franklin Natural Resources Fund - Class I delivered a +17.57%
one-year cumulative total return, as discussed in the Performance Summary on
page 56. This was significantly higher than the natural resources fund
average return of +11.26% for the same period, as measured by Lipper
Analytical Services.*
*Source: Lipper Analytical Services, Inc. There are 50 funds in the Lipper
Natural Resources Funds Category. Lipper calculations do not include sales
charges, and expense reductions by the fund's manager increased the fund's
total returns. The fund's performance relative to the category may have
differed if these factors had been considered. Past performance does not
guarantee future results.
Throughout the reporting period, many natural resources companies attempted
to diversify their service capabilities and develop economies of scale by
consolidating. One of our holdings, United Meridian Corp., merged with Ocean
Energy Inc., creating a leading independent producer of oil and gas. In the
oilfield services industry, Falcon Drilling Cos. Inc., another holding,
united with Reading & Bates to form R&B Falcon Corp., an offshore drilling
contractor with a fleet of drilling rigs. Consolidation also occurred in the
forest products and paper sector, with still another holding, Bowater Inc.,
acquiring Canadian-based Avenor and Korean-based Halla Paper, creating a
low-cost global newsprint business. And one of our positions in the precious
metals sector, Placer Dome Inc., announced it was taking a stake in Vengold,
which has exposure to vast, gold reserves in Lihir, Papua New Guinea.
Energy, our largest sector weighting on April 30, 1998, contributed
significantly to the fund's performance, as the value of our holdings in
Varco International Inc., Atwood Oceanics Inc., and Transocean Offshore Inc.
appreciated considerably. Varco profited from higher sales of hardware that
makes oil and gas drilling more productive, and Atwood Oceanics and
Transocean Offshore, global leaders in deepwater drilling projects,
experienced increased demand for their premium rigs.
As in all reporting periods, some positions hindered the fund's performance.
Due to higher levels of OPEC production, the return of Iraqi oil to the world
market, and a warmer-than-normal winter season in much of the northern
hemisphere, crude oil prices declined significantly. Consequently, our shares
of Gulf Canada Resources Ltd. and Nuevo Energy Co. fell in value. The
strength of the forest products and paper sector also negatively impacted our
performance because of our relatively low weighting in this area.
GRAPHIC MATERIAL 18 OMITTED - SEE APPENDIX AT END OF DOCUMENT
FRANKLIN NATURAL
RESOURCES FUND
Top 10 Holdings
4/30/98
Company % of Total
Industry, Country Net Assets
- - ----------------------------------------
Barrett Resources Corp. 4.1%
Energy, U.S.
Varco International Inc. 3.4%
Energy, U.S.
Diamond Offshore Drilling Inc. 3.2%
Energy, U.S.
EVI Inc. 3.0%
Energy, U.S.
Transocean Offshore Inc. 2.7%
Energy, U.S.
Gulf Canada Resources Ltd. 2.6%
Energy, Argentina
Nuevo Energy Co. 2.1%
Energy, U.S.
The AES Corp. 1.7%
Energy, U.S.
NewField Exploration Co. 1.6%
Energy, U.S.
During the reporting period, we did not make investments based solely on the
assumption that commodity prices would rise or fall. Rather, we purchased
shares of firms with efficient, technologically advanced operations that we
felt would prosper even in a weak environment. For example, we added to our
holdings of Barrett Resources Corp., the leading explorer of natural gas in
North America, and bought stock in EVI Inc., a major manufacturer of premium
tubular products for offshore oil and gas operations.
Looking forward, we anticipate a period of balanced supply and demand
conditions for a wide range of natural resources in the near future. In our
opinion, this should lead to moderate growth and sustained levels of
profitability for low-cost producers in commodity-related industries. It is
important to remember, however, that the rewards the fund may offer also
involve the special risks of investing in a non-diversified, sector fund, as
well as the currency volatility and political, economic or regulatory
uncertainty associated with foreign, and especially developing market,
investing.
This discussion reflects our views, opinions and portfolio holdings as of
April 30, 1998, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the fund's portfolio composition. Although historic
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
We thank you for your participation in Franklin Natural Resources Fund and
look forward to serving you in the future. Please feel free to contact us
with your questions or comments.
Sincerely,
Suzanne W. Killea
Portfolio Manager
Franklin Natural Resources Fund
PERFORMANCE SUMMARY
Class I
Franklin Natural Resources Fund - Class I produced a +17.57% cumulative total
return for the one-year period ended April 30, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge.
The fund's share price, as measured by net asset value, increased $1.39, from
$14.07 on April 30, 1997, to $15.46 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 8.7 cents ($0.087)
in dividend income, 48.51 cents ($0.4851) in short-term capital gains, and
39.39 cents ($0.3939) in long-term capital gains. Distributions will vary
depending on income earned by the fund and any profits realized from the sale
of securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
The graph on page 58 compares the performance of Franklin Natural Resources
Fund - Class I since inception with that of the Standard and Poor's 500 (S&P
500) Stock Index. The S&P 500 is a domestic, broad market index consisting of
companies of various sizes. Of course, such unmanaged market indices have
inherent performance differentials over any fund. They do not pay management
fees to cover salaries of securities analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need cash on hand to redeem
shares. In addition, the performance shown for the fund includes the maximum
initial sales charge, all fund expenses and account fees. If operating
expenses such as the fund's had been applied to the index, its performance
would have been lower. Please remember that an index is simply a measure of
performance and one cannot invest in it directly.
GRAPHIC MATERIAL 19 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Natural Resources Fund - Class I
Periods ended 4/30/98
Since
Inception
1-Year (6/5/95)
Cumulative Total Return1 17.57% 72.82%
Average Annual Total Return2 12.30% 18.85%
Value of $10,000 Investment3 $11,230 $16,506
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the maximum 4.5%
initial sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the sales charge.
The fund's manager has agreed in advance to waive a portion of its management
fees, which reduces operating expenses and increases total return to
shareholders. Without this waiver, total returns would have been lower. The
waiver may be discontinued at any time upon notice to the fund's Board of
Trustees.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, currency volatility,
and the economic, social, and political climates in countries where
investments are made. You may have a gain or loss when you sell your shares.
The Franklin Natural Resources Fund - Class I paid distributions derived from
long-term capital gains of 39.39 cents ($0.3939) per share in December 1997.
The fund hereby designates such distributions as capital gain dividends per
Section 852 (b)(3) of the Internal Revenue Code.
Advisor Class
Franklin Natural Resources Fund - Advisor Class produced a +18.11% cumulative
total return for the one-year period ended April 30, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment
of all distributions.
The fund's share price, as measured by net asset value, increased $1.41, from
$14.07 on April 30, 1997 to $15.48 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 13.55 cents
($0.1355) in dividend income, 48.51 cents ($0.4851) in short-term capital
gains, and 39.39 cents ($0.3939) in long-term capital gains. Distributions
will vary depending on income earned by the fund and any profits realized
from the sale of securities in the portfolio, as well as the level of the
fund's operating expenses. Past distributions are not indicative of future
trends.
The graph on page 62 compares the performance of Franklin Natural Resources
Fund - Advisor Class since inception with that of the Standard and Poor's 500
(S&P 500) Stock Index. The S&P 500 is a domestic, broad market index
consisting of companies of various sizes. Of course, such unmanaged market
indices have inherent performance differentials over any fund.
GRAPHIC MATERIAL 20 OMITTED - SEE APPENDIX AT END OF DOCUMENT
They do not pay management fees to cover salaries of securities analysts or
portfolio managers, or pay commissions or market spreads to buy and sell
securities. Unlike an index, mutual funds are never 100% invested because
they need cash on hand to redeem shares. In addition, the performance shown
for the fund includes all fund expenses and account fees. If operating
expenses such as the fund's had been applied to the index, its performance
would have been lower. Please remember that an index is simply a measure of
performance and one cannot invest in it directly.
Franklin Natural Resources Fund - Advisor Class
Period ended 4/30/98
Since
Inception
1-Year* (6/5/95)*
Cumulative Total Return1 18.11% 73.62%
Average Annual Total Return1 18.11% 20.94%
Value of $10,000 Investment2 $11,811 $17,362
*On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I sales
charge, but including the effect of Class I expenses, including Rule 12b-1 fees;
and (b) for periods after January 1, 1997, figures reflect actual Advisor Class
performance, including the deduction of all fees and expenses applicable only to
that class. Since January 2, 1997 (commencement of sales), the cumulative total
return of Advisor Class shares was 13.35%.
1. Cumulative total return represents the change in value of an investment
over the periods indicated. Average annual total return represents the
average annual change in value of an investment over the periods indicated.
2. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated.
The fund's manager has agreed in advance to waive a portion of its management
fees, which reduces operating expenses and increases total return to
shareholders. Without this waiver, total returns would have been lower. The
waiver may be discontinued at any time upon notice to the fund's Board of
Trustees.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, currency volatility,
and the economic, social and political climates of countries where
investments are made. You may have a gain or loss when you sell your shares.
The Franklin Natural Resources Fund - Advisor Class paid distributions
derived from long-term capital gains of 39.39 cents ($0.3939) per share in
December 1997. The fund hereby designates such distributions as capital gain
dividends per Section 852 (b)(3) of the Internal Revenue Code.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 125
of this report.
FRANKLIN SMALL CAP GROWTH FUND
Your Fund's Objective: Franklin Small Cap Growth Fund seeks long-term capital
growth by investing in equity securities of small-capitalization companies --
those with a market capitalization of less than $1 billion at the time of
investment.
Despite considerable market volatility, the 12 months under review proved to
be a favorable period for many investors in small-cap stocks. During this
time, a strong U.S. dollar put pressure on the earnings of many large,
multi-national corporations, but had less effect on small-cap companies.
Lacking significant exposure to overseas markets, these companies generally
experienced healthy earnings growth, and their stocks performed particularly
well as investor interest shifted from large-cap to small-cap equities.
However, in October 1997, fears about Asia's economic woes adversely affected
global equity markets, and nervous investors began to search for more liquid
investments. Fortunately, concerns about the "Asian flu" spreading to other
economies seemed to abate by the end of the fund's fiscal year.
Within this environment, Franklin Small Cap Growth Fund - Class I delivered a
+43.09% one-year cumulative total return, as discussed in the Performance
Summary on page 67. It outperformed the Standard & Poor's 500 Stock Index and
the Dow Jones Industrial Average, which provided total returns of +41.07% and
+31.61%, respectively, for the same period. The fund also outperformed its
benchmark, the Russell 2500(R) Index, which produced a +40.62% total return for
the 12 months under review.*
*Source: Standard & Poor's Micropal. Indices are unmanaged, and price
appreciation includes reinvested dividends. One cannot invest directly in an
index. Dow Jones Industrial Average's total return is calculated by Wilshire
Associates, Inc.
Contributing to the fund's performance was the rise in value of many of our
technology holdings, some of which advanced more than 75% during the fiscal
year. For example, Tekelec, a supplier of diagnostic systems and network
switching solutions, rose more than 300%, and PMC-Sierra Inc., a provider of
high speed internetworking component solutions, increased more than 160%. The
fund also benefited from its holdings in Tracor Inc., Sapient Corp., and
Integrated Systems Inc.
As impressive as the fund's performance was, it was hampered somewhat by our
exposure to energy stocks, whose value fell when commodity prices began to
drop. However, many energy stocks recovered from their lows by the end of the
reporting period, and despite volatile commodity prices, we remain bullish on
this sector's long-term prospects. On April 30, 1998, the fund's largest
holding was Varco International Inc., an equipment provider for offshore
drilling rigs, which we believe should benefit from increased capital
spending by large oil and gas companies.
In our search for small-cap companies that we considered well-positioned for
rapid growth of revenues, earnings, or cash flow, we focused on firms with
competitive advantages such as a proprietary product or unique marketing
niche. Despite the strength of the domestic equity stock market, we found no
shortage of attractively priced growth stocks. The expanding U.S. economy
provided a favorable environment for small-cap companies, and our research
led us to invest in a number of industries.
Believing that new developments should lead to substantial growth for
technology companies into the next century, we established several new
positions in that sector. For example, we purchased shares of i2 Technologies
Inc., a major vendor of supply chain management software, and Cambridge
Technology Partners Inc., a leading developer of client/server and Internet
applications. However, we sold our holdings of Adaptec Inc. and Altera Corp.
at a profit because we believe that the future growth of these companies was
already reflected in their stock prices.
GRAPHIC MATERIAL 21 OMITTED - SEE APPENDIX AT END OF DOCUMENT
FRANKLIN SMALL CAP
GROWTH FUND
Top 10 Holdings
4/30/98
Company, % of Total
Industry Net Assets
- - ----------------------------------------
Varco International Inc. 2.2%
Industrial Services
Atwood Oceanics Inc. 1.4%
Industrial Services
Barrett Resources Corp. 1.3%
Energy Minerals
Komag Inc. 1.2%
Electronic Technology
Affiliated Computer
Services Inc. Class A 1.2%
Technology Services
Synopsys Inc. 1.2%
Electronic Technology
Tekelec 1.2%
Electronic Technology
Etec Systems Inc. 1.2%
Electronic Technology
Tommy Hilfiger Corp. 1.1%
Consumer Non-Durable
Carpenter Technology Corp. 1.1%
Non-Energy Minerals
Looking forward, we are optimistic about prospects for small cap stocks.
Valuations for these companies relative to those of large cap companies
remain below historical averages, and we believe the growing U.S. economy and
apparent lack of inflationary pressure should create a favorable environment
for small cap firms. Of course, there are risks involved in investing in a
fund seeking long-term growth from small or relatively new or unseasoned
companies. These risks, which include relatively small revenues, limited
product lines and small market share, are further discussed in the fund's
prospectus.
This discussion reflects our views, opinions and portfolio holdings as of
April 30, 1998, the end of the reporting period. However, market and economic
conditions are changing constantly, which can be expected to affect our
strategies and the fund's portfolio composition. Although historic
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
We thank you for your participation in Franklin Small Cap Growth Fund and
look forward to serving you in the future. Please feel free to contact us
with your questions or comments.
Sincerely,
Edward B. Jamieson
Portfolio Manager
Franklin Small Cap Growth Fund
PERFORMANCE SUMMARY
Class I
Franklin Small Cap Growth Fund - Class I produced a +43.09% cumulative total
return for the one-year period ended April 30, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge. We always
maintain a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner. As you can see
from the table on page 69, the fund's Class I shares delivered a +249.62%
cumulative total return since inception on February 14, 1992.
The fund's share price, as measured by net asset value, increased $6.97, from
$18.96 on April 30, 1997, to $25.93 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 9.2 cents ($0.092)
in dividend income, 56 cents ($0.56) in short-term capital gains, and 36.7
cents ($0.367) in long-term capital gains. Distributions will vary depending
on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
The graph on page 68 compares the performance of Franklin Small Cap Growth
Fund - Class I since inception with that of the unmanaged Standard and Poor's
500 (S&P 500) Stock Index and the Russell 2500 Index. The S&P 500 is a
domestic, broad market index consisting of companies of various sizes,
whereas the Russell 2500 is an index of 2,500 companies with small market
capitalizations. Of course, such unmanaged market indices have inherent
performance differentials over any fund. They do not pay management fees to
cover salaries of securities analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need cash on hand to redeem
shares. In addition, the performance shown for the fund includes the maximum
initial sales charge, all fund expenses and account fees. If operating
expenses such as the fund's had been applied to the index, its performance
would have been lower. Please remember that an index is simply a measure of
performance and one cannot invest in it directly.
GRAPHIC MATERIAL 22 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Small Cap Growth Fund - Class I
Periods ended 4/30/98
Since
Inception
1-Year 3-Year 5-Year (2/14/92)
Cumulative Total Return1 43.09% 106.42% 238.99% 249.62%
Average Annual Total Return2 36.74% 25.39% 26.49% 21.44%
Value of $10,000 Investment3 $13,764 $19,716 $32,378 $33,392
4/30/94 4/30/95 4/30/96 4/30/97 4/30/98
One-Year Total Return4 29.26% 27.05% 44.06% 0.09% 43.09%
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the maximum 4.5%
initial sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the sales charge.
4. One-year total return represents the change in value of an investment over
the indicated periods ended on the specified dates and does not include the
initial sales charge.
Past expense reductions by the fund's manager increased the fund's total
return to shareholders. Without this waiver, the fund's total returns would
have been lower.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
The Franklin Small Cap Growth Fund - Class I paid distributions derived from
long-term capital gains of 36.70 cents ($0.3670) per share in December 1997.
The fund hereby designates such distributions as capital gain dividends per
Section 852 (b)(3) of the Internal Revenue Code.
Class II
Franklin Small Cap Growth Fund - Class II produced a +42.06% cumulative total
return for the one-year period ended April 30, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include sales charges.
The fund's share price, as measured by net asset value, increased $6.81, from
$18.78 on April 30, 1997, to $25.59 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 56 cents ($0.56) in
short-term capital gains, and 36.7 cents ($0.367) in long-term capital gains.
Distributions will vary depending on income earned by the fund and any
profits realized from the sale of securities in the portfolio, as well as the
level of the fund's operating expenses. Past distributions are not indicative
of future trends.
The graph on page 72 compares the performance of Franklin Small Cap Growth
Fund - Class II since inception with that of the unmanaged Standard and
Poor's 500 (S&P 500) Stock Index and the Russell 2500 Index. The S&P 500 is a
domestic, broad market index consisting of companies of various sizes,
whereas the Russell 2500 is an index of 2,500 companies with small market
capitalizations. Of course, such unmanaged market indices have inherent
performance differentials over any fund. They do not pay management fees to
cover salaries of securities analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need cash on hand to redeem
shares. In addition, the performance shown for the fund includes the maximum
initial sales charge, all fund expenses and account fees. If operating
expenses such as the fund's had been applied to the index, its performance
would have been lower. Please remember that an index is simply a measure of
performance and one cannot invest in it directly.
GRAPHIC MATERIAL 23 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Small Cap Growth Fund - Class II
Periods ended 4/30/98
Since
Inception
1-Year (10/2/95)
Cumulative Total Return1 42.06% 65.94%
Average Annual Total Return2 39.66% 21.24%
Value of $10,000 Investment3 $13,966 $16,426
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the 1.0% initial
sales charge and the 1.0% contingent deferred sales charge applicable to
shares redeemed within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include sales charges.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
The Franklin Small Cap Growth Fund - Class II paid distributions derived from
long-term capital gains of 36.70 cents ($0.3670) per share in December 1997.
The fund hereby designates such distributions as capital gain dividends per
Section 852 (b)(3) of the Internal Revenue Code.
Advisor Class
Franklin Small Cap Growth Fund - Advisor Class produced a +43.68% cumulative
total return for the one-year period ended April 30, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment
of all distributions.
The fund's share price, as measured by net asset value, increased $7.04, from
$18.97 on April 30, 1997 to $26.01 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 12.89 cents
($0.1289) in dividend income, 56 cents ($0.56) in short-term capital gains,
and 36.7 cents ($0.367) in long-term capital gains. Distributions will vary
depending on income earned by the fund and any profits realized from the sale
of securities in the portfolio, as well as the level of the fund's operating
expenses. Past distributions are not indicative of future trends.
The graph on page 76 compares the performance of Franklin Small Cap Growth
Fund - Advisor Class since inception with that of the unmanaged Standard and
Poor's 500 (S&P 500) Stock Index and the Russell 2500 Index. The S&P 500 is a
domestic, broad market index consisting of companies of various sizes,
whereas the Russell 2500 is an index of 2,500 companies with small market
capitalizations. Of course, such unmanaged market indices have inherent
performance differentials over any fund. They do not pay management fees to
cover salaries of securities analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need cash on hand to redeem
shares. In addition, the performance shown for the fund includes the maximum
initial sales charge, all fund expenses and account fees. If operating
expenses such as the fund's had been applied to the index, its performance
would have been lower. Please remember that an index is simply a measure of
performance and one cannot invest in it directly.
GRAPHIC MATERIAL 24 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Small Cap Growth Fund - Advisor Class
Periods ended 4/30/98
Since
Inception
1-Year* 3-Year* 5-Year* (2/14/92)*
Cumulative Total Return1 43.68% 107.30% 240.43% 251.11%
Average Annual total Return1 43.68% 27.51% 27.76% 22.43%
Value of $10,000 Investment2 $14,368 $20,730 $34,043 $35,111
4/30/95 4/30/96 4/30/96 4/30/97 4/30/98
One-Year Total Return*,3 29.26% 27.05% 44.06% 0.20% 43.68%
*On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures
reflect the fund's Class I performance, excluding the effect of the Class I
sales charge, but including the effect of Class I expenses, including Rule
12b-1 fees; and (b) for periods after January 1, 1997, figures reflect actual
Advisor Class performance, including the deduction of all fees and expenses
applicable only to that class. Since January 2, 1997 (commencement of sales),
the cumulative total return of Advisor Class shares was 33.03%.
1. Cumulative total return represents the change in value of an investment
over the periods indicated. Average annual total return represents the
average annual change in value of an investment over the periods indicated.
2. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated.
3. One-year total return represents the change in value of an investment over
the periods ended on the specified dates.
Past expense reductions by the fund's manager increased the fund's total
return to shareholders. Without this waiver, the fund's total returns would
have been lower.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
The Franklin Small Cap Growth Fund - Advisor Class paid distributions derived
from long-term capital gains of 36.7 cents ($0.367) per share in December
1997. The fund hereby designates such distributions as capital gain dividends
per Section 852 (b)(3) of the Internal Revenue Code.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 132
of this report.
FRANKLIN STRATEGIC INCOME FUND
Your Fund's Objective: Franklin Strategic Income Fund seeks a high level of
current income, with capital preservation over the long term as a secondary
objective. The fund uses an active asset allocation process and invests in
securities of foreign governments, U.S. and foreign high yield, fixed-income
securities, asset-backed securities, preferred stock, common stock that pays
dividends, and income-producing securities convertible into common stock of
such companies.
Steady, moderate economic growth, coupled with continued low inflation,
characterized the year under review. By diversifying across the six distinct
asset classes listed in the fund's objective, Franklin Strategic Income Fund
was able to capitalize on arising opportunities, maximizing the strengths of
certain sectors, while reducing volatility through diversification among
asset classes. We focused on economically sensitive sectors, maintaining our
position in U.S. high yield corporate bonds, increasing our allocation in
emerging markets and convertible securities, and selectively hedging our
international sector against the rising U.S. dollar. Relative to an internal
benchmark allocation, the fund maintained an underweighted exposure to more
interest-rate sensitive sectors because we expected lower total returns from
these markets over the intermediate term. Within this environment, the fund
achieved a +13.10% cumulative total return for the one-year period, as
detailed in the Performance Summary on page 84.
High Yield Corporate Bonds
During the 12-month period the fund maintained an overweighted position in
the high yield sector, as this market's strong total returns reflected the
continuation of low inflation and a growing economy.
Growing global demand for wireless communication services favorably impacted
the fund's performance over the past year. Our position in Nextel
Communications, a national digital network provider of wireless
communications services, has benefited from growing customer demand for its
product, translating into subscriber gains well above expectations. The fund
also benefited from our increased exposure in the media and broadcasting
sectors, which have been the direct beneficiaries of deregulation and
consolidation. Two fund holdings, Chancellor Media Corp., one of the
country's largest radio station operators, and Outdoor Systems, Inc., North
America's largest outdoor advertising company, experienced meaningful credit
improvement during the period, which was reflected in their securities'
prices. As many companies converted to real estate investment trusts (REITs)
to capture the potential tax benefits, their bond prices rose. This trend
helped to drive the prices for our bond positions in Vencor, Inc., a health
care provider, and in Marriott (HMH Properties, Inc.), as these companies
announced plans to move to REIT corporate structures, and subsequently to
tender for our bonds at substantial premiums.
Emerging Markets
Our relatively light exposure to various developing Asian markets helped the
fund largely avoid the significant declines in that region's financial
markets. Subsequent concern over these markets precipitated late 1997's
sell-off in the emerging markets sector. Seeking to take advantage of this
situation, the fund nearly doubled this sector's allocation, as we added to
government bond positions that we believe still have favorable, fundamental
long-term outlooks.
The fund's largest segment within the emerging markets sector is still Latin
America, where we found attractive investment opportunities, primarily in
Mexico, Argentina, Brazil and Venezuela. However, since February 1998,
emerging markets bond returns have strengthened. Consequently, the fund began
to focus on this sector's more liquid securities with intermediate-term
maturities, as we found they offer more compelling risk/return tradeoffs.
International
Activity in the fund's international arena was directly related to the
sources of global bond market volatility, particularly to certain foreign
currencies' declines in value relative to the U.S. dollar. After our
assessment of how these sources of volatility might affect the international
sector's performance, we reduced our positions in this sector, as the
comparison table on page 81 shows. The fund also continued to selectively
hedge its foreign currency exposure in an effort to preserve the dollar value
of these holdings.
Over the course of the annual period, we reallocated the fund's European
holdings by increasing our positions in peripheral countries including
Sweden, Denmark and Italy, while reducing our relative allocation in the U.K.
and Germany. In the dollar-bloc countries, the fund reduced its Canadian
exposure while adding to its Australia and New Zealand holdings.
Franklin Strategic Income Fund
Portfolio Breakdown
Based on Total Net Assets
April 30, 1998 April 30, 1997
High Yield Corporate Bonds 28.0% 26.9%
Emerging Market Bonds 23.7% 11.7%
International Bonds 15.9% 21.3%
Convertible Securities 10.1% 8.9%
Mortgage Securities 7.6% 4.7%
U.S. Government Bonds 4.8% 1.9%
Preferred Stock (Non-Convertible) 0.6% 3.7%
Cash & Equivalents 9.3% 20.9%
Convertible Securities
The fund's fiscal year saw a combination of declining interest rates and
healthy corporate earnings growth drive equity markets upward. Prices for
convertible securities similarly evidenced the appreciation of such
companies' underlying common shares. The fund capitalized on this strength as
it increased its convertible securities sector exposure. However, recent
stock market valuations appeared to fairly reflect the positive domestic
economic outlook, and we decided not to overweight this sector at the close
of the reporting period.
During the period under review, the fund held an investment in a Salomon
Smith Barney security that is convertible into Cincinnati Bell common stock.
This investment benefited from Cincinnati Bell's revenue growth, which
resulted from its move into the customer service and telemarketing
businesses. We also recently added to our holdings in Dovatron International,
Inc., an electronics design and manufacturing services provider, as we did
not believe the company's stock price accurately reflected its long-term
earnings growth potential.
Treasuries
Although inflation remained subdued during the year under review, given the
U.S. economy's continued strength, we believe the probability for a
significant near-term drop in interest rates has declined. Consequently,
although the fund moderately increased its Treasury holdings, as shown on
page 81, this sector's weighting was below average at the end of the period.
U.S. Mortgage Securities
The general trend of falling interest rates during the fund's fiscal year
increased refinancing risk, which largely offset the positive impacts from
declining volatility for the mortgage sector's interest rates. The fund
remained somewhat underweighted relative to our internal benchmark
allocation, based largely on an expectation of lower total returns compared
with other fixed-income investment alternatives.
Looking Forward
In our opinion, the fund's performance should continue to benefit from
relatively low inflation and moderate domestic economic growth. In addition,
we believe ongoing positive economic fundamentals in selected developing
countries should also lead to healthy performance from the fund's emerging
market allocation. The fund should also benefit from its more limited
exposure to interest-rate sensitive markets, given the expectation for lower
total returns from these sectors as we move toward the latter half of 1998.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of April 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected
to affect our strategies and the fund's portfolio composition. Although
historic performance is no guarantee of future results, these insights may
help you understand our investment and management philosophy.
Sincerely,
Christopher J. Molumphy
Portfolio Manager
Franklin Strategic Income Fund
PERFORMANCE SUMMARY
Franklin Strategic Income Fund produced a +13.10% cumulative total return for
the one-year period ended April 30, 1998. Cumulative total return measures
the change in value of an investment, assuming reinvestment of all
distributions, and does not include the sales charge.
The fund's share price, as measured by net asset value, increased 38 cents,
from $10.86 on April 30, 1997, to $11.24 on April 30, 1998. During the
reporting period, shareholders received per-share distributions of 90.3 cents
($0.903) in dividend income, 7.19 cents ($0.0719) in short-term capital
gains, and 1.51 cents ($0.0151) in long-term capital gains. Distributions
will vary depending on income earned by the fund and any profits realized
from the sale of securities in the portfolio, as well as the level of the
fund's operating expenses. Past distributions are not indicative of future
trends.
The graph on page 86 compares the fund's performance to a number of indices,
including the Salomon Brothers Non-U.S. World Government Bond Index, Salomon
Brothers High Yield Bond Index, and a composite index. Of course, such
unmanaged market indices have inherent performance differentials over any
fund. They do not pay management fees to cover salaries of securities
analysts or portfolio managers, or pay commissions or market spreads to buy
and sell securities. Unlike an index, mutual funds are never 100% invested
because they need cash on hand to redeem shares. In addition, the performance
shown for the fund includes the maximum initial sales charge, all fund
expenses and account fees. If operating expenses such as the fund's had been
applied to the indices, their performance would have been lower. Please
remember that an index is simply a measure of performance and one cannot
invest in it directly.
GRAPHIC MATERIAL 25 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Strategic Income Fund
Periods ended 4/30/98
Since
Inception
1-Year 3-Year (6/1/94)
Cumulative Total Return1 13.10% 47.27% 60.44%
Average Annual Total Return2 8.32% 12.14% 11.61%
Value of $10,000 Investment3 $10,832 $14,103 $15,368
Distribution Rate4 7.67%
30-Day Standardized Yield5 6.08%
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the maximum 4.25%
initial sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the sales charge.
4. Distribution rate is based on an annualization of April's 7.5 cent per
share monthly dividend and the maximum offering price of $11.74 on April 30,
1998.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended April 30, 1998.
The fund's manager has agreed in advance to waive a portion of its management
fees and to make certain payments to reduce expenses. If the manager had not
taken this action, the fund's distribution rate and total return would have
been lower and the yield for the period would have been 5.42%. The fee waiver
may be discontinued at any time upon notice to the fund's Board of Trustees.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, currency volatility
and the social, economic and political climates of countries where
investments are made. Emerging markets involve heightened risks related to
the same factors, in addition to those associated with the relatively small
size and lesser liquidity of these markets. You may have a gain or loss when
you sell your shares.
Franklin Strategic Income Fund paid distributions derived from long-term
capital gains of 1.51 cents ($0.0151) per share in December 1997. The fund
hereby designates such distributions as capital gain dividends per Section
852(b)(3) of the Internal Revenue Code.
FRANKLIN STRATEGIC SERIES
Financial Highlights
<TABLE>
<CAPTION>
Franklin Biotechnology Discovery Fund
Class I
-------------
Year Ended
April 30, 19981
-------------
<S> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ......................................................... $25.00
-------------
Income from investment operations:
Net investment loss ....................................................................... (.05)
Net realized and unrealized gains ......................................................... 1.99
-------------
Total from investment operations ........................................................... 1.94
-------------
Less distributions from:
Net realized gains ........................................................................ (.05)
-------------
Net asset value, end of year ............................................................... $26.89
=============
Total return*............................................................................... 7.78%
Ratios/supplemental data
Net assets, end of year (000's) ............................................................ $73,546
Ratios to average net assets:
Expenses .................................................................................. 1.50%***
Expenses excluding waiver and payments by affiliate ....................................... 1.61%***
Net investment loss ....................................................................... (.44%)***
Portfolio turnover rate .................................................................... 75.50%
Average commission rate paid** ............................................................. $.0339
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Relates to purchases and sales of equity securities.
***Annualized
1For the period September 15, 1997 (effective date) to April 30, 1998.
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 1998
<TABLE>
<CAPTION>
Franklin Biotechnology Discovery Fund SHARES VALUE
<S> <C> <C>
Common Stocks 85.7%
aAnimal Health 3.0%
Heska Corp. .................................................................... 167,600 $ 2,178,800
-------------
aBiomedical 13.3%
IDEC Pharmaceuticals Corp. ..................................................... 69,800 2,512,800
LifeCell Corp. ................................................................. 242,500 1,924,844
Synaptic Pharmaceutical Corp. .................................................. 140,000 1,750,000
Triangle Pharmaceuticals, Inc................................................... 152,500 2,363,750
Vical, Inc...................................................................... 50,000 753,125
XOMA Corp. ..................................................................... 100,000 487,500
-------------
9,792,019
-------------
aDelivery Systems 17.0%
Alkermes, Inc................................................................... 50,000 1,193,750
Aradigm Corp. .................................................................. 131,600 1,908,200
Aviron ......................................................................... 119,800 2,972,538
DepoTech Corp. ................................................................. 182,300 837,450
Inhale Therapeutic Systems ..................................................... 120,000 3,360,000
TRANSGENE S.A., Sponsored ADR (France).......................................... 125,000 2,250,000
-------------
12,521,938
-------------
aDiagnostics 2.5%
Myriad Genetics, Inc............................................................ 40,000 830,000
Technical Chemicals and Products, Inc........................................... 100,000 987,500
-------------
1,817,500
-------------
aDrugs 43.9%
Agouron Pharmaceuticals, Inc.................................................... 60,000 2,040,000
Alteon, Inc..................................................................... 115,000 517,500
Cell Therapeutics, Inc.......................................................... 137,500 519,929
Chiroscience Group, Plc. (United Kingdom)....................................... 623,000 3,411,400
CuraGen Corp. .................................................................. 151,000 1,698,750
Ligand Pharmaceuticals, Inc., Class B........................................... 200,000 2,900,000
Medicis Pharmaceutical Corp., Class A........................................... 45,000 1,923,750
Neurex Corp. ................................................................... 90,000 2,694,375
PathoGenesis Corp. ............................................................. 105,000 4,160,625
Schein Pharmaceutical, Inc...................................................... 40,000 980,000
SYNSORB Biotech, Inc. (Canada).................................................. 278,000 1,963,016
Texas Biotechnology Corp. ...................................................... 400,000 3,125,000
Vertex Pharmaceuticals, Inc..................................................... 60,000 1,867,500
ViroPharma, Inc................................................................. 70,000 1,522,500
Zonagen, Inc.................................................................... 85,000 2,953,750
-------------
32,278,095
-------------
aTherapeutics 6.0%
Chiron Corp. ................................................................... 125,000 $ 2,421,875
Neurogen Corp. ................................................................. 107,500 1,988,750
-------------
4,410,625
-------------
Total Long Term Investments (Cost $60,702,665) ................................. 62,998,977
-------------
PRINCIPAL
AMOUNT
------------
eRepurchase Agreement 8.9%
Joint Repurchase Agreement, 5.487%, 5/01/98,
(Maturity Value $6,574,607) (Cost $6,573,605) ................................. $6,573,605 6,573,605
BancAmerica Robertson Stephens (Maturity Value $586,192)
Barclays Capital Group, Inc. (Maturity Value $586,192)
Bear, Stearns & Co., Inc. (Maturity Value $319,723)
BT Alex Brown, Inc. (Maturity Value $586,192)
Chase Securities, Inc. (Maturity Value $392,964)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $586,192)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $586,192)
Greenwich Capital Markets, Inc. (Maturity Value $586,192)
Lehman Brothers, Inc. (Maturity Value $586,192)
Paribas Corp. (Maturity Value $586,192)
SBC Warburg Dillon Read, Inc. (Maturity Value $586,192)
UBS Securities, L.L.C. (Maturity Value $586,192)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $67,276,270) 94.6% ..................................... 69,572,582
Securities Sold Short (8.9%) ................................................... (6,519,963)
Other Assets, less Liabilities 14.3% ........................................... 10,493,538
-------------
Net Assets 100.0% .............................................................. $73,546,157
=============
a,gSecurities Sold Short
ISSUER SHARES VALUE
Biogen, Inc..................................................................... 30,000 $ 1,331,250
Biora AB, Sponsored ADR (Sweden)................................................ 14,700 461,213
Elan Corp., Plc., Sponsored ADR (Ireland)....................................... 25,000 1,553,125
ICOS Corp. ..................................................................... 25,000 368,750
Protein Design Labs, Inc........................................................ 32,500 1,040,000
SangStat Medical Corp. ......................................................... 20,000 676,250
Transkaryotic Therapies, Inc.................................................... 35,000 1,089,375
-------------
Total (Proceeds $6,874,305) .................................................... $ 6,519,963
=============
</TABLE>
aNon-income producing.
eSee Note 1(c) regarding joint repurchase agreement.
gSee Note 1(e) regarding securities sold short.
FRANKLIN STRATEGIC SERIES
Financial Highlights
<TABLE>
<CAPTION>
Franklin Blue Chip Fund
Class I
----------------------
Year Ended April 30,
----------------------
1998 19975
----------------------
<S> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................................................. $10.85 $10.00
----------------------
Income from investment operations:
Net investment income .............................................................. .09 .09
Net realized and unrealized gains .................................................. 1.67 .82
----------------------
Total from investment operations .................................................... 1.76 .91
----------------------
Less distributions from:
Net investment income .............................................................. (.06) (.06)
Net realized gains ................................................................. (.09) --
----------------------
Total distributions ................................................................. (.15) (.06)
----------------------
Net asset value, end of year ........................................................ $12.46 $10.85
======================
Total return* ....................................................................... 16.41% 9.14%
Ratios/supplemental data
Net assets, end of year (000's) ..................................................... $16,836 $5,600
Ratios to average net assets:
Expenses ........................................................................... 1.25% 1.25%***
Expenses excluding waiver and payments by affiliate ................................ 1.95% 2.22%***
Net investment income .............................................................. 1.04% 1.07%***
Portfolio turnover rate ............................................................. 57.67% 11.14%
Average commission rate paid** ...................................................... $.0367 $.0525
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Relates to purchases and sales of equity securities.
***Annualized
5For the period June 3, 1996 (effective date) to April 30, 1997.
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 1998
<TABLE>
<CAPTION>
Franklin Blue Chip Fund COUNTRY SHARES VALUE
<S> <C> <C> <C>
Common Stocks 93.5%
Consumer Durables 4.4%
General Electric Co. ....................................................... United States 3,800 $ 323,475
Sony Corp. ................................................................. Japan 2,900 241,648
Toyota Motor Corp. ......................................................... Japan 7,000 182,775
------------
747,898
------------
Consumer Staples 17.8%
Bestfoods .................................................................. United States 3,400 186,575
Campbell Soup Co. .......................................................... United States 3,700 189,856
Gillette Co. ............................................................... United States 2,200 253,963
Kao Corp. .................................................................. Japan 12,000 176,644
L'OREAL .................................................................... France 365 174,077
Nestle, SA, Registered Shares .............................................. Switzerland 185 358,924
Nike, Inc., Class B ........................................................ United States 4,300 205,325
Panamerican Beverages, Inc., A Shares ...................................... Mexico 4,800 191,400
PepsiCo, Inc. .............................................................. United States 4,000 158,750
Philip Morris Cos., Inc. ................................................... United States 6,500 242,531
Procter & Gamble Co. ....................................................... United States 2,200 180,813
The Coca-Cola Co. .......................................................... United States 4,000 303,500
Unilever, NV, New York Shares .............................................. Netherlands 2,600 194,025
Wm. Wrigley Jr. Co. ........................................................ United States 2,000 178,000
------------
2,994,383
------------
Energy 9.2%
British Petroleum Co., Plc., Sponsored ADR ................................. United Kingdom 2,619 247,495
Exxon Corp. ................................................................ United States 4,600 335,513
Royal Dutch Petroleum Co., New York Shares ................................. Netherlands 5,800 328,063
Schlumberger, Ltd. ......................................................... United States 3,600 298,350
Total, SA, Sponsored ADR ................................................... France 3,300 193,875
YPF, SA, Sponsored ADR ..................................................... Argentina 4,300 149,963
------------
1,553,259
------------
Financial Services 11.8%
American International Group, Inc. ......................................... United States 2,575 338,773
Charles Schwab Corp. ....................................................... United States 4,300 150,500
Citicorp ................................................................... United States 1,400 210,700
Federal National Mortgage Association ...................................... United States 4,700 281,413
HSBC Holding, Plc. ......................................................... United Kingdom 10,033 316,881
J.P. Morgan & Co., Inc. .................................................... United States 1,000 131,250
Merrill Lynch & Co., Inc. .................................................. United States 2,300 201,825
Tokio Marine & Fire Insurance Co., Sponsored ADR ........................... Japan 3,100 170,887
Wells Fargo & Co. .......................................................... United States 500 184,250
------------
1,986,479
------------
Healthcare 11.9%
Abbott Laboratories ........................................................ United States 2,500 182,813
Baxter International, Inc. ................................................. United States 3,500 194,031
Eli Lilly & Co. ............................................................ United States 4,400 306,075
Johnson & Johnson .......................................................... United States 3,400 242,675
Healthcare (cont.)
Medtronic, Inc. ............................................................ United States 3,600 $ 189,450
Merck & Co., Inc. .......................................................... United States 2,100 253,050
Novartis, AG ............................................................... Switzerland 180 297,620
Roche Holding, AG .......................................................... Switzerland 21 212,884
Smithkline Beecham, Plc. ................................................... United Kingdom 11,169 133,242
------------
2,011,840
------------
Industrial Cyclicals 9.4%
ABB AB, B Shares ........................................................... Sweden 9,900 153,512
Avery Dennison Corp. ....................................................... United States 4,600 240,924
De Beers Consolidated Mines, AG, ADR ....................................... South Africa 8,000 206,000
Minnesota Mining and Manufacturing Co. ..................................... United States 2,800 264,250
Monsanto Co. ............................................................... United States 2,400 126,900
Praxair, Inc. .............................................................. United States 3,500 176,094
Rio Tinto, Plc., Sponsored ADR ............................................. United Kingdom 4,000 233,000
Sigma-Aldrich Corp. ........................................................ United States 4,500 179,437
------------
1,580,117
------------
Retail .8%
Wal-Mart Stores, Inc. ...................................................... United States 2,600 131,463
------------
Services 10.3%
Brambles Industries, Ltd. .................................................. Australia 10,700 220,524
aCendant Corp. ............................................................. United States 5,922 148,050
Disney (Walt) Co. .......................................................... United States 1,600 198,900
First Data Corp. ........................................................... United States 6,700 226,963
Hutchison Whampoa, Ltd. .................................................... Hong Kong 23,000 142,228
McDonald's Corp. ........................................................... United States 2,800 173,250
SAP, AG .................................................................... Germany 500 236,277
Secom ...................................................................... Japan 3,000 177,098
Xerox Corp. ................................................................ United States 1,800 204,300
------------
1,727,590
------------
Technology 11.9%
aApplied Materials, Inc. ................................................... United States 3,200 115,600
aCisco Systems, Inc. ....................................................... United States 2,650 194,113
Compaq Computer Corp. ...................................................... United States 4,500 126,281
Ericsson (L.M.) Telecommunications, Sponsored ADR .......................... Sweden 3,800 195,463
Hewlett-Packard Co. ........................................................ United States 4,500 338,906
Intel Corp. ................................................................ United States 3,900 315,169
Lucent Technologies, Inc. .................................................. United States 722 54,962
aMicrosoft Corp. ........................................................... United States 1,200 108,150
Molex, Inc. ................................................................ United States 8,000 229,000
Motorola, Inc. ............................................................. United States 3,700 205,813
aOracle Corp. .............................................................. United States 4,500 116,437
------------
1,999,894
------------
Utilities and Telecommunications 6.0%
aAirTouch Communications, Inc. ............................................. United States 1,800 $ 95,625
Bellsouth Corp. ............................................................ United States 2,300 147,631
Enron Corp. ................................................................ United States 3,600 177,075
SK Telecom Co., Ltd., ADR .................................................. South Korea 204 1,520
Telecomunicacoes Brasileiras, SA, Sponsored ADR ............................ Brazil 1,100 133,994
Telefonica de Espana, Sponsored ADR ........................................ Spain 1,091 136,307
aThe AES Corp. ............................................................. United States 2,900 160,044
VEBA, AG ................................................................... Germany 2,400 158,216
------------
1,010,412
------------
Total Long Term Investments (Cost $13,431,295) ............................. 15,743,335
------------
PRINCIPAL
AMOUNT
--------
eRepurchase Agreement 5.9%
Joint Repurchase Agreement, 5.487%, 5/01/98,
(Maturity Value $990,407) (Cost $990,256) .................................. United States $990,256 990,256
BancAmerica Robertson Stephens (Maturity Value $88,305)
Barclays Capital Group, Inc. (Maturity Value $88,305)
Bear, Stearns & Co., Inc. (Maturity Value $48,160)
BT Alex Brown, Inc. (Maturity Value $88,305)
Chase Securities, Inc. (Maturity Value $59,197)
Donaldson, Lufkin, & Jenrette Securities Corp. (Maturity Value $88,305)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $88,305)
Greenwich Capital Markets, Inc. (Maturity Value $88,305)
Lehman Brothers, Inc. (Maturity Value $88,305)
Paribas Corp. (Maturity Value $88,305)
SBC Warburg Dillon Read, Inc. (Maturity Value $88,305)
UBS Securities, L.L.C. (Maturity Value $88,305)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $14,421,551) 99.4% ................................. 16,733,591
Other Assets, less Liabilities .6% ......................................... 102,529
------------
Net Assets 100.0% .......................................................... $16,836,120
============
</TABLE>
aNon-income producing
eSee Note 1(c) regarding joint repurchase agreement.
FRANKLIN STRATEGIC SERIES
Financial Highlights
<TABLE>
<CAPTION>
Franklin California Growth Fund
Class I
------------------------------------------------
Year Ended April 30,
------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $19.35 $18.26 $14.03 $12.05 $10.21
------------------------------------------------
Income from investment operations:
Net investment income ................................ .14 .13 .20 .16 .14
Net realized and unrealized gains .................... 6.48 1.51 6.03 3.04 2.43
------------------------------------------------
Total from investment operations ...................... 6.62 1.64 6.23 3.20 2.57
------------------------------------------------
Less distributions from:
Net investment income ................................ (.14) (.12) (.23) (.12) (.15)
Net realized gains ................................... (.86) (.43) (1.77) (1.10) (.58)
------------------------------------------------
Total distributions ................................... (1.00) (.55) (2.00) (1.22) (.73)
------------------------------------------------
Net asset value, end of year .......................... $24.97 $19.35 $18.26 $14.03 $12.05
================================================
Total return* ......................................... 34.98% 8.94% 47.42% 29.09% 25.55%
Ratios/supplemental data
Net assets, end of year (000's) ....................... $721,254 $282,898 $81,175 $13,844 $4,646
Ratios to average net assets:
Expenses ............................................. .99% 1.08% .71% .25% .09%
Expenses excluding waiver and payments by affiliate .. .99% 1.08% 1.09% 1.27% 1.89%
Net investment income ................................ .67% .84% 1.42% 1.63% 1.16%
Portfolio turnover rate ............................... 48.52% 44.81% 61.82% 79.52% 135.12%
Average commission rate paid** ........................ $.0530 $.0544 $.0536 -- --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Relates to purchases and sales of equity securities. Prior to fiscal year end
1996 disclosure of average commission rate was not required.
<TABLE>
<CAPTION>
Class II
---------------------
Year Ended April 30,
---------------------
1998 19977
---------------------
<S> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................................................. $19.27 $18.05
---------------------
Income from investment operations:
Net investment income .............................................................. -- .05
Net realized and unrealized gains .................................................. 6.43 1.65
---------------------
Total from investment operations .................................................... 6.43 1.70
---------------------
Less distributions from:
Net investment income .............................................................. (.03) (.05)
Net realized gains ................................................................. (.86) (.43)
---------------------
Total distributions ................................................................. (.89) (.48)
---------------------
Net asset value, end of year ........................................................ $24.81 $19.27
=====================
Total return* ....................................................................... 34.02% 9.32%
Ratios/supplemental data
Net assets, end of year (000's) ..................................................... $122,701 $24,556
Ratios to average net assets:
Expenses ........................................................................... 1.74% 1.86%***
Net investment income (loss) ....................................................... (.10%) .05%***
Portfolio turnover rate ............................................................. 48.52% 44.81%
Average commission rate paid** ...................................................... $.0530 $.0544
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Relates to purchases and sales of equity securities.
***Annualized
7For the period September 3, 1996 (effective date) to April 30, 1997.
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 1998
<TABLE>
<CAPTION>
Franklin California Growth Fund SHARES VALUE
<S> <C> <C>
Common Stocks 90.1%
a Commercial Services 2.3%
f RemedyTemp, Inc., Class A.................................................. 350,000 $ 11,112,500
Robert Half International, Inc............................................. 160,000 8,660,000
--------------
19,772,500
--------------
Consumer Durables 2.2%
K2, Inc.................................................................... 250,000 5,671,875
Mattel, Inc................................................................ 300,000 11,493,750
a Signature Eyewear, Inc..................................................... 150,000 1,275,000
--------------
18,440,625
--------------
Consumer Non-Durables 1.0%
Clorox Co. ................................................................ 100,000 8,387,500
--------------
Consumer Services 2.1%
Disney (Walt) Co. ......................................................... 30,000 3,729,375
Hilton Hotels Corp. ....................................................... 75,000 2,395,313
The McClatchy Co., Class A................................................. 175,000 5,239,062
United Television, Inc..................................................... 60,000 6,630,000
--------------
17,993,750
--------------
Electronic Technology 21.7%
a 3COM Corp. ................................................................ 275,000 9,418,750
a Adaptec, Inc............................................................... 250,000 5,921,875
a Applied Materials, Inc..................................................... 75,000 2,709,375
a Applied Micro Circuits Corp. .............................................. 253,700 7,008,463
a Broadcom Corp., Class A.................................................... 3,200 153,600
a Cisco Systems, Inc......................................................... 225,000 16,481,250
a Coherent, Inc.............................................................. 400,000 9,500,000
Computer Sciences Corp. ................................................... 250,000 13,187,500
a Cypress Semiconductor Corp. ............................................... 500,000 5,000,000
a Electroglas, Inc........................................................... 175,000 2,953,125
First Virtual Corp. ....................................................... 108,000 1,701,000
a Flextronics International, Ltd............................................. 100,000 4,750,000
Hewlett-Packard Co. ....................................................... 125,000 9,414,063
a Integrated Process Equipment Corp. ........................................ 125,000 2,273,438
a Integrated Sensor Solutions, Inc........................................... 250,000 2,187,500
Intel Corp. ............................................................... 100,000 8,081,250
a KLA-Tencor Corp. .......................................................... 125,000 5,039,063
a Komag, Inc................................................................. 500,000 7,750,000
Linear Technology Corp. ................................................... 55,000 4,427,500
a Read-Rite Corp. ........................................................... 300,000 4,143,750
Rockwell International Corp. .............................................. 100,000 5,593,750
a Sanmina Corp. ............................................................. 55,000 4,950,000
a Seagate Technology, Inc.................................................... 375,000 10,007,813
a Solectron Corp. ........................................................... 85,000 3,766,563
a Spectra-Physics Lasers, Inc................................................ 176,500 3,154,938
a SpeedFam International, Inc................................................ 100,000 2,900,000
a Sun Microsystems, Inc...................................................... 200,000 8,237,500
Electronic Technology (cont.)
a Uniphase Corp. ............................................................ 125,000 $ 6,781,250
a Western Digital Corp. ..................................................... 200,000 3,950,000
a Xilinx, Inc................................................................ 250,000 11,437,500
--------------
182,880,816
--------------
Energy Minerals 5.7%
Atlantic Richfield Co. (ARCO) ............................................. 175,000 13,650,000
a Benton Oil & Gas Co. ...................................................... 200,000 2,437,500
Chevron Corp. ............................................................. 150,000 12,403,125
a Nuevo Energy Co. .......................................................... 50,000 1,781,250
Ultramar Diamond Shamrock Corp. ........................................... 275,000 8,885,938
Unocal Corp. .............................................................. 225,000 9,210,938
--------------
48,368,751
--------------
Finance 8.4%
a BA Merchant Services, Inc., Class A........................................ 400,000 6,000,000
BankAmerica Corp. ......................................................... 150,000 12,750,000
Charles Schwab Corp. ...................................................... 100,000 3,500,000
Countrywide Credit Industries, Inc......................................... 225,000 10,884,375
a Freedom Securities Corp. .................................................. 95,900 2,127,781
Providian Financial Corp. ................................................. 175,000 10,532,813
a Silicon Valley Bancshares ................................................. 148,700 9,702,675
United Panam Financial Corp. .............................................. 99,800 1,322,350
Washington Mutual, Inc..................................................... 100,000 7,006,250
Zenith National Insurance Corp. ........................................... 250,000 7,031,250
--------------
70,857,494
--------------
Health Services 2.4%
a Access Health, Inc......................................................... 100,000 3,375,000
a,fCohr, Inc. ................................................................ 425,000 3,320,313
McKesson Corp. ............................................................ 50,000 3,534,375
a Total Renal Care Holdings, Inc............................................. 300,000 9,937,500
--------------
20,167,188
--------------
Health Technology 5.2%
a Chiron Corp. .............................................................. 400,000 7,750,000
a Dura Pharmaceuticals, Inc.................................................. 250,000 6,625,000
a Inhale Therapeutic Systems ................................................ 300,000 8,400,000
Mentor Corp. .............................................................. 225,000 6,117,188
a Molecular Devices Corp. ................................................... 180,000 3,037,500
a Nanogen, Inc............................................................... 185,000 1,780,625
a Penederm, Inc.............................................................. 266,800 3,001,500
a The Cooper Companies, Inc.................................................. 173,900 6,684,281
--------------
43,396,094
--------------
Industrial Services 4.0%
a Catalytica, Inc............................................................ 273,400 3,964,300
a Emcon ..................................................................... 275,400 1,377,000
Industrial Services (cont.)
Granite Construction, Inc.................................................. 220,000 $ 6,503,750
a UNOVA, Inc................................................................. 65,000 1,511,250
a Varco International, Inc................................................... 500,000 15,375,000
a Western Atlas, Inc......................................................... 65,000 5,135,000
--------------
33,866,300
--------------
Non-Energy Minerals .8%
Reliance Steel & Aluminum Co. ............................................. 164,000 6,621,500
--------------
Process Industries 1.4%
Avery Dennison Corp. ...................................................... 225,000 11,784,375
--------------
Producer Manufacturing 1.4%
a International Manufacturing Services, Inc.................................. 100,000 993,750
a Simpson Manufacturing Co., Inc............................................. 75,000 3,121,875
Superior Industries International, Inc..................................... 225,000 7,228,125
a US Filter Corp. ........................................................... 25,000 815,625
--------------
12,159,375
--------------
Real Estate 6.9%
Alexandria Real Estate Equities, Inc....................................... 150,000 4,940,625
AMB Property Corp. ........................................................ 250,000 5,750,000
Arden Realty, Inc.......................................................... 450,000 12,628,125
Burnham Pacific Properties, Inc............................................ 575,000 8,121,875
a Catellus Development Corp. ................................................ 325,000 5,789,062
Innkeepers USA Trust ...................................................... 450,000 6,806,250
Irvine Apartment Communities, Inc.......................................... 150,000 4,584,375
c Pacific Retail Trust ...................................................... 359,922 4,678,986
Spieker Properties, Inc.................................................... 125,000 4,953,125
--------------
58,252,423
--------------
a Retail Trade 5.2%
Cost Plus, Inc............................................................. 218,000 7,057,750
Costco Co., Inc............................................................ 150,000 8,381,250
Federated Department Stores, Inc........................................... 100,000 4,918,750
Foodmaker, Inc............................................................. 100,000 1,900,000
Guitar Center, Inc......................................................... 15,000 427,500
Safeway, Inc............................................................... 300,000 11,475,000
Viking Office Products, Inc................................................ 400,000 9,675,000
--------------
43,835,250
--------------
Technology Services 14.1%
a Activision, Inc............................................................ 390,000 4,241,250
Autodesk, Inc.............................................................. 200,000 9,400,000
b Brio Technology, Inc....................................................... 4,700 51,700
a BroadVision, Inc........................................................... 76,900 1,422,650
a Clarify, Inc............................................................... 330,000 4,537,500
a Documentum, Inc............................................................ 75,000 4,040,625
a E*TRADE Group, Inc......................................................... 150,000 3,740,625
Technology Services (cont.)
a Electronic Arts, Inc....................................................... 225,000 $ 10,406,250
a HNC Software, Inc.......................................................... 290,000 11,310,000
a i2 Technologies, Inc....................................................... 75,000 5,006,250
a Integrated Systems, Inc.................................................... 250,000 4,718,750
a Mercury Interactive Corp. ................................................. 100,000 4,050,000
a MetaCreations Corp. ....................................................... 425,000 4,462,500
a Oracle Corp. .............................................................. 100,000 2,587,500
a Parametric Technology Corp. ............................................... 100,000 3,196,880
a PeopleSoft, Inc............................................................ 50,000 2,325,000
a Remedy Corp. .............................................................. 150,000 3,309,375
a Synopsys, Inc.............................................................. 325,000 13,975,000
a Vantive Corp. ............................................................. 330,000 10,560,000
a VERITAS Software Corp. .................................................... 89,700 4,911,075
a Wind River Systems, Inc.................................................... 300,000 10,387,500
--------------
118,640,430
--------------
Transportation 1.8%
Air Express International Corp. ........................................... 300,000 7,875,000
Expeditors International of Washington, Inc................................ 170,000 7,225,000
--------------
15,100,000
--------------
Utilities 3.5%
a AirTouch Communications, Inc............................................... 200,000 10,625,000
California Water Service Group ............................................ 180,000 4,826,250
Enova Corp. ............................................................... 400,000 10,700,000
Southern California Water Co. ............................................. 140,000 3,255,000
--------------
29,406,250
--------------
Total Common Stocks (Cost $646,581,313) ................................... 759,930,621
--------------
Convertible Preferred Stocks .7%
Glenborough Realty Trust, Inc., cvt., pfd., 7.75%, Series A (Cost $6,000,000) 240,000 6,120,000
--------------
PRINCIPAL
AMOUNT
------------
Convertible Bonds 1.7%
Activision, Inc., cvt. sub. notes, 144A, 6.75%,1/1/05 ..................... $ 3,000,000 2,595,000
Heartport, Inc., cvt. deb., 144A, 7.25%, 5/01/04 .......................... 3,500,000 2,646,870
Hexcel Corp., cvt. sub. notes, 7.00%, 8/01/03 ............................. 2,000,000 3,752,500
US Filter Corp., cvt. sub. notes, 4.50%, 12/15/01 ......................... 5,000,000 5,250,000
--------------
Total Convertible Bonds (Cost $13,912,286) ................................ 14,244,370
--------------
Total Long Term Investments (Cost $666,493,599) 780,294,991
--------------
e Repurchase Agreement 7.8%
Joint Repurchase Agreement, 5.487%, 5/01/98,
(Maturity Value $66,067,133) (Cost $66,057,064) ........................... $66,057,064 $ 66,057,064
BancAmerica Robertson Stephens (Maturity Value $5,890,546)
Barclays Capital Group, Inc. (Maturity Value $5,890,546)
Bear, Stearns & Co., Inc. (Maturity Value $3,212,845)
BT Alex Brown, Inc. (Maturity Value $5,890,546)
Chase Securities, Inc. (Maturity Value $3,948,833)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $5,890,546)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $5,890,546)
Greenwich Capital Markets, Inc. (Maturity Value $5,890,545)
Lehman Brothers, Inc. (Maturity Value $5,890,545)
Paribas Corp. (Maturity Value $5,890,545)
SBC Warburg Dillon Read, Inc. (Maturity Value $5,890,545)
UBS Securities, L.L.C. (Maturity Value $5,890,545)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $732,550,663) 100.3% .............................. 846,352,055
Other Assets, less Liabilities (.3%) ...................................... (2,396,971)
--------------
Net Assets 100.0% ......................................................... $843,955,084
==============
</TABLE>
aNon-income producing.
bSufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
cSee Note 8 regarding restricted securities.
eSee Note 1 (c) regarding joint repurchase agreement.
fSee Note 9 regarding holdings of 5% voting securities.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Global Health Care Fund
Class I
------------------------------------------------
Year Ended April 30,
------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $16.11 $19.34 $11.45 $10.43 $ 8.88
------------------------------------------------
Income from investment operations:
Net investment income (loss) ......................... (.14) (.06) .11 .08 .07
Net realized and unrealized gains (losses) ........... 4.58 (2.75) 8.96 1.56 1.86
------------------------------------------------
Total from investment operations ...................... 4.44 (2.81) 9.07 1.64 1.93
------------------------------------------------
Less distributions from:
Net investment income ................................ (.09) (.04) (.13) (.06) (.08)
Net realized gains ................................... (1.18) (.38) (1.05) (.56) (.30)
------------------------------------------------
Total distributions ................................... (1.27) (.42) (1.18) (.62) (.38)
------------------------------------------------
Net asset value, end of year .......................... $19.28 $16.11 $19.34 $11.45 $10.43
================================================
Total return* ......................................... 28.22% (14.71%) 82.78% 16.33% 21.93%
Ratios/supplemental data
Net assets, end of year (000's) ....................... $176,545 $150,653 $108,914 $12,906 $5,795
Ratios to average net assets:
Expenses ............................................. 1.15% 1.14% .73% .25% .10%
Expenses excluding waiver and payments by affiliate .. 1.15% 1.14% 1.16% 1.37% 1.74%
Net investment income (loss) ......................... (.67%) (.39%) .50% .80% .68%
Portfolio turnover rate ............................... 66.84% 73.17% 54.78% 93.79% 110.82%
Average commission rate paid** ........................ $.0358 $.0368 $.0709 -- --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Relates to purchases and sales of equity securities. Prior to fiscal year end
1996 disclosure of average commission rate was not required.
<TABLE>
<CAPTION>
CLASS II
------------------------
YEAR ENDED APRIL 30,
------------------------
1998 19977
------------------------
<S> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................................................. $16.07 $17.37
------------------------
Income from investment operations:
Net investment loss ................................................................ (.20) (.07)
Net realized and unrealized gains (losses) ......................................... 4.48 (.85)
------------------------
Total from investment operations .................................................... 4.28 (.92)
------------------------
Less distributions from:
Net realized gains ................................................................. (1.18) (.38)
------------------------
Net asset value, end of year ........................................................ $19.17 $16.07
========================
Total return* ....................................................................... 27.22% (5.47%)
Ratios/supplemental data
Net assets, end of year (000's) ..................................................... $25,321 $10,099
Ratios to average net assets:
Expenses ........................................................................... 1.90% 1.92%***
Net investment loss ................................................................ (1.44%) (1.29%)***
Portfolio turnover rate ............................................................. 66.84% 73.17%
Average commission rate paid** ...................................................... $.0358 $.0368
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Relates to purchases and sales of equity securities.
***Annualized
7For the period September 3, 1996 (effective date) to April 30, 1997.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 1998
Franklin Global Health Care Fund COUNTRY SHARES VALUE
Common Stocks 93.9%
aAlternate Site Providers 11.8%
<S> <C> <C> <C>
National Surgery Centers, Inc. ............................................. United States 200,000 $ 5,675,000
Renal Care Group, Inc. ..................................................... United States 237,500 9,084,375
Total Renal Care Holdings, Inc. ............................................ United States 275,000 9,109,375
-------------
23,868,750
-------------
aBiotechnology 13.0%
DepoTech Corp. ............................................................. United States 350,000 1,607,830
Ligand Pharmaceuticals, Class B ............................................ United States 325,000 4,712,500
Neurogen Corp. ............................................................. United States 124,600 2,305,100
Serologicals Corp. ......................................................... United States 414,100 12,423,000
Vertex Pharmaceuticals, Inc. ............................................... United States 170,000 5,291,250
-------------
26,339,680
-------------
aHospitals 2.3%
Tenet Healthcare Corp. ..................................................... United States 125,000 4,679,688
-------------
Managed Care and HMOs 3.5%
United Healthcare Corp. .................................................... United States 100,000 7,025,000
-------------
Medical Technology and Supplies 20.2%
aBoston Scientific Corp. ................................................... United States 100,000 7,231,250
Cochlear, Ltd. ............................................................. Australia 225,000 990,227
aESC Medical Systems, Ltd. ................................................. Israel 485,000 15,762,500
Mentor Corp. ............................................................... United States 120,000 3,262,500
aMolecular Devices Corp. ................................................... United States 270,000 4,556,250
aOrthoLogic Corp. .......................................................... United States 500,000 3,000,000
aSomnus Medical Technologies, Inc. ......................................... United States 290,000 3,480,000
aTechnical Chemicals and Products, Inc. .................................... United States 250,000 2,468,750
-------------
40,751,477
-------------
aNursing Homes 3.3%
Assisted Living Concepts, Inc. ............................................. United States 200,000 3,675,000
Centennial Healthcare Corp. ................................................ United States 125,000 2,968,750
-------------
6,643,750
-------------
aMiscellaneous 5.0%
fCohr, Inc. ................................................................ United States 405,500 3,167,969
Healthcare Recoveries, Inc. ................................................ United States 210,000 5,013,750
Pharmaceutical Product Development, Inc. ................................... United States 75,000 1,879,688
-------------
10,061,407
-------------
Pharmaceuticals 3.2%
Novartis, AG ............................................................... Switzerland 3,900 6,448,430
-------------
aPhysician Practice Management 5.0%
Advanced Health Corp. ...................................................... United States 340,000 4,845,000
Pediatrix Medical Group, Inc. .............................................. United States 125,000 5,273,438
-------------
10,118,438
-------------
Software and Information Systems 4.6%
aAccess Health, Inc. ....................................................... United States 100,000 $ 3,375,000
HBO & Co. .................................................................. United States 75,000 4,485,938
aTransitions Systems, Inc. ................................................. United States 67,900 1,527,750
-------------
9,388,688
-------------
aSpecialty Pharmaceuticals 21.3%
Algos Pharmaceutical Corp. ................................................. United States 250,000 8,218,750
Anesta Corp. ............................................................... United States 75,000 1,293,750
fCIMA Labs, Inc. .......................................................... United States 625,000 2,578,122
Dura Pharmaceuticals, Inc. ................................................. United States 150,000 3,975,000
Ethical Holdings, Plc., ADR ................................................ United Kingdom 100,000 187,500
Heska Corp. ................................................................ United States 125,000 1,625,000
Inhale Therapeutic Systems ................................................. United States 251,400 7,039,200
Matrix Pharmaceutical, Inc. ................................................ United States 156,200 702,900
Noven Pharmaceutical, Inc. ................................................. United States 113,800 739,700
fPenederm, Inc. ........................................................... United States 525,000 5,906,250
Shire Pharmaceuticals Group, Plc., ADR ..................................... United States 76,300 1,716,750
Zonagen, Inc. .............................................................. United States 260,000 9,035,000
-------------
43,017,922
-------------
aWholesalers/Distributors .7%
Grupo Casa Autrey, SA de CV, ADR ........................................... Mexico 100,000 1,325,000
-------------
Total Long Term Investments (Cost $166,158,408) ............................ 189,668,230
-------------
PRINCIPAL
AMOUNT
------------
eRepurchase Agreement 3.2%
Joint Repurchase Agreement, 5.487%, 5/01/98 (Maturity Value $6,443,258)
(Cost $6,442,276) ......................................................... United States $6,442,276 6,442,276
BancAmerica Robertson Stephens (Maturity Value $574,481)
Barclays Capital Group, Inc. (Maturity Value $574,481)
Bear, Stearns & Co., Inc. (Maturity Value $313,335)
BT Alex Brown, Inc. (Maturity Value $574,481)
Chase Securities, Inc. (Maturity Value $385,113)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $574,481)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $574,481)
Greenwich Capital Markets, Inc. (Maturity Value $574,481)
Lehman Brothers, Inc. (Maturity Value $574,481)
Paribas Corp. (Maturity Value $574,481)
SBC Warburg Dillon Read, Inc. (Maturity Value $574,481)
UBS Securities, L.L.C. (Maturity Value $574,481)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $172,600,684) 97.1% ................................ 196,110,506
Other Assets, less Liabilities 2.9% ........................................ 5,755,129
-------------
Net Assets 100.0% .......................................................... $201,865,635
=============
</TABLE>
aNon-income producing.
eSee Note 1(c) regarding joint repurchase agreement.
fSee Note 9 regarding holdings of 5% voting securities.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Global Utilities Fund
Class I
-----------------------------------------------
Year Ended April 30,
-----------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $14.46 $14.28 $12.23 $12.60 $11.36
-----------------------------------------------
Income from investment operations:
Net investment income ................................ .33 .42 .37 .42 .30
Net realized and unrealized gains (losses) ........... 4.69 1.35 2.39 (.07) 1.28
-----------------------------------------------
Total from investment operations ...................... 5.02 1.77 2.76 .35 1.58
-----------------------------------------------
Less distributions from:
Net investment income ................................ (.37) (.38) (.39) (.36) (.30)
Net realized gains ................................... (1.75) (1.21) (.32) (.36) (.04)
-----------------------------------------------
Total distributions ................................... (2.12) (1.59) (.71) (.72) (.34)
-----------------------------------------------
Net asset value, end of year .......................... $17.36 $14.46 $14.28 $12.23 $12.60
===============================================
Total return* ......................................... 37.02% 12.94% 23.27% 3.17% 14.04%
Ratios/supplemental data
Net assets, end of year (000's) ....................... $226,594 $174,023 $167,225 $119,250 $124,188
Ratios to average net assets:
Expenses ............................................. 1.03% 1.00% 1.04% 1.12% .84%
Expenses excluding waiver and payments by affiliate .. 1.03% 1.00% 1.04% 1.12% 1.28%
Net investment income ................................ 2.02% 2.82% 2.85% 3.47% 2.95%
Portfolio turnover rate ............................... 45.51% 47.55% 50.51% 16.65% 16.28%
Average commission rate paid** ........................ $.0277 $.0150 $.0313 -- --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Relates to purchases and sales of equity securities. Prior to fiscal year end
1996 disclosure of average commission rate was not required.
<TABLE>
<CAPTION>
Class II
--------------------------
Year Ended April 30,
--------------------------
1998 1997 1996
--------------------------
<S> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................................ $14.37 $14.24 $12.23
--------------------------
Income from investment operations:
Net investment income .................................................... .24 .32 .37
Net realized and unrealized gains ........................................ 4.66 1.33 2.32
--------------------------
Total from investment operations .......................................... 4.90 1.65 2.69
--------------------------
Less distributions from:
Net investment income .................................................... (.27) (.31) (.36)
Net realized gains ....................................................... (1.75) (1.21) (.32)
--------------------------
Total distributions ....................................................... (2.02) (1.52) (.68)
--------------------------
Net asset value, end of year .............................................. $17.25 $14.37 $14.24
==========================
Total return* ............................................................. 36.21% 12.04% 22.63%
Ratios/supplemental data
Net assets, end of year (000's) ........................................... $16,324 $8,467 $2,727
Ratios to average net assets:
Expenses ................................................................. 1.78% 1.77% 1.81%
Net investment income .................................................... 1.29% 1.98% 2.10%
Portfolio turnover rate ................................................... 45.51% 47.55% 50.51%
Average commission rate paid** ............................................ $.0277 $.0150 $.0313
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Relates to purchases and sales of equity securities.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 1998
Franklin Global Utilities Fund COUNTRY SHARES VALUE
<S> <C> <C> <C>
Common Stocks 94.0%
Electric & Gas Utilities 52.3%
Beijing Datang Power Generation Co., Ltd. .................................. Hong Kong 509,000 $ 206,991
BSES, Ltd., 144A ........................................................... India 21,400 351,495
CINergy Corp. .............................................................. United States 67,000 2,336,625
Coastal Corp. .............................................................. United States 34,000 2,428,875
Companhia Paranaense de Energia-Copel, Sponsored ADR ....................... Brazil 41,700 594,225
Dominion Resources, Inc. ................................................... United States 69,700 2,757,506
Duke Energy Corp. .......................................................... United States 155,701 9,011,195
Empresa Nacional de Electricidad, SA, Sponsored ADR ........................ Chile 160,000 2,790,000
Enron Corp. ................................................................ United States 127,000 6,246,813
Entergy Corp. .............................................................. United States 77,000 1,915,375
Espoon Sahko Oy, 144A ...................................................... Finland 195,000 4,832,003
EVN Energie-Versorgung Niederoesterreich, AG ............................... Austria 3,360 496,229
Florida Progress Corp. ..................................................... United States 105,000 4,265,625
FPL Group, Inc. ............................................................ United States 39,000 2,420,438
Hong Kong Electric Holdings, Ltd. .......................................... Hong Kong 687,500 2,112,381
aHuaneng Power International, Inc., Sponsored ADR .......................... China 62,000 1,364,000
Korea Electric Power Corp. ................................................. South Korea 25,530 347,659
Light Servicos de Eletricidade, SA ......................................... Brazil 2,750,000 1,105,769
MCN Corp. .................................................................. United States 26,700 1,007,925
MDU Resources Group, Inc. .................................................. United States 88,800 3,080,250
MidAmerican Energy Holdings Co. ............................................ United States 43,600 921,050
National Fuel Gas Co. ...................................................... United States 109,000 5,014,000
National Power, Plc. ....................................................... United Kingdom 97,500 950,400
New Century Energies, Inc. ................................................. United States 50,000 2,375,000
New Jersey Resources Corp. ................................................. United States 125,400 4,733,850
Northwestern Public Service Co. ............................................ United States 150,000 3,337,500
aNRG Generating (U.S), Inc. ................................................ United States 260,500 3,940,063
OGE Energy Corp. ........................................................... United States 16,700 917,456
Pacific Enterprises ........................................................ United States 176,000 6,853,000
Pacific Gas & Electric Co. ................................................. United States 100,000 3,237,500
Pinnacle West Capital Corp. ................................................ United States 60,000 2,655,000
PowerGen, Plc. ............................................................. United Kingdom 102,000 1,380,545
RWE, AG .................................................................... Germany 70,000 3,580,942
Scottish Power, Plc. ....................................................... United Kingdom 180,000 1,648,498
Shandong Huaneng Power Co., Ltd., Sponsored ADR ............................ China 45,600 330,600
SIG Corp., Inc. ............................................................ United States 61,800 1,826,963
Sonat, Inc. ................................................................ United States 85,000 3,771,875
Southern Co. ............................................................... United States 146,500 3,882,250
Southern Electric, Plc. .................................................... United Kingdom 95,446 885,695
TECO Energy, Inc. ......................................................... United States 126,900 3,378,713
Texas Utilities Co. ........................................................ United States 86,400 3,456,000
TNP Enterprises, Inc. ...................................................... United States 140,000 4,515,000
Tokyo Electric Power Co. ................................................... Japan 48,000 920,911
Tokyo Gas Co., Ltd. ........................................................ Japan 700,000 1,584,046
Transportadora de Gas del Sur, SA, Sponsored ADR ........................... Argentina 179,000 2,069,688
aThe AES Corp. ............................................................. United States 140,000 7,726,250
Viag, AG ................................................................... Germany 2,600 1,327,746
Electric & Gas Utilities (cont.)
Western Resources, Inc. .................................................... United States 1,700 $ 66,406
Wing Shan International, Ltd. .............................................. Hong Kong 340,000 45,649
------------
127,003,975
------------
aElectronic Technology .1%
NCR Corp. .................................................................. United States 4,375 160,508
------------
Telecommunications Services/Equipment 41.6%
aAirTouch Communications, Inc. ............................................. United States 135,150 7,179,844
Alcatel Alsthom ............................................................ France 5,000 926,426
Ameritech Corp. ............................................................ United States 20,000 851,250
aApplied Micro Circuits Corp. .............................................. United States 40,700 1,124,338
aArch Communications Group, Inc. ........................................... United States 285,000 1,620,938
aAscend Communications, Inc. ............................................... United States 13,300 579,381
Bellsouth Corp. ............................................................ United States 50,000 3,209,375
aBroadcom Corp., Class A ................................................... United States 1,000 48,000
aChina Telecom (Hong Kong), Ltd., Sponsored ADR ............................ Hong Kong 109,900 4,244,888
aEsat Telecom Group, Plc., ADR ............................................. Ireland 85,000 2,720,000
aEsprit Telecom Group, Plc., ADR ........................................... United Kingdom 91,900 1,458,913
aGlobal TeleSystems Group, Inc. ............................................ United States 95,300 4,479,100
aGrupo Iusacell, SA, Series D ............................................. Mexico 44,400 53,835
aGrupo Iusacell, SA, Series L, Sponsored ADR .............................. Mexico 73,000 1,414,375
Hellenic Telecommunications Organization, SA ............................... Greece 116,585 3,336,879
aICG Communications, Inc. .................................................. United States 240,000 8,400,000
aIntermedia Communications, Inc. ........................................... United States 56,900 4,152,812
aItron, Inc. ............................................................... United States 104,500 1,600,156
aLightbridge, Inc. ......................................................... United States 100,000 1,200,000
aPaging Network, Inc. ...................................................... United States 275,000 3,867,188
Pakistan Telecommunications Corp., Sponsored GDR ........................... Pakistan 3,127 220,454
Philippine Long Distance Telephone Co., Sponsored ADR ..................... Philippines 10,835 292,555
Portugal Telecom, SA ....................................................... Portugal 119,900 6,443,118
aPrimus Telecommunications Group, Inc. ..................................... United States 13,000 310,375
PT Indosat ................................................................. Indonesia 750,000 1,086,687
PT Indosat, ADR ............................................................ Indonesia 21,200 299,450
aRELTEC Corp. .............................................................. United States 123,000 4,904,625
aRural Cellular Corp., Class A ............................................. United States 95,700 1,698,675
SBC Communications, Inc. ................................................... United States 115,800 4,798,463
Tele Danmark, A/S, Class B ................................................. Denmark 7,830 657,921
Tele Danmark, A/S, Sponsored ADR .......................................... Denmark 133,540 5,608,680
Telecom Corp. of New Zealand, Ltd., ADR .................................... New Zealand 91,400 1,965,100
Telecom Italia, SpA ........................................................ Italy 1,004,767 5,295,589
Telecomunicacoes Brasileiras, SA, Sponsored ADR ............................ Brazil 16,000 1,949,000
Telefonica de Argentina, ADS ............................................... Argentina 34,200 1,318,838
Telefonica de Espana, Sponsored ADR ....................................... Spain 27,110 3,387,056
Telefonica del Peru, SA, Sponsored ADR ..................................... Peru 169,000 3,739,125
Total Access Communication Public Co., Ltd. ................................ Thailand 600,000 834,000
Telecommunications Services/Equipment (cont.)
Videsh Sanchar Nigam, Ltd., Sponsored GDR, 144A ............................ India 140,000 $ 1,732,500
aWorldCom, Inc. ............................................................ United States 50,000 2,139,058
------------
101,148,967
------------
Total Common Stocks (Cost $173,513,333) .................................... 228,313,450
------------
Preferred Stocks .5%
Electric Gas & Utilities
Eletropaulo Metropolitana-Electricidade de Sao Paulo, SA, pfd. ............. Brazil 7,500,000 883,086
aEmpresa Bandeirante de Energia, SA, pfd. .................................. Brazil 7,500,000 255,682
aEmpresa Metropolitana de Aguas e Energia, SA, pfd. ........................ Brazil 7,500,000 14,423
aEmpresa Paulista de Transmissao de Energia Eletrica, SA, pfd. ............. Brazil 7,500,000 51,136
------------
Total Preferred Stock (Cost $1,582,356) .................................... 1,204,327
------------
Convertible Preferred Stocks 2.9%
Telecommunications
cCMS Energy Corp., cvt., pfd. .............................................. United States 35,000 2,091,250
Nortel Inversora, SA, 10.00%, cvt., pfd. ................................... Argentina 80,000 5,040,000
------------
Total Convertible Preferred Stock (Cost $7,079,000) ........................ 7,131,250
------------
Total Long Term Investments (Cost $182,174,689) ............................ 236,649,027
------------
PRINCIPAL
AMOUNT
----------
eRepurchase Agreement 3.8%
Joint Repurchase Agreement, 5.487%, 5/01/98, (Maturity Value $9,253,277)
(Cost $9,251,867).......................................................... United States $9,251,867 9,251,867
BancAmerica Robertson Stephens (Maturity Value $825,022)
Barclays Capital Group, Inc. (Maturity Value $825,022)
Bear, Stearns & Co., Inc. (Maturity Value $449,987)
BT Alex Brown, Inc. (Maturity Value $825,022)
Chase Securities, Inc. (Maturity Value $553,070)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $825,022)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $825,022)
Greenwich Capital Markets, Inc. (Maturity Value $825,022)
Lehman Brothers, Inc. (Maturity Value $825,022)
Paribas Corp. (Maturity Value $825,022)
SBC Warburg Dillon Read, Inc. (Maturity Value $825,022)
UBS Securities, L.L.C. (Maturity Value $825,022)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $191,426,556) 101.2% ............................... 245,900,894
Other Assets, less Liabilities (1.2%) ...................................... (2,982,907)
------------
Net Assets 100.0% .......................................................... $242,917,987
============
</TABLE>
aNon-income producing.
cSee Note 8 regarding restricted securities.
eSee Note 1(c) regarding joint repurchase agreement.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin MidCap Growth Fund
Class I
----------------------------------------------
Year Ended April 30,
----------------------------------------------
1998 1997 1996 1995 19946
----------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $13.34 $14.24 $10.81 $10.05 $10.00
----------------------------------------------
Income from investment operations:
Net investment income (loss) ......................... -- (.02) .18 .21 .15
Net realized and unrealized gains .................... 4.66 .93 3.59 .77 .01
----------------------------------------------
Total from investment operations ...................... 4.66 .91 3.77 .98 .16
----------------------------------------------
Less distributions from:
Net investment income ................................ -- (.05) (.21) (.20) (.08)
Net realized gains ................................... (.56) (1.76) (.13) (.02) (.03)
----------------------------------------------
Total distributions ................................... (.56) (1.81) (.34) (.22) (.11)
----------------------------------------------
Net asset value, end of year .......................... $17.44 $13.34 $14.24 $10.81 $10.05
==============================================
Total return* ......................................... 35.53% 6.31% 35.40% 10.06% 1.62%
Ratios/supplemental data
Net assets, end of year (000's) ....................... $29,864 $12,853 $7,575 $5,591 $5,079
Ratios to average net assets:
Expenses ............................................. 1.17% 1.07% .16% -- --
Expenses excluding waiver and payments by affiliate .. 1.17% 1.07% .96% .98% .91%***
Net investment income (loss) ......................... (.03%) (.22%) 1.42% 2.12% 2.21%***
Portfolio turnover rate ............................... 50.16% 76.35% 102.65% 163.54% 70.53%
Average commission rate paid** ........................ $.0621 $.0550 $.0467 -- --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Relates to purchases and sales of equity securities. Prior to fiscal year end
1996 disclosure of average commission rate was not required.
***Annualized
6For the period August 17, 1993 (effective date) to April 30, 1994.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 1998
Franklin MidCap Growth Fund SHARES VALUE
<S> <C> <C>
Common Stocks 86.2%
Commercial Services 5.6%
a Applied Graphic Technologies, Inc. ........................................ 7,000 $ 350,000
Norrell Corp. ............................................................. 2,600 54,763
a Robert Half International, Inc. ........................................... 6,900 373,463
a Sylvan Learning Systems, Inc. ............................................. 12,500 617,188
a Valassis Communications, Inc. ............................................. 7,000 274,750
-----------
1,670,164
-----------
Consumer Durables 4.3%
Callaway Golf Co. ........................................................ 9,300 253,425
Clayton Homes, Inc. ....................................................... 27,375 549,211
a Electronic Arts, Inc. ..................................................... 6,500 300,625
K2, Inc. .................................................................. 8,000 181,500
-----------
1,284,761
-----------
Consumer Non-Durables 5.6%
a Consolidated Cigar Holdings, Inc. ......................................... 11,200 154,700
a Jones Apparel Group, Inc. ................................................. 10,000 598,125
The Estee Lauder Cos., Inc., Class A ...................................... 8,300 551,431
a Tommy Hilfiger Corp. ...................................................... 5,900 359,900
-----------
1,664,156
-----------
Consumer Services 11.6%
a Apollo Group, Inc., Class A ............................................... 18,000 616,500
a CapStar Hotel Co. ......................................................... 8,600 276,275
a Chancellor Media Corp. .................................................... 5,500 260,906
a DeVry, Inc. ............................................................... 16,100 609,788
a Education Management Corp. ................................................ 7,900 274,525
a Host Marriott Corp. ....................................................... 13,000 252,688
a Mirage Resorts, Inc. ...................................................... 14,000 308,875
a Starbucks Corp. ........................................................... 5,500 264,688
Starwood Hotels & Resorts ................................................ 6,000 301,125
The McClatchy Co., Class A ................................................ 9,800 293,388
-----------
3,458,758
-----------
a Electronic Technology 5.5%
Computer Sciences Corp. ................................................... 5,000 263,750
ICG Communications, Inc. .................................................. 8,400 294,000
Komag, Inc. ............................................................... 13,600 210,800
Seagate Technology, Inc. .................................................. 4,800 128,100
Tellabs, Inc. ............................................................. 8,600 609,525
Western Digital Corp. ..................................................... 6,600 130,350
-----------
1,636,525
-----------
a Energy Minerals 1.0%
Barrett Resources Corp. ................................................... 8,000 297,000
-----------
Finance 9.1%
BankBoston Corp. .......................................................... 2,600 280,638
Countrywide Credit Industries, Inc. ....................................... 6,900 333,788
Finance (cont.)
a E*TRADE Group, Inc. ....................................................... 10,000 $ 249,375
Espirito Santo Financial Group, ADR (Luxembourg) .......................... 11,400 294,263
EVEREN Capital Corp. ...................................................... 5,000 265,938
Hartford Life, Inc., Class A .............................................. 7,600 375,725
a,bHeller Financial, Inc. .................................................... 1,600 43,200
Providian Financial Corp. ................................................. 4,700 282,881
Republic New York Corp. ................................................... 2,000 267,500
The PMI Group, Inc. ....................................................... 4,000 325,000
-----------
2,718,308
-----------
a Health Services 2.0%
HEALTHSOUTH Corp. ........................................................ 9,300 280,744
Total Renal Care Holdings, Inc. ........................................... 9,800 324,625
-----------
605,369
-----------
Health Technology .6%
Mentor Corp. .............................................................. 6,800 184,875
-----------
Industrial Services 7.9%
Diamond Offshore Drilling, Inc. ........................................... 6,000 303,750
a Ispat International, NV, New York Registered Shares ....................... 11,300 316,400
a The AES Corp. ............................................................. 7,200 397,350
Transocean Offshore, Inc. ................................................. 11,800 659,325
a USA Waste Services, Inc. .................................................. 6,500 318,906
a Varco International, Inc. ................................................. 12,400 381,300
-----------
2,377,031
-----------
Process Industries 1.1%
BetzDearborn, Inc. ........................................................ 2,600 139,425
Bowater, Inc. ............................................................. 3,200 179,000
-----------
318,425
-----------
Producer Manufacturing 3.8%
a EVI, Inc. ................................................................. 7,100 378,075
a Gentex Corp. .............................................................. 5,100 172,125
Mark IV Industries, Inc. .................................................. 13,450 283,291
a US Filter Corp. ........................................................... 9,500 309,930
-----------
1,143,421
-----------
Real Estate Investment Trusts 3.4%
Arden Realty, Inc. ........................................................ 10,300 289,044
Meridian Industrial Trust, Inc. ........................................... 10,300 238,188
a Security Capital Group, Inc., Class B ..................................... 16,200 490,050
-----------
1,017,282
-----------
Retail 8.2%
a Consolidated Stores Corp. ................................................. 8,000 320,000
a Cost Plus, Inc. ........................................................... 10,000 323,750
Family Dollar Stores, Inc. ................................................ 10,000 340,000
Retail (cont.)
a Guitar Center, Inc. ....................................................... 5,300 $ 151,050
a Safeway, Inc. ............................................................. 8,000 306,000
Talbots, Inc. ............................................................. 10,000 190,000
a Viking Office Products, Inc. .............................................. 21,000 507,938
a West Marine, Inc. ......................................................... 11,800 295,738
-----------
2,434,476
-----------
Semiconductors 4.8%
a Adaptec, Inc. ............................................................. 11,700 277,144
a Altera Corp. ............................................................. 6,900 279,450
a Analog Devices, Inc. ...................................................... 6,666 259,557
a Broadcom Corp., Class A ................................................... 100 4,800
Linear Technology Corp. .................................................. 3,800 305,900
a Xilinx, Inc. .............................................................. 6,600 301,950
-----------
1,428,801
-----------
a Technology Services 5.8%
Affiliated Computer Services, Inc., Class A ............................... 4,500 158,063
BMC Software, Inc. ....................................................... 3,000 280,688
Cambridge Technology Partners, Inc. ....................................... 7,200 376,200
Parametric Technology Corp. ............................................... 11,400 364,444
RELTEC Corp. .............................................................. 2,800 111,650
Sterling Commerce, Inc. ................................................... 4,711 200,512
Synopsys, Inc. ............................................................ 5,600 240,800
-----------
1,732,357
-----------
Transportation 2.9%
C.H. Robinson Worldwide, Inc. ............................................. 15,600 356,850
Expeditors International of Washington, Inc. .............................. 12,000 510,000
-----------
866,850
-----------
a Utilities 3.0%
Intermedia Communications, Inc. ........................................... 4,600 335,728
Millicom International Cellular, SA (Luxembourg) .......................... 6,800 266,050
Paging Network, Inc. ...................................................... 22,000 309,375
-----------
911,153
-----------
Total Long Term Investments (Cost $19,759,908) ............................ 25,749,712
-----------
e Repurchase Agreement 14.6%
Joint Repurchase Agreement, 5.487%, 5/01/98,
(Maturity Value $4,355,767) (Cost $4,355,103) ............................. $4,355,103 $ 4,355,103
BancAmerica Robertson Stephens (Maturity Value $388,360)
Barclays Capital Group, Inc. (Maturity Value $388,360)
Bear, Stearns & Co., Inc. (Maturity Value $211,821)
BT Alex Brown, Inc. (Maturity Value $388,360)
Chase Securities, Inc. (Maturity Value $260,346)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $388,360)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $388,360)
Greenwich Capital Markets, Inc. (Maturity Value $388,360)
Lehman Brothers, Inc. (Maturity Value $388,360)
Paribas Corp. (Maturity Value $388,360)
SBC Warburg Dillon Read, Inc. (Maturity Value $388,360)
UBS Securities, L.L.C. (Maturity Value $388,360)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $24,115,011) 100.8% ............................... 30,104,815
Other Assets, less Liabilities (.8%) ...................................... (241,153)
-----------
Net Assets 100.0% ......................................................... $29,863,662
===========
</TABLE>
aNon-income producing.
bSufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
eSee Note 1(c) regarding joint repurchase agreement.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Natural Resources Fund
Class I
-----------------------
Year Ended April 30,
-----------------------
1998 1997 19963
-----------------------
<S> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................................ $14.07 $13.14 $10.00
-----------------------
Income from investment operations:
Net investment income .................................................... .10 .09 .08
Net realized and unrealized gains ........................................ 2.26 1.25 3.22
-----------------------
Total from investment operations .......................................... 2.36 1.34 3.30
-----------------------
Less distributions from:
Net investment income .................................................... (.09) (.09) (.06)
Net realized gains ....................................................... (.88) (.32) (.10)
-----------------------
Total distributions ....................................................... (.97) (.41) (.16)
-----------------------
Net asset value, end of year .............................................. $15.46 $14.07 $13.14
=======================
Total return* ............................................................. 17.57% 10.23% 33.36%
Ratios/supplemental data
Net assets, end of year (000's) ........................................... $62,274 $45,386 $9,909
Ratios to average net assets:
Expenses ................................................................. .96% .98% .99%***
Expenses excluding waiver and payments by affiliate ...................... 1.31% 1.31% 1.77%***
Net investment income .................................................... .67% .72% 1.16%***
Portfolio turnover rate ................................................... 72.93% 46.31% 59.04%
Average commission rate paid** ............................................ $.0305 $.0331 $.0517
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Relates to purchases and sales of equity securities.
***Annualized
3For the period June 5, 1995 (effective date) to April 30, 1996.
<TABLE>
<CAPTION>
Advisor Class
---------------------
Year Ended April 30,
---------------------
1998 19978
---------------------
<S> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................................................. $14.07 $14.66
---------------------
Income from investment operations:
Net investment income .............................................................. .23 --
Net realized and unrealized gains (losses) ......................................... 2.20 (.59)
---------------------
Total from investment operations .................................................... 2.43 (.59)
---------------------
Less distributions from:
Net investment income .............................................................. (.14) --
Net realized gains ................................................................. (.88) --
---------------------
Total distributions ................................................................. (1.02) --
---------------------
Net asset value, end of year ........................................................ $15.48 $14.07
=====================
Total return* ....................................................................... 18.11% (4.02%)
Ratios/supplemental data
Net assets, end of year (000's) ..................................................... $892 $1,123
Ratios to average net assets:
Expenses ........................................................................... .64% .64%***
Expenses excluding waiver and payments by affiliate ................................ 1.03% .86%***
Net investment income .............................................................. 1.02% 1.03%***
Portfolio turnover rate ............................................................. 72.93% 46.31%
Average commission rate paid** ...................................................... $.0305 $.0331
</TABLE>
*Total return is not annualized.
**Relates to purchases and sales of equity securities.
***Annualized
8For the period January 2, 1997 (effective date) to April 30, 1997.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 1998
SHARES/
Franklin Natural Resources Fund COUNTRY WARRANTS VALUE
<S> <C> <C> <C>
Common Stocks and Warrants 87.7%
aCapital Goods/Containers 1.5%
Owens-Illinois, Inc. ...................................................... United States 12,500 $ 494,531
Pentacon, Inc. ............................................................. United States 18,000 238,500
Ritchie Bros. Auctioneers, Inc. ............................................ Canada 8,900 239,744
-------------
972,775
-------------
Chemicals 7.5%
aAirgas, Inc. .............................................................. United States 20,000 310,000
Avery Dennison Corp. ...................................................... United States 5,700 298,538
BetzDearborn, Inc. ......................................................... United States 9,000 482,625
Du Pont (EI) De Nemours and Co. ............................................ United States 4,000 291,250
Hanna (M.A.) Co. ........................................................... United States 40,000 917,500
IMC Global, Inc. ........................................................... United States 10,000 360,000
Monsanto Co. ............................................................... United States 3,000 158,625
Potash Corp. of Saskatchewan, Inc. ........................................ Canada 11,385 1,016,823
Praxair, Inc. ............................................................. United States 18,400 925,750
-------------
4,761,111
-------------
Forest Products and Paper 3.8%
Asia Pulp & Paper Co., Ltd., ADR ........................................... Singapore 55,800 812,588
Bowater, Inc. ............................................................. United States 5,600 313,250
Champion International Corp. ............................................... United States 7,400 398,213
Crown Cork & Seal Co., Inc. ................................................ United States 11,000 572,688
Willamette Industries, Inc. ................................................ United States 7,000 271,688
-------------
2,368,427
-------------
Iron/Steel 6.1%
Carpenter Technology Corp. ................................................. United States 12,900 749,006
Companhia Vale do Rio Doce, Sponsored ADR .................................. Brazil 22,000 519,231
aGibraltar Steel Corp. .................................................... United States 18,500 444,000
aIspat International, NV, New York Registered Shares ....................... Netherlands 18,700 523,600
Nucor Corp. ................................................................ United States 11,400 683,288
Pohang Iron & Steel Co., Ltd., Sponsored ADR .............................. South Korea 32,500 578,906
Worthington Industries, Inc. .............................................. United States 18,000 323,438
-------------
3,821,469
-------------
Metal - Diversified 2.3%
Austral Coal, Ltd. ........................................................ Australia 1,313,000 410,917
Freeport-McMoRan Copper & Gold, Inc., Class A .............................. United States 11,700 208,406
Freeport-McMoRan Copper & Gold, Inc., Class B .............................. United States 8,000 150,500
Rio Tinto, Plc. ............................................................ United Kingdom 46,000 661,054
aTenke Mining Corp., warrants .............................................. Canada 4,500 --
-------------
1,430,877
-------------
Mining - Precious Metals 8.9%
aAber Resources, Ltd. ...................................................... Canada 55,000 624,847
Barrick Gold Corp. ......................................................... Canada 28,000 628,250
aCanyon Resources Corp., warrants .......................................... United States 7,000 --
Compania de Minas Buenaventura, SA, Class B ................................ Peru 1,235 9,625
Mining - Precious Metals (cont.)
Compania de Minas Buenaventura, SA, Sponsored ADR .......................... Peru 17,149 $ 265,810
De Beers Consolidated Mines, AG, ADR ....................................... South Africa 32,000 824,000
aEquinox Resources, NL .................................................... Australia 330,000 34,426
Euro-Nevada Mining Corp. ................................................... Canada 53,900 970,339
Franco-Nevada Mining Corp. ................................................. Canada 36,000 880,903
aMinefinders Corp., Ltd. ................................................... Canada 124,300 171,197
Newmont Mining Corp. ...................................................... United States 18,735 603,033
Placer Dome, Inc. .......................................................... Canada 42,600 628,350
-------------
5,640,780
-------------
Oil/Gas Distribution 3.3%
Enron Corp. ................................................................ United States 20,300 998,506
aThe AES Corp. ............................................................. United States 19,460 1,073,949
-------------
2,072,455
-------------
Oil/Gas - Domestic 2.2%
Atlantic Richfield Co. (ARCO) .............................................. United States 10,000 780,000
Unocal Corp. ............................................................... United States 15,400 630,438
-------------
1,410,438
-------------
Oil/Gas - Equipment & Services 25.2%
aAtwood Oceanics, Inc. ..................................................... United States 17,800 973,438
Baker Hughes, Inc. ......................................................... United States 13,000 526,500
Coflexip, SA, Sponsored ADR ................................................ France 12,000 855,000
aCore Laboratories, NV ..................................................... Netherlands 16,100 456,838
Diamond Offshore Drilling, Inc. ............................................ United States 39,800 2,014,875
ENSCO International, Inc. .................................................. United States 11,000 310,750
aEVI, Inc. ................................................................. United States 36,000 1,917,000
Halliburton Co. ........................................................... United States 6,000 330,000
aMarine Drilling Cos., Inc. ................................................ United States 20,000 486,250
aR & B Falcon Corp. ........................................................ United States 16,800 538,650
aRowan Cos., Inc. .......................................................... United States 8,500 250,219
Schlumberger, Ltd. ......................................................... United States 2,500 207,188
aStolt Comex Seaway, SA .................................................... United Kingdom 16,600 539,500
aTesco Corp. .............................................................. Canada 27,000 439,822
Tidewater, Inc. ............................................................ United States 12,500 495,313
aTransCoastal Marine Services, Inc. ........................................ United States 40,000 460,000
Transocean Offshore, Inc. .................................................. United States 30,000 1,676,250
aTuboscope, Inc. ........................................................... United States 24,600 582,712
aVarco International, Inc. ................................................. United States 70,200 2,158,650
aWeatherford Enterra, Inc. ................................................ United States 14,500 725,906
-------------
15,944,861
-------------
Oil/Gas - Exploration 19.7%
aAbacan Resource Corp. .................................................... Canada 186,500 234,697
aBarrett Resources Corp. .................................................. United States 70,300 2,609,887
aBasin Exploration, Inc. ................................................... United States 39,000 775,125
aBenton Oil & Gas Co. ...................................................... United States 10,000 121,875
Oil/Gas - Exploration (cont.)
Devon Energy Corp. ......................................................... United States 21,800 $ 869,275
aGulf Canada Resources, Ltd. ............................................... Canada 311,500 1,654,843
aMagnum Hunter Resources, Inc. ............................................. United States 94,000 640,375
aNational Energy Group, Inc. ............................................... United States 130,000 320,943
aNewfield Exploration Co. .................................................. United States 42,000 1,018,500
aNuevo Energy Co. .......................................................... United States 36,500 1,300,313
aOcean Energy, Inc. ........................................................ United States 38,420 941,290
Patina Oil & Gas Corp. ..................................................... United States 69,500 486,500
aTitan Exploration, Inc. ................................................... United States 96,600 802,988
aTriton Energy, Ltd. ....................................................... United States 17,000 682,125
-------------
12,458,736
-------------
Oil/Gas - International 3.8%
Royal Dutch Petroleum Co., New York Shares ................................ Netherlands 8,400 475,125
Total, SA, Sponsored ADR .................................................. France 8,640 507,600
YPF, SA, Sponsored ADR .................................................... Argentina 40,500 1,412,437
-------------
2,395,162
-------------
Real Estate Investment Trusts 2.7%
Alexandria Real Estate Equities, Inc. ...................................... United States 11,300 372,193
Arden Realty, Inc. ......................................................... United States 15,000 420,937
Starwood Hotels & Resorts .................................................. United States 7,300 366,368
Storage Trust Realty ...................................................... United States 22,700 550,475
-------------
1,709,973
-------------
aWaste Management/Environmental Services .7%
American Disposal Services, Inc. ........................................... United States 10,700 429,004
-------------
Total Common Stocks and Warrants (Cost $48,831,413) ........................ 55,416,068
-------------
Convertible Preferred Stocks .8%
Timet Capital Trust, 6.625%, cvt., pfd., 144A .............................. United States 4,600 221,950
USX Corp., 6.75%, cvt., pfd. .............................................. United States 14,000 290,500
-------------
Total Convertible Preferred Stocks (Cost $526,650) ......................... 512,450
-------------
PRINCIPAL
AMOUNT*
aConvertible Bonds .9%
Dayton Mining Corp., cvt. sub. notes, 144A, 7.00%, 4/01/02 (Cost $800,000) . Canada $ 800,000 CAD552,000
-------------
Total Long Term Investments ($50,158,063) .................................. 56,480,518
-------------
eRepurchase Agreement 14.2%................................................. United Kingdom
Joint Repurchase Agreement, 5.487%, 5/01/98, (Maturity Value $8,988,996)
(Cost $8,987,626) ......................................................... United States $8,987,626 $ 8,987,626
BancAmerica Robertson Stephens (Maturity Value $801,459)
Barclays Capital Group, Inc. (Maturity Value $801,459)
Bear, Stearns & Co., Inc. (Maturity Value $437,135)
BT Alex Brown, Inc. (Maturity Value $801,459)
Chase Securities, Inc. (Maturity Value $537,271)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $801,459)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $801,459)
Greenwich Capital Markets, Inc. (Maturity Value $801,459)
Lehman Brothers, Inc. (Maturity Value $801,459)
Paribas Corp. (Maturity Value $801,459)
SBC Warburg Dillon Read, Inc. (Maturity Value $801,459)
UBS Securities, L.L.C. (Maturity Value $801,459)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $59,145,689) 103.6% ................................ 65,468,144
Other Assets, less Liabilities (3.6%) ...................................... (2,302,109)
-------------
Net Assets 100.0%........................................................... $63,166,035
=============
</TABLE>
See glossary of currency abbreviations on page 140.
*Securities traded in U.S. dollars unless otherwise indicated.
aNon-income producing.
eSee Note 1(c) regarding joint repurchase agreement.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Small Cap Growth Fund
Class I
------------------------------------------------
Year Ended April 30,
------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $18.96 $19.75 $14.90 $12.75 $10.22
------------------------------------------------
Income from investment operations:
Net investment income .............................. .07 .03 .01 .03 .03
Net realized and unrealized gains .................. 7.92 .04 6.23 3.14 2.94
------------------------------------------------
Total from investment operations .................... 7.99 .07 6.24 3.17 2.97
------------------------------------------------
Less distributions from:
Net investment income .............................. (.09) (.06) (.01) (.02) (.04)
Net realized gains ................................. (.93) (.80) (1.38) (1.00) (.40)
------------------------------------------------
Total distributions ................................. (1.02) (.86) (1.39) (1.02) (.44)
------------------------------------------------
Net asset value, end of year ........................ $25.93 $18.96 $19.75 $14.90 $12.75
================================================
Total return* ....................................... 43.09% 0.14% 44.06% 27.05% 29.26%
Ratios/supplemental data
Net assets, end of year (000's) ..................... $3,957,972 $1,071,352 $444,912 $63,010 $23,915
Ratios to average net assets:
Expenses ........................................... .89% .92% .97% .69% .30%
Expenses excluding waiver and payments by affiliate .89% .92% 1.00% 1.16% 1.58%
Net investment income .............................. .32% .10% .09% .25% .24%
Portfolio turnover rate ............................. 42.97% 55.27% 87.92% 104.84% 89.60%
Average commission rate paid** ...................... $.0535 $.0499 $.0505 -- --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Relates to purchases and sales of equity securities. Prior to fiscal year end
1996 disclosure of average commission rate was not required.
<TABLE>
<CAPTION>
Class II
----------------------------
Year Ended April 30,
----------------------------
1998 1997 19964
----------------------------
<S> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................................ $18.78 $19.66 $17.94
----------------------------
Income from investment operations:
Net investment income (loss) ............................................. (.02) (.05) (.03)
Net realized and unrealized gains (losses) ............................... 7.76 (.03) 2.71
----------------------------
Total from investment operations .......................................... 7.74 (.08) 2.68
----------------------------
Less distributions from:
Net realized gains ....................................................... (.93) (.80) (.96)
----------------------------
Total distributions ....................................................... (.93) (.80) (.96)
----------------------------
Net asset value, end of year .............................................. $25.59 $18.78 $19.66
============================
Total return* ............................................................. 42.06% (.65%) 15.98%
Ratios/supplemental data
Net assets, end of year (000's) ........................................... $731,707 $146,164 $24,102
Ratios to average net assets:
Expenses ................................................................. 1.64% 1.69% 1.76%***
Net investment loss ...................................................... (.42%) (.70%) (.69%)***
Portfolio turnover rate ................................................... 42.97% 55.27% 87.92%
Average commission rate paid** ............................................ $.0535 $.0499 $.0505
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Relates to purchases and sales of equity securities.
***Annualized
4For the period October 1, 1995 (effective date) to April 30, 1996.
<TABLE>
<CAPTION>
Advisor Class
------------------------
Year Ended April 30,
------------------------
1998 19978
------------------------
<S> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................................................. $18.97 $20.48
------------------------
Income from investment operations:
Net investment income .............................................................. .09 .01
Net realized and unrealized gains (losses) ......................................... 8.01 (1.52)
------------------------
Total from investment operations .................................................... 8.10 (1.51)
------------------------
Less distributions from:
Net investment income .............................................................. (.13) --
Net realized gains ................................................................. (0.93) --
------------------------
Total distributions ................................................................. (1.06) --
------------------------
Net asset value, end of year ........................................................ $26.01 $18.97
========================
Total return* ....................................................................... 43.68% (7.37%)
Ratios/supplemental data
Net assets, end of year (000's) ..................................................... $118,683 $18,777
Ratios to average net assets:
Expenses ........................................................................... .64% .69%***
Net investment income .............................................................. .58% .30%***
Portfolio turnover rate ............................................................. 42.97% 55.27%
Average commission rate paid** ...................................................... $.0535 $.0499
</TABLE>
*Total return is not annualized.
**Relates to purchases and sales of equity securities.
***Annualized
8For the period January 2, 1997 (effective date) to April 30, 1997.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 1998
SHARES/
Franklin Small Cap Growth Fund RIGHTS VALUE
<S> <C> <C>
Common Stocks and Rights 89.4%
Commercial Services 5.0%
a,fApplied Graphics Technologies, Inc. ...................................... 960,100 $ 48,005,000
a Charles River Associates, Inc. ............................................ 18,400 441,600
Norrell Corp. ............................................................. 931,100 19,611,294
a NOVA Corp. ................................................................ 486,500 16,541,000
a Paymentech, Inc. .......................................................... 730,000 14,006,875
a Pegasystems, Inc. ......................................................... 456,300 8,555,625
a,fRemedyTemp, Inc., Class A ................................................ 319,300 10,137,775
a,fSOS Staffing Services, Inc. .............................................. 872,400 19,192,800
a Sylvan Learning Systems, Inc. ............................................. 458,600 22,643,375
a Valassis Communications, Inc. ............................................. 1,042,400 40,914,200
Wallace Computer Services, Inc. ........................................... 1,040,600 37,526,638
----------------
237,576,182
----------------
Consumer Durables 1.5%
a,fActivision, Inc............................................................ 1,344,400 14,620,350
Electronic Arts, Inc. ..................................................... 200,000 9,250,000
f K2, Inc. .................................................................. 960,500 21,791,344
a,fRockShox, Inc. ......................................................... 965,800 5,432,625
a Sola International, Inc. .................................................. 534,800 22,729,000
----------------
73,823,319
----------------
Consumer Non-Durables 2.5%
Alberto-Culver Co. ........................................................ 793,100 21,215,425
a,fConsolidated Cigar Holdings, Inc. ........................................ 988,300 13,650,894
a North Face, Inc. .......................................................... 486,400 10,913,600
a Tommy Hilfiger Corp. ...................................................... 898,900 54,832,900
a,fTropical Sportswear International Corp. ................................... 413,200 7,024,400
a,fVans, Inc. ................................................................ 1,045,500 12,349,969
----------------
119,987,188
----------------
a Consumer Services 3.3%
AMF Bowling, Inc. ......................................................... 1,343,100 38,865,956
f CapStar Hotel Co. ......................................................... 1,330,000 42,726,250
DeVry, Inc. ............................................................... 532,400 20,164,650
Foodmaker, Inc. ........................................................... 100,000 1,900,000
f Marquee Group, Inc. ....................................................... 1,327,500 5,973,750
Prime Hospitality Corp. ................................................... 1,720,500 35,592,844
Rio Hotel and Casino, Inc. ................................................ 283,600 6,416,450
Vail Resorts, Inc. ........................................................ 295,800 8,652,150
----------------
160,292,050
----------------
a Electronic Technology 17.4%
f Advanced Energy Industries, Inc. .......................................... 1,374,300 20,442,713
Advanced Fibre Communications, Inc. ....................................... 100,000 4,237,500
Alliant Techsystems, Inc. ................................................. 271,200 17,339,850
Broadcom Corp., Class A ................................................... 18,300 878,400
f Coherent, Inc. ............................................................ 1,763,400 41,880,750
Etec Systems, Inc. ........................................................ 983,000 55,785,250
a Electronic Technology (cont.)
Flextronics International Ltd. ............................................ 200,000 $ 9,500,000
FLIR Systems, Inc. ........................................................ 184,800 3,811,500
FSI International, Inc. ................................................... 198,000 2,326,500
Gemstar International Group Ltd. .......................................... 527,300 20,366,963
f Harmonic Lightwaves, Inc. ................................................. 961,500 16,826,250
f H.T.E., Inc. .............................................................. 665,400 18,631,200
f Itron, Inc. ............................................................... 1,157,700 17,727,281
Jabil Circuit, Inc. ....................................................... 626,700 22,012,838
f Ladish Company, Inc. ...................................................... 802,300 12,435,650
Lattice Semiconductor Corp. ............................................... 706,500 32,234,063
Level One Communications, Inc. ............................................ 450,000 14,006,250
f Komag, Inc. ............................................................... 3,811,600 59,079,800
f Natural Microsystems Corp. ................................................ 646,600 20,852,850
Novellus Systems, Inc. .................................................... 500,000 23,937,500
f Perceptron, Inc. .......................................................... 793,500 12,100,875
PMC-Sierra, Inc. .......................................................... 1,065,300 48,471,150
PRI Automation, Inc. ...................................................... 162,000 4,333,500
f Rainbow Technologies, Inc. ................................................ 532,000 13,167,000
Read-Rite Corp. ........................................................... 1,903,700 26,294,856
RELTEC Corp. .............................................................. 470,000 18,741,250
Sanmina Corp. ............................................................. 209,100 18,819,000
Security Dynamics ......................................................... 650,000 15,681,250
f Spectra-Physics Lasers, Inc. .............................................. 1,016,300 18,166,363
f Spectralink Corp. ......................................................... 1,050,000 4,593,750
SpeedFam International, Inc. .............................................. 200,000 5,800,000
Synopsys, Inc. ............................................................ 1,305,000 56,115,000
Tekelec ................................................................... 1,111,800 55,867,950
Tracor, Inc. .............................................................. 1,209,500 47,548,469
f Transcrypt International, Inc. ............................................ 1,212,700 7,870,423
Trident Microsystems, Inc. ................................................ 539,600 4,131,339
TriStar Aerospace Co. ..................................................... 298,700 4,928,550
VLSI Technology, Inc. ..................................................... 200,000 4,125,000
Waters Corp. .............................................................. 869,800 46,534,300
Western Digital Corp. ..................................................... 375,000 7,406,250
----------------
835,009,383
----------------
Energy Minerals 4.2%
a Abacan Resource Corp. (Canada) ............................................ 2,356,400 2,965,372
a Abacan Resource Corp. ..................................................... 1,909,600 2,446,770
a,fBarrett Resources Corp. ................................................... 1,683,900 62,514,788
a Denbury Resources, Inc. ................................................... 1,003,800 16,813,650
Devon Energy Corp. ........................................................ 331,500 13,218,563
f Lomak Petroleum, Inc. ..................................................... 1,890,000 26,105,625
a Newfield Exploration Co. .................................................. 938,600 22,761,050
a Titan Exploration, Inc. ................................................... 1,645,700 13,679,881
a,fTom Brown, Inc. ........................................................... 2,095,800 43,225,875
----------------
203,731,574
----------------
Finance 9.8%
a Affiliated Managers Group, Inc. ........................................... 685,800 $ 25,460,325
a Amerin Corp. .............................................................. 583,500 18,562,594
Arden Realty, Inc. ........................................................ 1,330,400 37,334,350
CNB Bancshares, Inc. ...................................................... 47,000 2,303,000
Camden Property Trust ..................................................... 700,000 20,518,750
a E*TRADE Group, Inc. ....................................................... 700,000 17,456,250
Espirito Santo Financial Group, ADR (Luxembourg) .......................... 1,324,600 34,191,238
EVEREN Capital Corp. ...................................................... 350,000 18,615,625
Executive Risk, Inc. ...................................................... 426,400 28,435,550
FelCor Suite Hotels, Inc. ................................................. 637,300 22,305,500
Financial Security Assurance Holdings Ltd. ................................ 99,700 5,969,538
a Freedom Securities Corp. .................................................. 198,300 4,399,781
HCC Insurance Holdings, Inc. .............................................. 556,500 12,103,875
a HealthCare Financial Partners, Inc. ....................................... 288,900 14,553,338
a,bHeller Financial, Inc. .................................................... 267,400 7,219,800
f Innkeepers USA Trust ...................................................... 2,102,800 31,804,850
Life Real Estate Corp. .................................................... 265,600 19,123,200
Life USA Holding, Inc. .................................................... 586,100 8,864,763
Nationwide Financial Services, Inc., Class A .............................. 934,600 40,538,275
Omega Healthcare Investors, Inc. .......................................... 150,000 5,212,500
a Omega Worldwide, Inc. ..................................................... 39,787 335,703
a Omega Worldwide, Inc., rights ............................................. 9,946 9,324
a Risk Capital Holdings, Inc. ............................................... 761,900 19,095,119
Scor, Sponsored ADR (France) .............................................. 311,000 19,163,109
a Silicon Valley Bancshares ................................................. 490,600 32,011,650
Storage Trust Realty ...................................................... 597,400 14,486,950
Tower Realty Trust, Inc. .................................................. 120,900 2,856,263
Waddell and Reed Financial, Inc. .......................................... 98,400 2,435,400
Winston Hotels, Inc. ...................................................... 490,500 6,100,594
----------------
471,467,214
----------------
a Health Services 5.9%
f Access Health, Inc. ....................................................... 975,750 32,931,563
f Advanced Health Corp. ..................................................... 970,000 13,822,500
American Dental Partners, Inc. ............................................ 109,100 1,922,888
Medaphis Corp. ............................................................ 1,977,800 18,171,038
National Surgery Centers, Inc. ............................................ 336,500 9,548,188
PAREXEL International Corp. ............................................... 400,000 13,400,000
f Pediatrix Medical Group, Inc. ............................................. 1,101,500 46,469,531
Pharmaceutical Product Development, Inc. .................................. 1,000,000 25,062,500
PhyCor, Inc. .............................................................. 2,000,000 45,500,000
Renal Care Group, Inc. .................................................... 869,200 33,246,900
The Cooper Companies, Inc. ................................................ 250,000 9,609,375
Total Renal Care Holdings, Inc. ........................................... 791,666 26,223,936
Transitions Systems, Inc. ................................................. 307,300 6,914,250
----------------
282,822,669
----------------
Health Technology 3.9%
a,fDepoTech Corp. ............................................................ 995,700 $ 4,574,047
a Heska Corp. ............................................................... 620,100 8,061,300
a,fInhale Therapeutic Systems ................................................ 811,000 22,708,000
Mentor Corp. .............................................................. 496,200 13,490,437
a Neurogen Corp. ............................................................ 492,000 9,102,000
a OrthoLogic Corp. .......................................................... 1,250,000 7,500,000
a,fPenederm, Inc. ............................................................ 531,200 5,976,000
a,fSerologicals Corp. ........................................................ 1,381,800 41,454,000
a Uniphase Corp. ............................................................ 823,100 44,653,175
a Vertex Pharmaceuticals, Inc. .............................................. 499,200 15,537,600
a Zonagen, Inc. ............................................................. 448,800 15,595,800
----------------
188,652,359
----------------
a Industrial Services 6.7%
American Disposal Services, Inc. .......................................... 962,700 38,598,301
f Atwood Oceanics, Inc. ..................................................... 1,216,600 66,532,813
Catalytica, Inc. .......................................................... 2,058,633 29,850,178
f Core Laboratories, NV (Netherlands) ....................................... 1,700,900 48,263,038
Tuboscope, Inc. ........................................................... 678,400 16,069,600
f U.S. Liquids, Inc. ........................................................ 726,200 17,519,575
f Varco International, Inc. ................................................. 3,462,500 106,471,875
----------------
323,305,380
----------------
Non-Energy Minerals 1.1%
Carpenter Technology Corp. ................................................ 874,500 50,775,656
----------------
Process Industries .4%
ChemFirst, Inc. ........................................................... 715,000 19,036,875
----------------
Producer Manufacturing 3.0%
a Cable Design Technologies ................................................. 400,000 10,650,000
a Gentex Corp. .............................................................. 1,035,700 34,954,875
a,fGibraltar Steel Corp. ................................................... 1,012,800 24,307,200
JLG Industries, Inc. ...................................................... 1,262,700 20,597,794
Reliance Steel & Aluminum Co. ............................................. 580,000 23,417,500
Roper Industries, Inc. .................................................... 1,033,800 32,047,800
----------------
145,975,169
----------------
Retail Trade 1.6%
a Guitar Center, Inc. ....................................................... 556,800 15,868,800
a N2K, Inc. ................................................................. 55,100 1,384,388
Talbots, Inc. ............................................................. 1,254,700 23,839,300
a,fWest Marine, Inc........................................................... 1,474,800 36,962,175
----------------
78,054,663
----------------
a Technology Services 14.8%
Affiliated Computer Services, Inc., Class A ............................... 1,662,300 58,388,288
Arbor Software Corp. ...................................................... 306,800 14,438,775
Aspect Development, Inc. .................................................. 200,000 12,662,500
a Technology Services (cont.)
Aspen Technologies, Inc. .................................................. 489,200 $ 23,909,650
Borland International, Inc. ............................................... 1,200,000 12,000,000
b Brio Technology, Inc. ..................................................... 26,000 286,000
BroadVision, Inc. ......................................................... 223,100 4,127,350
Business Objects SA, ADR (France) ......................................... 806,200 15,217,025
Cambridge Technology Partners, Inc. ....................................... 322,100 16,829,725
Check Point Software Technologies, Ltd. ................................... 316,500 9,297,188
f Clarify, Inc. ............................................................. 1,297,200 17,836,500
Concord Communications, Inc. .............................................. 400,000 9,900,000
CSG Systems International, Inc. ........................................... 152,500 6,938,750
Documentum, Inc. .......................................................... 511,600 27,562,450
Envoy Corp. ............................................................... 605,800 25,519,325
Genesys Telecommunications Laboratories, Inc. ............................. 100,000 2,993,750
Harbinger Corp. ........................................................... 1,129,400 41,081,925
HNC Software, Inc. ........................................................ 1,079,900 42,116,100
Hyperion Software Corp. ................................................... 107,500 4,662,813
i2 Technologies, Inc. ..................................................... 348,800 23,282,400
Information Advantage, Inc. ............................................... 420,400 4,046,350
f Integrated Systems, Inc. .................................................. 2,091,300 39,473,288
International Network Services ............................................ 924,500 31,086,313
Intuit, Inc. .............................................................. 100,000 5,318,750
J.D. Edwards and Co. ...................................................... 400,000 14,250,000
MetaCreations Corp. ....................................................... 992,800 10,424,400
f Micromuse, Inc. ........................................................... 754,500 16,787,625
Network Associates, Inc. .................................................. 362,309 24,818,173
f Omtool, Ltd. .............................................................. 938,600 11,497,850
Sapient Corp. ............................................................. 200,800 9,914,500
Transaction Systems Architects, Inc. ...................................... 658,900 27,673,800
USCS International, Inc. .................................................. 941,800 18,953,725
Vanstar Corp. ............................................................. 500,000 6,656,250
Vantive Corp. ............................................................. 1,223,500 39,152,000
VERITAS Software Corp. .................................................... 407,800 22,327,050
Visio Corp. ............................................................... 350,000 17,325,000
Wind River Systems ........................................................ 834,000 28,877,250
f XcelleNet, Inc. ........................................................... 780,100 15,992,050
----------------
713,624,888
----------------
Transportation 3.2%
Air Express International Corp. ........................................... 911,000 23,913,750
a,fAtlantic Coast Airlines, Inc. ........................................... 700,000 39,593,750
C.H. Robinson Worldwide, Inc. ............................................. 1,046,200 23,931,825
Circle International Group, Inc. .......................................... 205,400 5,504,083
Expeditors International of Washington, Inc. .............................. 1,016,100 43,184,240
a,fMesa Air Group, Inc. ...................................................... 1,646,100 13,168,800
a Royal Olympic Cruise Lines, Inc. .......................................... 274,000 5,034,750
----------------
154,331,198
----------------
a Utilities 5.1%
f Arch Communications Group, Inc. ........................................... 2,000,000 $ 11,375,000
ICG Communications, Inc. .................................................. 1,399,100 48,968,500
Intermedia Communications, Inc. ........................................... 541,300 39,506,456
Millicom International Cellular, SA (Luxembourg ).......................... 865,200 33,850,950
Paging Network, Inc. ...................................................... 2,917,200 41,023,125
f Primus Telecommunications Group, Inc. ..................................... 1,003,000 23,946,625
f Rural Cellular Corp., Class A ............................................. 700,800 12,439,200
b,fWestern Wireless Corp., Class A ........................................... 1,719,200 33,524,400
----------------
244,634,256
----------------
Total Common Stocks and Rights (Cost $3,657,778,453) ...................... 4,303,100,023
----------------
PRINCIPAL
AMOUNT
-----------
Convertible Bonds .4%
Activision, Inc., cvt. sub. notes, 144A, 6.75%, 1/01/05 ................... $ 4,900,000 4,238,500
Atlantic Coast Airlines, cvt. sub. notes, 144A, 7.00%, 7/01/04 ............ 500,000 1,582,500
a Western Digital Corp., cvt. sub. debenture, 144A, zero coupon, 2/18/18 .... 23,800,000 8,865,500
Wind River Systems, cvt. sub. notes, 144A, 5.00%, 8/01/02 ................. 3,100,000 3,115,500
----------------
Total Convertible Bonds (Cost $17,121,500) ................................ 17,802,000
----------------
Total Long Term Investments (Cost $3,674,899,953) ......................... 4,320,902,023
----------------
e Repurchase Agreement 15.8%
Joint Repurchase Agreement, 5.487%, 5/01/98,
(Maturity Value $758,977,182) (Cost $758,861,509) ......................... 758,861,509 758,861,509
BancAmerica Robertson Stephens (Maturity Value $67,670,406)
Barclays Capital Group, Inc. (Maturity Value $67,670,406)
Bear, Stearns & Co., Inc. (Maturity Value $36,909,055)
BT Alex Brown, Inc. (Maturity Value $67,670,406)
Chase Securities, Inc. (Maturity Value $45,364,067)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $67,670,406)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $67,670,406)
Greenwich Capital Markets, Inc. (Maturity Value $67,670,406)
Lehman Brothers, Inc. (Maturity Value $67,670,406)
Paribas Corp. (Maturity Value $67,670,406)
SBC Warburg Dillon Read, Inc. (Maturity Value $67,670,406)
UBS Securities, L.L.C. (Maturity Value $67,670,406)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $4,433,761,462) 105.6% ............................ 5,079,763,532
Other Assets, less Liabilities (5.6%) ..................................... (271,400,744)
----------------
Net Assets 100.0% ......................................................... $4,808,362,788
----------------
</TABLE>
aNon-income producing.
bSufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
eSee Note 1(c) regarding joint repurchase agreement.
fSee Note 9 regarding holding of 5% voting securities.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Financial Highlights
Franklin Strategic Income Fund
Class I
-----------------------------------
Year Ended April 30, 1998
-----------------------------------
1998 1997 1996 19952
-----------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year $10.86 $10.77 $10.18 $10.00
-----------------------------------
Income from investment operations:
Net investment income .87 .93 .85 .70
Net realized and unrealized gains .50 .39 .67 .15
-----------------------------------
Total from investment operations 1.37 1.32 1.52 .85
-----------------------------------
Less distributions from:
Net investment income (.90) (.96) (.82) (.67)
Net realized gains (.09) (.27) (.11) --
-----------------------------------
Total distributions (.99) (1.23) (.93) (.67)
-----------------------------------
Net asset value, end of year $11.24 $10.86 $10.77 $10.18
===================================
Total return* 13.10% 12.64% 15.59% 8.94%
Ratios/supplemental data
Net assets, end of year (000's) $166,633 $34,864 $13,022 $6,736
Ratios to average net assets:
Expenses .25% .23% .25% .25%***
Expenses excluding waiver and payments by affiliate 1.05% 1.05% 1.08% 1.38%***
Net investment income 7.65% 8.60% 8.53% 7.93%***
Portfolio turnover rate 47.47% 114.26% 73.95% 68.43%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
***Annualized
2For the period May 24, 1994 (effective date) to April 30, 1995.
<TABLE>
<CAPTION>
FRANKLIN STRATEGIC SERIES
Statement of Investments, April 30, 1998
SHARES/
WARRANTS/
Franklin Strategic Income Fund COUNTRY RIGHTS VALUE
<S> <C> <C> <C>
a Common Stocks, Warrants, and Rights
Gulf States Steel, warrants ............................................ United States 200 $ 1,040
Orion Network Systems, Inc., SA, warrants .............................. United States 300 4,455
Sullivan Broadcast Holdings ............................................ United States 1,600 49,600
Venezuela Oil Value Recovery, rights ................................... Venezuela 3,035 --
Wireless One, Inc., warrants ........................................... United States 400 2
------------
Total Common Stocks, Warrants, and Rights (Cost $19,735) ............... 55,097
------------
Preferred Stocks .6%
California Federal Bank, 11.50%, pfd. .................................. United States 1,000 114,000
a CSC Holdings Inc., 11.125%, pfd. ....................................... United States 1,259 144,578
Fresenius Medical Care, 144A, 9.00%, pfd. .............................. Germany 100 103,250
Sinclair Capital, 11.625%, pfd. ........................................ United States 3,000 329,250
Time Warner, Inc., 10.25%, pfd. ........................................ United States 234 263,689
------------
Total Preferred Stocks (Cost $836,450).................................. 954,767
------------
Convertible Preferred Stocks 4.3%
CNF Trust I, 5.00%, cvt., pfd. ......................................... United States 5,700 336,300
El Paso Energy, 4.75%, cvt., pfd. ...................................... United States 32,000 1,682,000
Hilton Hotels, 8.00%, cvt., pfd. ....................................... United States 11,200 329,700
PLC Capital Trust II, 6.50%, cvt., pfd. ................................ United States 10,000 625,000
Ralston Purina Co., 7.00%, cvt., pfd. .................................. United States 9,300 566,138
Salomon, Inc., 6.25%, cvt., pfd. ....................................... United States 6,700 459,788
Triathlon Broadcasting, 9.00%, cvt., pfd. .............................. United States 20,000 217,500
Union Pacific Capital Trust, 144A, 6.25%, cvt., pfd. ................... United States 40,000 2,130,000
WBK Strypes Trust, 10.00%, cvt., pfd. .................................. United States 21,900 747,338
------------
Total Convertible Preferred Stocks (Cost $6,511,478).................... 7,093,764
------------
PRINCIPAL
AMOUNT*
------------
High Yield Corporate Bonds 28.0%
Automotive 1.4%
Advanced Accessory/AAS Cap, senior sub. notes, 144A, 9.75%, 10/01/07 ... United States $ 100,000 101,750
Aetna Industries, Inc., senior notes, 11.875%, 10/01/06 ................ United States 200,000 220,000
Cambridge Industries, Inc., senior sub. notes, 10.25%, 7/15/07 ......... United States 600,000 624,000
Collins & Aikman Products, senior sub. notes, 11.50%, 4/15/06 .......... United States 100,000 112,500
a,dHarvard Industries, Inc., senior notes, 11.125%, 8/01/05............... United States 300,000 117,000
Key Plastics, Inc., senior sub. notes, 10.25%, 3/15/07 ................. United States 100,000 106,375
LDM Technologies, Inc., senior sub. notes, 10.75%, 1/15/07 ............. United States 200,000 216,000
Talon Automotive Group, senior sub. notes, 144A, 9.625%, 5/01/08 ....... United States 800,000 804,000
------------
2,301,625
------------
Broadcasting 1.4%
Chancellor Media Corp., senior sub. notes, 8.75%, 6/15/07 .............. United States 500,000 520,000
Lin Holdings Corp., senior disc. notes, 144A, zero coupon to 3/1/03, 10.00%
thereafter, 3/01/08 ................................................... United States 1,500,000 941,250
Sinclair Broadcast Group Inc., senior sub notes, 8.75%, 12/15/07 ....... United States 700,000 712,250
Sullivan Broadcast Holdings, senior deb., 13.25%, 12/15/06 ............. United States 100,000 121,000
------------
2,294,500
------------
Cable Television 1.4%
CSC Holdings Inc., 9.875%, 4/01/23 ..................................... United States$ 1,000,00 $ 1,107,500
Diamond Cable Communications, senior notes, zero coupon to 12/15/00, 11.75%
thereafter, 12/15/05 .................................................. United Kingdom 150,000 120,000
Diamond Cable Communications, senior notes, zero coupon to 2/15/02, 10.75%
thereafter, 2/15/07 ................................................... United Kingdom 150,000 106,500
Diamond Holdings, Plc., senior notes, 144A, 9.125%, 2/01/08 ............ United Kingdom 1,000,000 1,025,000
------------
2,359,000
------------
Chemical .6%
Huntsman Corp., senior sub. notes, 144A, 9.50%, 7/01/07 ................ United States 1,000,000 1,007,500
------------
Consumer Products .9%
E&S Holdings Corp., senior sub. notes, 10.375%, 10/01/06 ............... United States 100,000 84,000
Revlon Consumer Products, senior sub. notes, 144A, 8.625%, 2/1/08 ...... United States 1,000,000 1,002,500
Sealy Corp., senior sub. notes, 144A, 9.875%, 12/15/07 ................. United States 200,000 212,000
Sealy Corp., senior disc. notes, 144A, zero coupon to 12/15/02, 10.925%
thereafter, 12/15/07 .................................................. United States 300,000 201,000
------------
1,499,500
------------
Containers and Packaging 1.0%
Anchor Glass, 11.25%, 4/01/05 .......................................... United States 300,000 331,500
Anchor Glass, 144A, 9.875%, 3/15/08 .................................... United States 700,000 712,250
Four M Corp., senior notes, Series B, 12.00%, 6/01/06 .................. United States 200,000 208,000
Graham Packaging Corp., senior sub. notes, 144A, 8.750%, 1/15/08 ....... United States 200,000 201,000
Graham Packaging Corp., senior disc. notes, 144A, zero coupon to 1/15/03, 10.75%
thereafter, 1/15/09 ................................................... United States 200,000 124,000
U.S. Can Corp., senior sub. notes, Series B, 10.125%, 10/15/06 ......... United States 100,000 107,000
------------
1,683,750
------------
Energy 1.8%
Abraxas Petroleum Corp., senior notes, Series B, 11.50%, 11/01/04 ...... United States 500,000 526,250
Abraxas Petroleum Corp., senior notes, Series B, 144A, 11.50%, 11/01/04 United States 380,000 398,050
Chesapeake Energy Corp., senior notes, 144A, 9.625%, 5/01/05 ........... United States 300,000 301,500
Clark R&M, Inc., senior sub. notes., 8.875%, 11/15/07 .................. United States 1,000,000 1,015,000
Dailey International, Inc., senior notes, 144A, 9.50%, 2/15/08 ......... United States 300,000 300,000
Dawson Production Services, senior notes, 9.375%, 2/01/07 .............. United States 100,000 102,000
Forcenergy, Inc., senior sub. notes, 9.50%, 11/01/06 ................... United States 100,000 103,500
Pride International, Inc., senior notes, 9.375%, 5/01/07 ............... United States 100,000 107,500
Rutherford-Moran Oil, senior sub. notes, 10.75%, 10/01/04 .............. United States 100,000 107,500
------------
2,961,300
------------
Financial .2%
First Nationwide Escrow Corp., senior sub. notes, 10.625%, 10/01/03 .... United States 200,000 224,500
HomeSide Finance, Inc., senior notes, 11.25%, 5/15/03 .................. United States 150,000 178,500
------------
403,000
------------
Food and Beverages .5%
Curtice-Burns Foods, Inc., senior sub. notes, 12.25%, 2/01/05 .......... United States $ 100,000 $ 110,000
Doane Products Co., senior notes, 10.625%, 3/01/06 ..................... United States 100,000 109,500
Purina Mills, Inc., senior sub notes, 144A, 9.00%, 3/15/10 ............. United States 600,000 616,500
------------
836,000
------------
Food Retailing .4%
Fleming Cos., Inc., senior sub. notes, 10.50%, 12/01/04 ................ United States 500,000 523,125
Shoppers Food Warehouse, senior notes, 9.75%, 6/15/04 .................. United States 125,000 138,750
------------
661,875
------------
Forest and Paper Products .4%
Doman Industries, Ltd., senior notes, 9.25%, 11/15/07 .................. Canada 200,000 202,000
Pindo Deli Finance Mauritius, Ltd., 10.75%, 10/01/07 ................... Indonesia 700,000 568,750
------------
770,750
------------
Gaming and Leisure .6%
AMF Group, Inc., senior disc. notes, zero coupon to 3/15/00, 12.25%
thereafter, 3/15/06 ................................................... United States 1,118,000 899,990
Showboat, Inc., senior sub. notes, 13.00%, 8/01/09 ..................... United States 100,000 120,500
------------
1,020,490
------------
Health Care 2.4%
Fresenius Medical Care, 144A, 7.875%, 2/01/08 .......................... Germany 1,000,000 980,000
Magellan Health Services, Inc., senior sub. notes, 144A, 9.00%, 2/15/08 United States 600,000 603,000
Pharmerica, Inc., senior sub notes, 144A, 8.375%, 4/1/08 ............... United States 350,000 350,000
Tenet Healthcare Corp., senior sub. notes, 10.125%, 3/01/05 ............ United States 100,000 111,500
Tenet Healthcare Corp., senior sub. notes, 8.625%, 1/15/07 ............. United States 200,000 208,250
Vencor, Inc., senior sub notes, 144A, 9.875%, 5/01/05 .................. United States 1,200,000 1,215,000
Vencor, Inc., senior sub. notes, 144A, 8.625%, 7/15/07 ................. United States 500,000 562,500
------------
4,030,250
------------
Industrial 2.0%
Allied Waste Industries, senior disc. notes, zero coupon to 6/01/02, 11.30%
thereafter, 6/01/07 ................................................... United States 500,000 371,250
American Standard, Inc., senior sub. deb., zero coupon to 6/01/98, 10.50%
thereafter, 6/01/05 ................................................... United States 150,000 156,563
Derlan Manufacturing, Inc., senior notes, 10.00%, 1/15/07 .............. Canada 150,000 157,500
Falcon Building Products, Inc., senior disc. notes, 10.50%, 6/15/07 .... United States 250,000 166,875
Intertek Finance, Plc., senior sub. notes, Series B, 10.25%, 11/01/06 .. United Kingdom 100,000 107,000
Neenah Corp., senior sub. notes, Series B, 11.125%, 5/01/07 ............ United States 100,000 110,625
Nortek, Inc., senior notes, 9.125%, 9/01/07 ............................ United States 300,000 307,500
OshKosh Truck Corp., senior sub notes, 144A, 8.750%, 3/01/08 ........... United States 400,000 403,500
Terex Corp., senior sub. notes, 144A, 8.875%, 4/01/08 .................. United States 850,000 843,625
Universal Compression Inc., senior disc. notes, 144A, zero coupon to 2/15/03,
9.875% thereafter, 2/15/08 ............................................ United States 1,250,000 793,750
------------
3,418,188
------------
Information Systems and Technology .2%
Iron Mountain, Inc., senior sub. notes, 8.75%, 9/30/09 ................. United States $ 350,000 $ 358,750
------------
Lodging .5%
HMH Properties, Inc., senior notes, 8.875%, 7/15/07 .................... United States 500,000 556,875
Prime Hospitality Corp., senior sub. notes, Series B, 9.75%, 4/01/07 ... United States 300,000 317,250
------------
874,125
------------
Media 2.0%
Big Flower Press Holdings, senior sub. notes, 8.875%, 7/01/07 .......... United States 300,000 309,000
Fox Kids Worldwide, Inc., senior disc. notes, 144A, zero coupon to 11/01/02,
10.25% thereafter, 11/01/07 ........................................... United States 600,000 387,000
Fox Kids Worldwide, Inc., senior notes, 144A, 9.25%, 11/01/07 .......... United States 200,000 198,250
Fox/Liberty Networks, L.L.C., senior disc. notes, zero coupon to 8/15/02, 9.75%
thereafter, 8/15/07 ................................................... United States 500,000 342,500
Outdoor Systems, Inc., senior sub. notes, 8.875%, 6/15/07 .............. United States 500,000 520,000
Six Flags Entertainment., senior notes, 8.875%, 4/01/06 ................ United States 600,000 607,500
United Artists Theaters, senior sub. notes, 144A, 9.75%, 4/15/08 ....... United States 1,000,000 1,005,000
------------
3,369,250
------------
Metals and Mining .6%
LTV Corp., senior notes, 8.20%, 9/15/07 ................................ United States 1,000,000 1,002,500
------------
Restaurants .6%
AmeriServ Food Co., senior sub. notes, 10.125%, 7/15/07 ................ United States 400,000 426,000
AmeriServ Food Distribution, senior notes, 8.875%, 10/15/06 ............ United States 500,000 512,500
------------
938,500
------------
Retail .2%
Specialty Retailers, Inc., senior notes, 8.50%, 7/15/05 ................ United States 250,000 256,875
------------
Telecommunications 3.4%
Flag, Ltd., senior notes, 144A, 8.250%, 1/30/08 ........................ Bermuda 200,000 203,500
Intelcom Group, Inc., senior disc. notes, zero coupon to 5/1/01, 12.50%
thereafter, 5/01/06 ................................................... United States 250,000 200,000
Intermedia Communication, senior disc. notes, 11.25%, 7/15/07 .......... United States 750,000 555,000
IXC Communications, Inc., senior sub. notes, 144A, 9.00%, 4/15/08 ...... United States 650,000 650,000
Level 3 Communications Corp., senior sub. notes, 144A, 9.125%, 5/01/08 . United States 1,500,000 1,485,000
Netia Holdings B.V., 144A, 10.25%, 11/01/07 ............................ Poland 200,000 208,500
Netia Holdings B.V., 144A, zero coupon to 11/01/01, 11.25% thereafter, 11/01/07 Poland 500,000 364,375
Nextlink Communications, Inc., senior notes, 9.625%, 10/01/07 .......... United States 250,000 263,125
Nextlink Communications, Inc., senior notes, 144A, 9.00%, 3/15/08 ...... United States 750,000 769,688
Nextlink Communications, Inc., senior notes, 144A, zero coupon, 4/15/08 United States 500,000 314,375
RSL Communications, Plc., senior disc. notes, 144A, zero coupon to 3/01/03,
10.125% thereafter, 3/01/08 ........................................... United States 1,000,000 620,000
------------
5,633,563
------------
Textiles and Apparel .6%
Collins & Aikman Floor Coverings, senior disc. sub. notes, Series B, 10.00%, 1/15/07 United States300,000 312,750
Pillowtex Corp., senior sub. notes, 9.00%, 12/18/07 .................... United States 600,000 623,250
------------
936,000
------------
Transportation .7%
L-3 Communications Corp., senior sub. notes, 10.375%, 5/01/07 .......... United States $ 100,000 $ 110,375
Loomis Fargo & Co., senior sub. notes, 10.00%, 1/15/04 ................. United States 100,000 101,500
Ultrapetrol, Ltd., 144A, 10.50%, 4/01/08 ............................... Bahamas 1,000,000 1,005,000
------------
1,216,875
------------
Utilities - Electric .7%
AES China Generating Co., Ltd., 10.125%, 12/15/06 ...................... China 100,000 94,000
AES Corp., senior sub. notes, 8.50%, 11/01/07 .......................... United States 750,000 772,500
ESI Tractebel Acquisition Corp., 144A, 7.99%, 12/31/11 ................. United States 250,000 248,750
------------
1,115,250
------------
Wireless Communications 3.5%
Arch Communications Group, senior discount notes, zero coupon to 3/15/01,
10.875% thereafter, 3/15/08 ........................................... United States 300,000 165,750
Comcast Cellular, senior notes, 9.50%, 5/01/07 ......................... United States 400,000 418,500
Metrocall, Inc., senior sub. notes, 9.75%, 11/01/07 .................... United States 1,000,000 1,020,000
Microcell Telecommunications Service, senior disc. notes, zero coupon to
12/01/01, 14.00% thereafter, 6/01/06 .................................. Canada 600,000 448,500
Millicom International Cellular, SA, senior disc. notes, zero coupon to 6/01/01,
13.50% thereafter, 6/01/06 ............................................ Luxembourg 300,000LUF 235,500
Nextel Communications, senior disc. notes, zero coupon to 2/15/99, 9.75%
thereafter, 8/15/04 ................................................... United States 500,000 483,750
Nextel Communications, senior disc. notes, zero coupon to 10/31/02, 9.75%
thereafter, 10/31/07 .................................................. United States 500,000 327,500
Nextel Communications, senior disc. notes, 144A, zero coupon to 2/15/03, 9.95%
thereafter, 2/15/08 ................................................... United States 300,000 192,000
Orion Network Systems, Inc., SA, senior disc. notes, zero coupon to 1/15/02, 12.50%
thereafter, 1/15/07 ................................................... United States 300,000 232,500
Paging Network, Inc., senior sub. notes, 10.125%, 8/01/07 .............. United States 400,000 422,000
Sprint Spectrum, L.P., senior disc. notes, zero coupon to 8/01/01, 12.50%
thereafter, 8/15/06 ................................................... United States 300,000 249,750
Sygnet Wireless, Inc., senior notes, 11.50%, 10/01/06 .................. United States 500,000 561,250
Triton Communications L.L.C., senior disc. notes, 144A, zero coupon to 5/1/03,
11.00% thereafter, 5/1/08 ............................................. United States 1,750,000 1,039,064
------------
5,796,064
------------
Total High Yield Corporate Bonds (Cost $45,420,799) .................... 46,745,480
------------
Convertible Bonds 5.8%
Energy .6%
Diamond Offshore Drilling, cvt., 3.75%, 2/15/07 ........................ United States 800,000 1,082,000
------------
Financial .6%
Leasing Solutions Inc., cvt., 6.875%, 10/01/03 ......................... United States 1,000,000 1,035,000
------------
Health Care .3%
Assisted Living Concepts, cvt., sub. deb., 6.00%, 11/01/02 ............. United States 400,000 429,000
------------
Information Technology 3.7%
Bay Networks, cvt., 144A, 5.25%, 5/15/03 ............................... United States $ 750,000 $ 710,625
Dovatron International, Inc., cvt., sub. notes, 144A, 6.00%, 10/15/02 .. United States 2,000,000 2,585,000
Kent Electronics, cvt., 4.50%, 9/01/04 ................................. United States 1,750,000 1,480,938
Motorola Inc., cvt., sub. deb., 0.00%, 9/27/13 ......................... United States 1,750,000 1,305,938
------------
6,082,501
------------
Real Estate Investment Trusts .6%
Macerich Co., cvt., sub. notes, 144A, 7.25%, 12/15/02 .................. United States 1,000,000 993,750
------------
Total Convertible Bonds (Cost $9,342,598)............................... 9,622,251
------------
Emerging Market Bonds 23.7%
Bepensa, SA, senior notes, 144A, 9.75%, 9/30/04 ........................ Mexico 150,000 151,688
Bridas Corp., senior notes, 12.50%, 11/15/99 ........................... Argentina 100,000 106,250
Cemex, SA, 144A, 10.75%, 7/15/00 ....................................... Mexico 100,000 106,370
Centrais Eletricas Brasileiras, SA, 144A, 10.00%, 10/30/98 ............. Brazil 120,000 120,600
Government of Jamaica, 9.625%, 7/02/02 ................................. Jamaica 1,250,000 1,257,813
Pera Financial Services, secured notes, 144A, 9.375%, 10/15/02 ......... Turkey 160,000 152,000
Pera Financial Services, secured notes, 144A, 9.375%, 10/15/02 ......... Turkey 1,000,000 950,000
Poland Communications, Inc., senior notes, 9.875%, 11/01/03 ............ Poland 200,000 199,500
Republic of Argentina, 9.25%, 2/23/01 .................................. Argentina 275,000 284,109
Republic of Argentina, 11.00%, 10/09/06 ................................ Argentina 1,000,000 1,101,250
Republic of Argentina, 9.75%, 9/19/27 .................................. Argentina 730,000 706,275
Republic of Argentina, Bonos Del Tesoro, 8.75%, 5/09/02 ................ Argentina 3,300,000 3,235,650
Republic of Argentina, Global, 11.375%, 1/30/17 ........................ Argentina 160,000 177,500
Republic of Brazil, 8.875%, 11/05/01 ................................... Brazil 2,295,000 2,360,981
Republic of Brazil, 9.375%, 4/07/08 .................................... Brazil 3,000,000 2,992,500
Republic of Brazil, 6.688%, 4/15/12 .................................... Brazil 835,000 662,781
Republic of Brazil, 10.125%, 5/15/27 ................................... Brazil 2,200,000 2,147,750
Republic of Brazil, C Bond, 8.00%, 4/15/14 ............................. Brazil 2,065,181 1,715,459
Republic of Bulgaria, floating rate deb., 6.563%, 7/28/11 .............. Bulgaria 2,220,000 1,753,800
Republic of Ecuador, unsub., 11.25%, 4/25/02 ........................... Ecuador 1,000,000 1,031,250
Republic of Ecuador, unsub., 144A, 11.25%, 4/25/02 ..................... Ecuador 750,000 773,438
Republic of Panama, 8.875%, 9/30/27 .................................... Panama 1,500,000 1,473,750
Republic of Turkey, 144A, 9.875%, 2/23/05 .............................. Turkey 750,000 761,813
Republic of Turkey, 144A, 10.00%, 9/19/07 .............................. Turkey 650,000 664,219
Republic of Venezuela, 6.812%, 12/18/07 ................................ Venezuela 952,380 855,357
Republic of Venezuela, 9.25%, 9/15/27 .................................. Venezuela 3,643,000 3,226,332
Republic of Venezuela, Disc. W-A, 6.563%, 3/31/20 ...................... Venezuela 250,000 220,156
Republic of Venezuela, senior unsub. notes, 9.125%, 6/18/07 ............ Venezuela 1,200,000 1,201,560
Republic of Venezuela, senior unsub. notes, 144A, 9.125%, 6/18/07 ...... Venezuela 100,000 100,130
SEI Holdings IX, Inc., senior notes, 144A, 11.00%, 11/30/00 ............ Trinidad 125,000 134,376
United Mexican States, 9.75%, 2/06/01 .................................. Mexico 1,950,000 2,069,438
United Mexican States, 9.875%, 1/15/07 ................................. Mexico 415,000 445,606
United Mexican States, 8.625%, 3/12/08 ................................. Mexico 4,250,000 4,228,750
United Mexican States, 11.375%, 9/15/16 ................................ Mexico 800,000 940,000
United Mexican States, 11.50%, 5/15/26 ................................. Mexico 950,000 1,147,125
------------
Total Emerging Market Bonds (Cost $38,938,942) ......................... 39,455,576
------------
a Foreign Government Bonds 15.9%.......................................... United Kingdom
Australian Government, 9.50%, 8/15/03 .................................. Australia $ 2,457,000 AUD $ 1,889,391
Belgium Kingdom, 5.00%, 3/28/01 ........................................ Belgium 20,000,000 BEF 548,106
Belgium Kingdom, 6.25%, 3/28/07 ........................................ Belgium 20,000,000 BEF 584,884
Bundesobligation, Series 110, 5.375%, 2/22/99 .......................... Germany 1,205,000 DEM 679,286
Bundesobligation, Series 118, 5.25%, 2/21/01 ........................... Germany 865,000 DEM 492,633
Bundesschatzanweisungen, 6.875%, 2/24/99 ............................... Germany 1,035,000 DEM 590,086
Buoni Poliennali del Tesoro, 10.50%, 7/15/00 ........................... Italy 2,055,000,000 ITL 1,298,096
Buoni Poliennali del Tesoro, 7.75%, 11/01/06 ........................... Italy 2,815,000,000 ITL 1,870,312
Deutschland Republic, 6.00%, 1/05/06 ................................... Germany 1,175,000 DEM 696,291
German Unity Fund, 8.75%, 8/20/01 ...................................... Germany 1,580,000 DEM 992,640
Government of Canada, 10.50%, 7/01/00 .................................. Canada 935,000 CAD 724,320
Government of Canada, 10.50%, 3/01/01 .................................. Canada 1,645,000 CAD 1,308,237
Government of Canada, 10.00%, 5/01/02 .................................. Canada 1,515,000 CAD 1,238,871
Government of Canada, 6.50%, 6/01/04 ................................... Canada 1,000,000 CAD 742,175
Government of Canada, 10.00%, 6/01/08 .................................. Canada 700,000 CAD 662,126
Kingdom of Denmark, 9.00%, 11/15/00 .................................... Denmark 1,785,000 DKK 287,321
Kingdom of Denmark, 8.00%, 5/15/03 ..................................... Denmark 5,630,000 DKK 930,003
Kingdom of Denmark, 7.00%, 12/15/04 .................................... Denmark 6,000,000 DKK 968,063
New Zealand Government, 6.50%, 2/15/00 ................................. New Zealand 1,295,000 NZD 704,591
Spanish Government, 12.25%, 3/25/00 .................................... Spain 176,680,000 ESP 1,320,449
Spanish Government, 8.80%, 4/30/06 ..................................... Spain 235,150,000 ESP 1,903,077
Swedish Government, 13.00%, 6/15/01 .................................... Sweden 6,200,000 SEK 985,713
Swedish Government, 10.25%, 5/05/03 .................................... Sweden 11,700,000 SEK 1,860,347
Treuhandanstalt, 7.75%, 10/02/02 ....................................... Germany 1,530,000 DEM 955,174
U.K. Treasury, 8.00%, 12/07/00 ......................................... United Kingdom 1,070,000 GBP 1,860,031
World Bank IBRD-Global Bond, 4.50%, 3/20/03 ............................ Japan 45,000,000 JPY 395,704
------------
Total Foreign Government Bonds (Cost $26,827,137) ...................... 26,487,927
------------
U.S. Government Securities 4.8%
U.S. Treasury Bonds, 7.125%, 2/15/23 ................................... United States 400,000 455,750
U.S. Treasury Notes, 5.875%, 9/30/02 ................................... United States 5,000,000 5,037,505
U.S. Treasury Notes, 5.625%, 12/31/02 .................................. United States 2,500,000 2,495,315
------------
Total U.S. Government Securities (Cost $7,945,016) ..................... 7,988,570
------------
Mortgages 7.6%
Miscellaneous Mortgages 2.4%
Morgan Stanley Capital I, 6.55%, 12/15/07 .............................. United States 2,000,000 2,020,781
Nomura Asset Securities Corp., Series 1998 D-6, 6.77%, 3/17/28 ......... United States 2,000,000 2,007,500
------------
4,028,281
------------
U.S. Government Agencies/Mortgages 5.2%
FHLMC, 7.00%, 1/01/09 .................................................. United States 18,969 19,361
FHLMC, 6.00%, 4/01/09 .................................................. United States 20,720 20,553
FHLMC, 6.00%, 1/01/11 .................................................. United States 20,932 20,704
FHLMC, 6.50%, 4/01/11 .................................................. United States 32,629 32,864
FHLMC, 7.00%, 9/01/11 .................................................. United States 42,127 43,003
FHLMC, 7.00%, 4/01/24 .................................................. United States 48,179 48,967
FHLMC, 7.50%, 4/01/24 .................................................. United States 36,549 37,536
FHLMC, 8.50%, 12/01/24 ................................................. United States 19,942 20,908
U.S. Government Agencies/Mortgages (cont.)
FHLMC, 9.00%, 12/01/24 ................................................. United States $ 12,926 $ 13,709
FHLMC, 7.00%, 11/01/25 ................................................. United States 26,497 26,876
FHLMC, 8.00%, 11/01/25 ................................................. United States 22,864 23,736
FHLMC, 6.50%, 12/01/25 ................................................. United States 35,735 35,562
FHLMC, 7.50%, 1/01/26 .................................................. United States 30,573 31,396
FHLMC, 8.00%, 1/01/26 .................................................. United States 19,527 20,271
FHLMC, 6.50%, 3/01/26 .................................................. United States 47,584 47,308
FHLMC, 7.00%, 9/01/26 .................................................. United States 26,783 27,164
FHLMC, 7.50%, 1/01/27 .................................................. United States 61,782 63,438
b FHLMC, 7.00%, 5/01/28 .................................................. United States 1,000,000 1,011,250
FNMA, 7.50%, 10/01/07 .................................................. United States 27,957 28,812
FNMA, 2.125%, 10/09/07 ................................................. United States50,000,000 JPY 390,827
FNMA, 6.50%, 2/01/09 ................................................... United States 28,219 28,397
FNMA, 6.50%, 4/01/11 ................................................... United States 21,529 21,652
FNMA, 6.50%, 1/01/24 ................................................... United States 35,452 35,297
FNMA, 7.00%, 5/01/24 ................................................... United States 21,115 21,434
FNMA, 8.00%, 1/01/25 ................................................... United States 25,621 26,621
FNMA, 9.00%, 3/01/25 ................................................... United States 20,482 21,701
FNMA, 9.00%, 5/01/25 ................................................... United States 4,978 5,274
FNMA, 8.50%, 7/01/25 ................................................... United States 18,639 19,570
FNMA, 8.00%,12/01/25 ................................................... United States 839,149 871,641
FNMA, 7.00%, 1/01/26 ................................................... United States 46,575 47,180
FNMA, 7.00%, 3/01/26 ................................................... United States 51,786 52,449
FNMA, 7.50%, 3/01/26 ................................................... United States 37,547 38,587
FNMA, 8.00%, 5/01/26 ................................................... United States 21,096 21,880
FNMA, 8.00%, 6/01/26 ................................................... United States 15,643 16,225
FNMA, 7.50%, 8/01/26 ................................................... United States 34,087 35,032
FNMA, 7.50%, 10/01/26 .................................................. United States 18,890 19,413
FNMA, 8.00%, 1/01/27 ................................................... United States 52,269 54,211
FNMA, 7.00%, 4/01/27 ................................................... United States 990,931 1,003,542
FNMA, 6.50%, 3/01/28 ................................................... United States 3,027,284 3,000,795
GNMA, SF, 7.50%, 9/15/23 ............................................... United States 17,571 18,107
GNMA, SF, 6.50%, 3/15/24 ............................................... United States 47,723 47,528
GNMA, SF, 8.00%, 6/15/24 ............................................... United States 39,401 40,924
GNMA, SF, 8.50%, 8/15/24 ............................................... United States 12,960 13,712
GNMA, SF, 9.00%, 1/15/25 ............................................... United States 4,896 5,257
GNMA, SF, 8.00%, 2/15/25 ............................................... United States 17,928 18,660
GNMA, SF, 9.50%, 6/15/25 ............................................... United States 11,873 12,884
GNMA, SF, 7.50%, 1/15/26 ............................................... United States 22,189 22,823
GNMA, SF, 7.50%, 1/15/26 ............................................... United States 21,245 21,852
GNMA, SF, 7.50%, 2/15/26 ............................................... United States 22,524 23,168
GNMA, SF, 7.00%, 3/15/26 ............................................... United States 24,067 24,401
GNMA, SF, 9.00%, 3/15/26 ............................................... United States 39,749 42,627
GNMA, SF, 8.00%, 6/15/26 ............................................... United States 55,964 58,121
GNMA, SF, 8.50%, 7/15/26 ............................................... United States 21,098 22,277
U.S. Government Agencies/Mortgages (cont.)
GNMA, SF, 7.50%, 9/15/27 ............................................... United States $ 984,559 $ 1,012,537
GNMA II, 7.00%, 9/20/25 ................................................ United States 51,288 51,906
------------
8,741,930
------------
Total Mortgages (Cost $12,759,657) ..................................... 12,770,211
------------
Total Long Term Investments (Cost $148,601,812) ........................ 151,173,643
------------
e Repurchase Agreement 9.7%
Joint Repurchase Agreement, 5.487%, 5/01/98, (Maturity Value $16,204,390)
(Cost $16,201,920) .................................................... United States16,201,920 16,201,920
BancAmerica Robertson Stephens (Maturity Value $1,422,908)
Barclays Capital Group, Inc. (Maturity Value $1,422,908)
Bear, Stearns & Co., Inc. (Maturity Value $776,190)
BT Alex Brown, Inc. (Maturity Value $1,668,400)
Chase Securities, Inc. (Maturity Value $953,628)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $1,422,908)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $1,422,908)
Greenwich Capital Markets, Inc. (Maturity Value $1,422,908)
Lehman Brothers, Inc. (Maturity Value $1,422,908)
Paribas Corp. (Maturity Value $1,422,908)
SBC Warburg Dillon Read, Inc. (Maturity Value $1,422,908)
UBS Securities, L.L.C. (Maturity Value $1,422,908)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $164,803,732) 100.4% ........................... 167,375,563
Other Assets, Less Liabilities (.4%) ................................... (742,165)
------------
Net Assets 100.0%....................................................... $166,633,398
------------
</TABLE>
Currency Abbreviations
AUD - Australian Dollar
BEF - Belgium Franc
CAD - Canadian Dollar
DEM - German Mark
DKK - Danish Krone
ESP - Spanish Peseta
GBP - British Pound
ITL - Italian Lira
JPY - Japanese Yen
LUF - Luxembourg Franc
NZD - New Zealand Dollar
SEK - Swedish Krona
*Securities traded in U.S. dollars unless otherwise indicated.
aNon-income producing.
bSufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
dSee Note 7 regarding defaulted securities.
eSee Note 1(c) regarding joint repurchase agreement.
FRANKLIN STRATEGIC SERIES
Financial Statements
Statements of Assets and Liabilities
April 30, 1998
<TABLE>
<CAPTION>
Franklin Franklin
Biotechnology Franklin California
Discovery Fund Blue Chip Fund Growth Fund
--------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................... $60,702,665 $13,431,295 $653,105,078
Cost - Non-controlled affiliated issuers .................. -- -- 13,388,521
--------------------------------------------------
Value - Unaffiliated issuers .............................. 62,998,977 15,743,335 765,862,178
Value - Non-controlled affiliated issuers ................. -- -- 14,432,813
Repurchase agreements, at value and cost ................... 6,573,605 990,256 66,057,064
Cash ....................................................... 554,836 68,397 630,597
Receivables:
Investment securities sold ................................ 7,204,919 135,125 3,154,676
Capital shares sold ....................................... 308,797 6,735 3,860,727
Dividends and interest .................................... -- 26,332 546,238
Affiliates ................................................ -- 12,705 --
Deposits with brokers for securities sold short ............ 3,001,001 -- --
Other assets ............................................... 19,669 -- --
--------------------------------------------------
Total assets .......................................... 80,661,804 16,982,885 854,544,293
--------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ........................... 310,000 97,544 8,445,755
Capital shares redeemed ................................... 80,936 -- 335,802
Affiliates ................................................ 149,913 28,537 1,114,919
Shareholders .............................................. 21,446 5,812 655,822
Securities sold short, at value
(proceeds $6,874,305) ...................................... 6,519,963 -- --
Other liabilities .......................................... 33,389 14,872 36,911
--------------------------------------------------
Total liabilities ..................................... 7,115,647 146,765 10,589,209
--------------------------------------------------
Net assets, at value ................................. $73,546,157 $16,836,120 $843,955,084
==================================================
Franklin Franklin
Biotechnology Franklin California
Discovery Fund Blue Chip Fund Growth Fund
--------------------------------------------------
<S> <C> <C> <C>
Net assets consist of:
Undistributed net investment income (loss) ................. $-- $ 51,383 $ 1,171,577
Net unrealized appreciation ................................ 2,650,654 2,308,083 113,801,392
Accumulated net realized gain (loss) ....................... (89,289) (428,215) 21,746,042
Capital shares ............................................. 70,984,792 14,904,869 707,236,073
--------------------------------------------------
Net assets, at value .................................. $73,546,157 $16,836,120 $843,955,084
==================================================
Class I:
Net assets, at value ....................................... $73,546,157 $16,836,120 $721,254,298
==================================================
Shares outstanding ......................................... 2,735,059 1,351,240 28,882,609
==================================================
Net asset value per share* ................................. $26.89 $12.46 $24.97
==================================================
Maximum offering price per share
(net asset value per share O 95.50%) ....................... $28.16 $13.05 $26.15
==================================================
Class II:
Net assets, at value ....................................... -- -- $122,700,786
==================================================
Shares outstanding ......................................... -- -- 4,944,822
==================================================
Net asset value per share* ................................. -- -- $24.81
==================================================
Maximum offering price per share
(net asset value per share O 99.00%) ....................... -- -- $25.06
==================================================
*Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
Franklin
Global Health Franklin Global Franklin MidCap
Care Fund Utilities Fund Growth Fund
--------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................... $147,700,628 $182,174,689 $19,759,908
Cost - Non-controlled affiliated issuers .................. 18,457,780 -- --
--------------------------------------------------
Value - Unaffiliated issuers .............................. 178,015,889 236,649,027 25,749,712
Value - Non-controlled affiliated issuers ................. 11,652,341 -- --
Repurchase agreements, at value and cost ................... 6,442,276 9,251,867 4,355,103
Cash ....................................................... 226,198 -- 95,250
Receivables:
Investment securities sold ................................ 5,759,899 -- 1,787
Capital shares sold ....................................... 416,679 691,002 51,169
Dividends and interest .................................... 3,000 637,050 7,970
Affiliates ................................................ -- -- 348
--------------------------------------------------
Total assets .......................................... 202,516,282 247,228,946 30,261,339
--------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ........................... -- 3,607,970 349,895
Capital shares redeemed ................................... 144,353 199,387 --
Affiliates ................................................ 316,421 299,799 35,743
Shareholders .............................................. 171,530 171,765 6,915
Other liabilities .......................................... 18,343 32,038 5,124
--------------------------------------------------
Total liabilities ..................................... 650,647 4,310,959 397,677
--------------------------------------------------
Net assets, at value ................................. $201,865,635 $242,917,987 $29,863,662
==================================================
Franklin
Global Health Franklin Global Franklin MidCap
Care Fund Utilities Fund Growth Fund
--------------------------------------------------
<S> <C> <C> <C>
Net assets consist of:
Undistributed net investment income ........................ $-- $ 1,555,065 $--
Net unrealized appreciation ................................ 23,509,822 54,474,242 5,989,804
Accumulated net realized gain .............................. 116,079 11,322,847 319,578
Capital shares ............................................. 178,239,734 175,565,833 23,554,280
--------------------------------------------------
Net assets, at value .................................. $201,865,635 $242,917,987 $29,863,662
==================================================
Class I:
Net assets, at value ....................................... $176,545,075 $226,593,935 $29,863,662
==================================================
Shares outstanding ......................................... 9,156,408 13,050,797 1,711,958
==================================================
Net asset value per share* ................................. $19.28 $17.36 $17.44
==================================================
Maximum offering price per share
(net asset value per share O 95.50%) ....................... $20.19 $18.18 $18.26
==================================================
Class II:
Net assets, at value ....................................... $ 25,320,560 $ 16,324,052 --
==================================================
Shares outstanding ......................................... 1,321,101 946,226 --
==================================================
Net asset value per share* ................................. $19.17 $17.25 --
==================================================
Maximum offering price per share
(net asset value per share O 99.00%) ....................... $19.36 $17.42 --
==================================================
*Redemption price is equal to net asset value less any applicable contingent deferred sales charge.
Franklin Franklin
Franklin Natural Small Cap Strategic
Resources Fund Growth Fund Income Fund
--------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................... $50,158,063 $2,480,319,729 $148,601,812
Cost - Non-controlled affiliated issuers .................. -- 1,194,580,224 --
--------------------------------------------------
Value - Unaffiliated issuers .............................. 56,480,518 2,988,943,418 151,173,643
Value - Non-controlled affiliated issuers ................. -- 1,331,958,605 --
Repurchase agreements, at value and cost ................... 8,987,626 758,861,509 16,201,920
Cash ....................................................... 34,450 14,884,021 816,352
Receivables:
Investment securities sold ................................ 7,265 2,011,770 901,418
Capital shares sold ....................................... 143,156 25,658,027 1,509,379
Dividends and interest .................................... 103,925 347,502 2,768,455
Affiliates ................................................ 16,929 -- 160,222
Unrealized gain on forward
exchange contracts (Note 6) ................................ -- -- 54,246
--------------------------------------------------
Total assets .......................................... 65,773,869 5,122,664,852 173,585,635
--------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ........................... -- 86,784,575 6,305,465
Capital shares redeemed ................................... 427 2,558,612 73,749
Affiliates ................................................ 57,058 5,954,813 96,365
Shareholders .............................................. 61,526 11,226,579 85,744
Payable upon return of
securities loaned (Note 10) ................................ 2,322,000 207,631,985 --
Unrealized loss on forward
exchange contracts (Note 6) ................................ -- -- 379,760
Other liabilities .......................................... 166,823 145,500 11,154
--------------------------------------------------
Total liabilities ..................................... 2,607,834 314,302,064 6,952,237
--------------------------------------------------
Net assets, at value ................................. $63,166,035 $4,808,362,788 $166,633,398
==================================================
Franklin Franklin
Franklin Natural Small Cap Strategic
Resources Fund Growth Fund Income Fund
--------------------------------------------------
<S> <C> <C> <C>
Net assets consist of:
Undistributed net investment income ........................ $ 293,376 $ -- $ 131,047
Net unrealized appreciation ................................ 6,322,455 646,002,070 2,252,475
Accumulated net realized gain (loss) ....................... (612,877) 62,459,516 (134,177)
Capital shares ............................................. 57,163,081 4,099,901,202 164,384,053
--------------------------------------------------
Net assets, at value .................................. $63,166,035 $4,808,362,788 $166,633,398
==================================================
Class I:
Net assets, at value ....................................... $62,273,906 $3,957,972,469 $166,633,398
==================================================
Shares outstanding ......................................... 4,028,477 152,638,807 14,831,268
==================================================
Net assets value per share* ................................ $15.46 $25.93 $11.24
==================================================
Maximum offering price per share
(net asset value per share O 95.50%, 95.50%, 95.75%,
respectively) .............................................. $16.19 $27.15 $11.74
==================================================
Class II:
Net assets, at value ....................................... -- $ 731,707,459 --
==================================================
Shares outstanding ......................................... -- 28,598,878 --
==================================================
Net asset value per share* ................................. -- $25.59 --
==================================================
Maximum offering price per share
(net asset value per share O 99.00%) ....................... -- $25.85 --
==================================================
Advisor Class:
Net assets, at value ....................................... $ 892,129 $ 118,682,860 --
==================================================
Shares outstanding ......................................... 57,638 4,563,483 --
==================================================
Net asset value and maximum offering price per share ....... $15.48 $26.01 --
==================================================
</TABLE>
*Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Operations
for the year ended April 30, 1998
<TABLE>
<CAPTION>
Franklin Franklin
Biotechnology Franklin California
Discovery Fund** Blue Chip Fund Growth Fund
--------------------------------------------------
<S> <C> <C> <C>
Investment income:*
Dividends .................................................. $-- $ 130,525 $ 5,006,474
Interest ................................................... 328,275 110,911 4,606,211
--------------------------------------------------
Total investment income ............................... 328,275 241,436 9,612,685
--------------------------------------------------
Expenses:
Management fees (Note 3) ................................... 196,583 91,184 2,866,217
Administrative fees (Note 3) ............................... 44,500 -- --
Distribution fees (Note 3)
Class I ................................................... 104,362 26,000 1,300,088
Class II .................................................. -- -- 687,671
Transfer agent fees (Note 3) ............................... 79,420 34,500 982,605
Custodian fees ............................................. 9,943 5,156 7,473
Reports to shareholders .................................... 10,430 10,327 257,967
Registration and filing fees ............................... 1,250 16,375 68,708
Professional fees .......................................... 12,971 1,841 19,784
Trustees' fees and expenses ................................ 120 42 4,469
Amortization of offering costs (Note 1) .................... 32,782 -- --
Pricing fees ............................................... -- 13,732 1,415
Other ...................................................... 8,454 5,725 77,661
--------------------------------------------------
Total expenses ........................................ 500,815 204,882 6,274,058
Expenses waived/paid by affiliate (Note 3) ............ (35,315) (73,186) --
--------------------------------------------------
Net expenses ......................................... 465,500 131,696 6,274,058
--------------------------------------------------
Net investment income (loss) ........................ (137,225) 109,740 3,338,627
--------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ............................................... (362,395) (362,701) 42,533,146
Foreign currency transactions ............................. 2,676 (8,732) --
Securities sold short ..................................... 438,271 -- --
--------------------------------------------------
Net realized gain (loss) ................................. 78,552 (371,433) 42,533,146
Net unrealized appreciation (depreciation) on:
Investments ............................................... 2,650,654 2,024,983 104,216,403
Translation of assets and liabilities
denominated in foreign currencies ........................... -- (3,920) --
--------------------------------------------------
Net unrealized appreciation .............................. 2,650,654 2,021,063 104,216,403
--------------------------------------------------
Net realized and unrealized gain ............................ 2,729,206 1,649,630 146,749,549
--------------------------------------------------
Net increase in net assets resulting from operations ........ $2,591,981 $1,759,370 $150,088,176
==================================================
*Net of foreign taxes of $12,590 for the Franklin Blue Chip Fund.
**For the period September 15, 1997 (effective date) to April 30, 1998.
Franklin
Global Health Franklin Global Franklin MidCap
Care Fund Utilities Fund Growth Fund
--------------------------------------------------
<S> <C> <C> <C>
Investment income:*
Dividends .................................................. $ 219,084 $5,674,618 $ 91,792
Interest ................................................... 753,241 762,319 146,256
--------------------------------------------------
Total investment income ............................... 972,325 6,436,937 238,048
--------------------------------------------------
Expenses:
Management fees (Note 3) ................................... 1,141,626 1,179,477 135,485
Distribution fees (Note 3)
Class I ................................................... 469,000 502,459 44,768
Class II .................................................. 188,100 121,500 --
Transfer agent fees (Note 3) ............................... 466,405 291,025 31,574
Custodian fees ............................................. 14,568 33,815 296
Reports to shareholders .................................... 122,578 76,956 9,450
Registration and filing fees ............................... 63,953 32,452 17,537
Professional fees .......................................... 7,472 7,684 4,228
Trustees' fees and expenses ................................ 1,805 1,843 185
Pricing fees ............................................... 1,240 4,645 117
Other ...................................................... 5,870 6,425 500
--------------------------------------------------
Total expenses ........................................ 2,482,617 2,258,281 244,140
--------------------------------------------------
Net investment income (loss) ......................... (1,510,292) 4,178,656 (6,092)
--------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ............................................... 7,408,991 22,104,757 900,767
Foreign currency transactions ............................. (65,505) (36,764) (1,488)
--------------------------------------------------
Net realized gain ........................................ 7,343,486 22,067,993 899,279
Net unrealized appreciation on:
Investments ............................................... 39,298,346 39,396,011 4,795,383
Translation of assets and liabilities
denominated in foreign currencies .......................... 826 229 --
--------------------------------------------------
Net unrealized appreciation .............................. 39,299,172 39,396,240 4,795,383
--------------------------------------------------
Net realized and unrealized gain ............................ 46,642,658 61,464,233 5,694,662
--------------------------------------------------
Net increase in net assets resulting from operations ........ $45,132,366 $65,642,889 $5,688,570
==================================================
*Net of foreign taxes of $45,298, $183,892, and $1,486 for the Franklin Global
Health Care Fund, the Franklin Global Utilities Fund, and the Franklin MidCap
Growth Fund, respectively.
Franklin Franklin
Franklin Natural Small Cap Strategic
Resources Fund Growth Fund Income Fund
--------------------------------------------------
<S> <C> <C> <C>
Investment income:*
Dividends (Note 9) ......................................... $ 553,710 $ 9,764,392 $ 271,509
Interest ................................................... 383,110 25,927,842 6,533,406
--------------------------------------------------
Total investment income ............................... 936,820 35,692,234 6,804,915
--------------------------------------------------
Expenses:
Management fees (Note 3) ................................... 357,984 13,566,077 527,061
Distribution fees (Note 3)
Class I ................................................... 181,570 6,173,460 222,922
Class II .................................................. -- 4,283,103 --
Transfer agent fees (Note 3) ............................... 113,674 3,755,444 66,796
Custodian fees ............................................. 8,187 50,895 11,527
Reports to shareholders .................................... 34,867 742,709 19,266
Registration and filing fees ............................... 41,738 595,799 40,100
Professional fees .......................................... 3,165 89,388 3,994
Trustees' fees and expenses ................................ 593 21,703 692
Pricing fees ............................................... 4,783 5,997 1,430
Other ...................................................... 1,087 40,447 8,029
--------------------------------------------------
Total expenses ........................................ 747,648 29,325,022 901,817
Expenses waived/paid by affiliate (Note 3) ............ (198,780) -- (687,283)
--------------------------------------------------
Net expenses ......................................... 548,868 29,325,022 214,534
--------------------------------------------------
Net investment income ............................... 387,952 6,367,212 6,590,381
--------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ............................................... 3,242,908 168,904,266 343,200
Foreign currency transactions ............................. 26,123 1,316 (7,888)
--------------------------------------------------
Net realized gain ........................................ 3,269,031 168,905,582 335,312
Net unrealized appreciation on:
Investments ............................................... 4,698,227 660,877,005 2,122,179
Translation of assets and liabilities
denominated in foreign currencies .......................... 18 -- --
--------------------------------------------------
Net unrealized appreciation .............................. 4,698,245 660,877,005 2,122,179
--------------------------------------------------
Net realized and unrealized gain ............................ 7,967,276 829,782,587 2,457,491
--------------------------------------------------
Net increase in net assets resulting from operations ........ $8,355,228 $836,149,799 $9,047,872
==================================================
*Net of foreign taxes of $14,839 and $133,122 for the Franklin Natural Resources
Fund and the Franklin Small Cap Growth Fund, respectively.
FRANKLIN STRATEGIC SERIES
Financial Statements (continued)
Statements of Changes in Net Assets
for the years ended April 30, 1998 and 1997
Franklin
Biotechnology Franklin
Discovery Fund* Blue Chip Fund
-------------------------------------------------
1998 1998 1997**
-------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) .............................. $ (137,225) $ 109,740 $ 35,615
Net realized gain (loss) from
investments and foreign currency
transactions ............................................... 78,552 (371,433) 15,018
Net unrealized appreciation on
investments and translation of assets
and liabilities denominated in foreign currencies .......... 2,650,654 2,021,063 287,020
-------------------------------------------------
Net increase in net assets
resulting from operations .................................. 2,591,981 1,759,370 337,653
Distributions to shareholders from:
Net investment income:
Class I ................................................... -- (61,919) (22,820)
Net realized gains:
Class I ................................................... (92,644) (81,033) --
-------------------------------------------------
Total distributions to shareholders ......................... (92,644) (142,952) (22,820)
Capital share transactions: (Note 2)
Class I ................................................... 71,046,820 9,619,758 5,285,111
-------------------------------------------------
Net increase in net assets ............................ 73,546,157 11,236,176 5,599,944
Net assets:
Beginning of year .......................................... -- 5,599,944 --
-------------------------------------------------
End of year ................................................ $73,546,157 $16,836,120 $5,599,944
=================================================
Undistributed net investment income
(loss) included in net assets
End of year ................................................ $-- $ 51,383 $ 12,294
=================================================
*For the period September 15, 1997 (effective date) to April 30, 1998.
**For the period June 3, 1996 (effective date) to April 30, 1997.
Franklin Franklin
California Growth Fund Global Health Care Fund
-----------------------------------------------------------
1998 1997 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) .............................. $ 3,338,627 $ 1,347,123 $ (1,510,292) $ (615,092)
Net realized gain from
investments and foreign
currency transactions ...................................... 42,533,146 5,419,170 7,343,486 9,002,325
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies .............. 104,216,403 (1,845,799) 39,299,172 (33,436,572)
-----------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations .................................. 150,088,176 4,920,494 45,132,366 (25,049,339)
Distributions to shareholders from:
Net investment income:
Class I ................................................... (2,778,436) (856,516) (839,395) (288,917)
Class II .................................................. (56,235) (15,424) -- --
Net realized gains:
Class I ................................................... (20,449,548) (3,662,883) (10,783,573) (3,142,405)
Class II .................................................. (2,848,861) (130,572) (1,181,824) (90,072)
-----------------------------------------------------------
Total distributions to shareholders ......................... (26,133,080) (4,665,395) (12,804,792) (3,521,394)
Capital share transactions: (Note 2)
Class I ................................................... 328,134,373 200,527,555 (4,628,248) 69,202,314
Class II .................................................. 84,411,109 25,497,086 13,414,237 11,206,101
-----------------------------------------------------------
Total capital share transactions ............................ 412,545,482 226,024,641 8,785,989 80,408,415
-----------------------------------------------------------
Net increase in net assets ............................ 536,500,578 226,279,740 41,113,563 51,837,682
Net assets:
Beginning of year .......................................... 307,454,506 81,174,766 160,752,072 108,914,390
-----------------------------------------------------------
End of year ................................................$843,955,084 $307,454,506 $201,865,635 $160,752,072
===========================================================
Undistributed net investment income included in
net assets
End of year ............................................... $ 1,171,577 $ 667,621 $-- $--
===========================================================
Franklin Franklin
Global Utilities Fund MidCap Growth Fund
-----------------------------------------------------------
1998 1997 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income (loss) .............................. $ 4,178,656 $ 4,919,700 $ (6,092) $ (22,588)
Net realized gain from investments
and foreign currency transactions .......................... 22,067,993 20,104,534 899,279 545,132
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies .............. 39,396,240 (3,808,807) 4,795,383 (3,730)
-----------------------------------------------------------
Net increase in net assets resulting
from operations ............................................ 65,642,889 21,215,427 5,688,570 518,814
Distributions to shareholders from:
Net investment income:
Class I ................................................... (4,337,700) (4,357,887) -- (26,689)
Class II .................................................. (173,616) (103,773) -- --
Net realized gains:
Class I ................................................... (20,433,197) (13,464,544) (759,611) (1,366,521)
Class II .................................................. (1,296,647) (541,655) -- --
Total distributions to shareholders ......................... (26,241,160) (18,467,859) (759,611) (1,393,210)
Capital share transactions: (Note 2)
Class I ................................................... 15,321,019 4,024,519 12,082,084 6,152,403
Class II .................................................. 5,705,054 5,766,591 -- --
-----------------------------------------------------------
Total capital share transactions ............................ 21,026,073 9,791,110 12,082,084 6,152,403
-----------------------------------------------------------
Net increase in net assets ............................ 60,427,802 12,538,678 17,011,043 5,278,007
Net assets:
Beginning of year .......................................... 182,490,185 169,951,507 12,852,619 7,574,612
-----------------------------------------------------------
End of year ................................................$242,917,987 $182,490,185 $29,863,662 $12,852,619
===========================================================
Undistributed net investment income included in
net assets
End of year ............................................... $ 1,555,065 $ 1,924,489 $-- $--
===========================================================
Franklin Franklin
Natural Resources Fund Small Cap Growth Fund
-----------------------------------------------------------
1998 1997 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ..................................... $ 387,952 $ 201,953 $ 6,367,212 $ 176,656
Net realized gain from investments and foreign
currency transactions ...................................... 3,269,031 52,954 168,905,582 40,556,983
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies .............. 4,698,245 442,249 660,877,005 (72,391,160)
-----------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations .................................. 8,355,228 697,156 836,149,799 (31,657,521)
Distributions to shareholders from:
Net investment income:
Class I ................................................... (290,715) (151,754) (10,251,644) (2,394,321)
Advisor Class ............................................. (11,637) -- (376,164) --
Net realized gains:
Class I ................................................... (3,235,588) (678,900) (103,290,267) (28,319,877)
Class II .................................................. -- -- (19,206,121) (3,174,405)
Advisor Class ............................................. (65,092) -- (2,705,237) --
-----------------------------------------------------------
Total distributions to shareholders ......................... (3,603,032) (830,654) (135,829,433) (33,888,603)
Capital share transactions: (Note 2)
Class I ................................................... 12,387,988 35,584,860 2,294,635,207 681,937,816
Class II .................................................. -- -- 492,492,347 130,927,016
Advisor Class ............................................. (483,354) 1,148,975 84,621,122 19,961,079
-----------------------------------------------------------
Total capital share transactions ............................ 11,904,634 36,733,835 2,871,748,676 832,825,911
-----------------------------------------------------------
Net increase in net assets ............................ 16,656,830 36,600,337 3,572,069,042 767,279,787
Net assets:
Beginning of year .......................................... 46,509,205 9,908,868 1,236,293,746 469,013,959
-----------------------------------------------------------
End of year ................................................ $63,166,035 $46,509,205 $4,808,362,788 $1,236,293,746
===========================================================
Undistributed net investment income included in
net assets
End of year ............................................... $ 293,376 $ 227,995 $ -- $ --
===========================================================
Franklin
Strategic Income Fund
-------------------------
1998 1997
-------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income .................................................... $ 6,590,381 $ 1,782,592
Net realized gain from investments
and foreign currency transactions .......................................... 335,312 632,481
Net unrealized appreciation (depreciation)
on investments and translation of assets and
liabilities denominated in foreign currencies ............................. 2,122,179 (329,459)
-------------------------
Net increase in net assets resulting from operations ................. 9,047,872 2,085,614
Distributions to shareholders from:
Net investment income:
Class I .................................................................. (6,541,159) (1,770,285)
Net realized gains:
Class I .................................................................. (692,982) (519,339)
-------------------------
Total distributions to shareholders ........................................ (7,234,141) (2,289,624)
Capital share transactions: (Note 2)
Class I .................................................................. 129,955,768 22,046,373
-------------------------
Net increase in net assets ........................................... 131,769,499 21,842,363
Net assets:
Beginning of year ......................................................... 34,863,899 13,021,536
-------------------------
End of year ............................................................... $166,633,398 $34,863,899
=========================
Undistributed net investment income included in net assets
End of year ............................................................... $ 131,047 $ 141,184
=========================
</TABLE>
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (the Trust) is registered under the Investment Company
Act of 1940 as an open-ended investment company, consisting of nine separate
series (the Funds). All Funds are non-diversified except the Franklin Blue Chip
Fund, the Franklin MidCap Growth Fund, and the Franklin Small Cap Growth Fund.
The Funds and their investment objectives are:
Capital Growth Growth and Income Total Return
- - --------------------------------------------------------------------------------
Biotechnology Discovery Fund Strategic Income Fund Global Utilities Fund
Blue Chip Fund Natural Resources Fund
California Growth Fund
Global Health Care Fund
MidCap Growth Fund
Small Cap Growth Fund
The following summarizes the Funds' significant accounting policies.
a. Security Valuation:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Trustees.
b. Foreign Currency Translation:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. Joint Repurchase Agreement:
The Funds may enter into a joint repurchase agreement whereby their uninvested
cash balance is deposited into a joint cash account to be used to invest in one
or more repurchase agreements. The value and face amount of the joint repurchase
agreement are allocated to the Funds based on their pro-rata interest. A
repurchase agreement is accounted for as a loan by the Funds to the seller,
collateralized by securities which are delivered to the Funds' custodian. The
market value, including accrued interest, of the initial collateralization is
required to be at least 102% of the dollar amount invested by the Funds, with
the value of the underlying securities marked to market daily to maintain
coverage of at least 100%. At April 30, 1998, all outstanding repurchase
agreements had been entered into on that date.
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)
d. Forward Exchange Contracts:
The Strategic Income Fund may enter into forward exchange contracts to hedge
against foreign exchange risks. These contracts are valued daily and the Fund's
equity therein is included in the Statement of Assets and Liabilities. Realized
and unrealized gains and losses are included in the Statement of Operations (see
Note 6 for details).
e. Securities Sold Short:
The Biotechnology Discovery Fund is engaged in selling securities short, which
obligates the Fund to replace a security borrowed by purchasing the same
security at the current market value. The Fund would incur a loss if the price
of the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund would realize a gain if
the price of the security declines between those dates. These instruments
involve market risk
in excess of the amount recognized on the Statement of Assets and Liabilities.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit for the broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short.
f. Income Taxes:
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
g. Security Transactions, Investment Income, Expenses and Distributions:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount is
amortized on an income tax basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets. Other expenses are
charged to each Fund on a specific identification basis.
Distributions received by the Trust from securities may be a return of capital
(ROC). Such distributions reduce the cost basis of the securities, and any
distributions in excess of the cost basis are recognized as capital gains.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
h. Offering Costs:
Offering costs are amortized on a straight-line basis over twelve months.
i. Accounting Estimates:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARESOFBENEFICIALINTEREST
The classes of shares offered within each of the Funds are indicated below. The
shares have the same rights except for their initial sales load, distribution
fees, voting rights on matters affecting a single class and the exchange
privilege of each class.
<TABLE>
<CAPTION>
Class I Class I & Class II Class I & Advisor Class Class I, Class II,& Advisor Class
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Biotechnology Discovery Fund California Growth Fund Natural Resources Fund Small Cap Growth Fund
Blue Chip Fund Global Health Care Fund
MidCap Growth Fund Global Utilities Fund
Strategic Income Fund
</TABLE>
At April 30, 1998, there were an unlimited number of shares authorized ($.01 par
value). On February 26, 1998, the Board approved the establishment of a second
class of shares, Class II, for the Franklin Strategic Income Fund. Class II
shares will become available for sale on May 1, 1998. Transactions in the Funds'
shares were as follows:
<TABLE>
<CAPTION>
Franklin Biotechnology Franklin Franklin
Discovery Fund Blue Chip Fund California Growth Fund
----------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class I
Year ended April 30, 19981
Shares sold ................. 3,010,054 $77,917,478 1,118,441 $12,925,246 20,145,768 $465,817,703
Shares issued in reinvestment
of distributions ............ 3,075 72,075 12,437 135,809 978,677 21,399,872
Shares redeemed ............. (278,070) (6,942,733) (295,806) (3,441,297) (6,859,634) (159,083,202)
----------------------------------------------------------------------------------------
Net increase ................ 2,735,059 $71,046,820 835,072 $ 9,619,758 14,264,811 $328,134,373
========================================================================================
Year ended April 30, 19972
Shares sold ................................................. 612,646 $ 6,294,403 13,366,627 $262,790,549
Shares issued in reinvestment of distributions .............. 2,160 22,245 210,190 4,152,217
Shares redeemed ............................................. (98,638) (1,031,537) (3,404,453) (66,415,211)
-------------------------------------------------------
Net increase ................................................ 516,168 $ 5,285,111 10,172,364 $200,527,555
=======================================================
Class II
Year ended April 30, 1998
Shares sold ................................................................... 4,008,172 $ 92,395,912
Shares issued in reinvestment of distributions ................................ 122,953 2,681,530
Shares redeemed ............................................................... (460,393) (10,666,333)
----------------------------
Net increase .................................................................. 3,670,732 $ 84,411,109
============================
Year ended April 30, 19973
Shares sold ................................................................... 1,316,359 $ 26,332,041
Shares issued in reinvestment of distributions ................................ 6,813 135,235
Shares redeemed ............................................................... (49,082) (970,190)
----------------------------
Net increase .................................................................. 1,274,090 $ 25,497,086
============================
</TABLE>
1For the Biotechnology Fund, for the period September 15,1997 (effective date)
to April 30, 1998.
2For the Blue Chip Fund, for the period June 3, 1996 (effective date) to April
30, 1997.
3For the California Growth Fund, for the period September 3, 1996 (effective
date) to April 30, 1997.
2. SHARES OF BENEFICIALINTEREST (cont.)
<TABLE>
<CAPTION>
Franklin Franklin Franklin
Global Health Care Fund Global Utilities Fund MidCap Growth Fund
---------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class I
Year ended April 30, 1998
Shares sold ................. 5,859,007 $114,702,245 3,212,803 $52,323,466 1,253,115 $20,195,538
Shares issued in reinvestment
of distributions ............ 579,437 10,337,126 1,370,293 20,834,692 47,614 724,287
Shares redeemed ............. (6,631,021) (129,667,619) (3,569,029) (57,837,139) (551,956) (8,837,741)
---------------------------------------------------------------------------------------------
Net increase (decrease) ..... (192,577) $ (4,628,248) 1,014,067 $15,321,019 748,773 $12,082,084
=============================================================================================
Year ended April 30, 1997
Shares sold ................. 9,894,341 $179,514,277 2,133,940 $31,224,215 436,500 $ 6,261,329
Shares issued in reinvestment
of distributions ............ 173,822 3,042,776 1,052,925 14,710,262 99,179 1,337,419
Shares redeemed ............. (6,350,088) (113,354,739) (2,859,257) (41,909,958) (104,275) (1,446,345)
---------------------------------------------------------------------------------------------
Net increase ................ 3,718,075 $ 69,202,314 327,608 $ 4,024,519 431,404 $ 6,152,403
=============================================================================================
Class II
Year ended April 30, 1998
Shares sold ................. 977,854 $ 18,978,351 374,083 $ 6,062,631
Shares issued in reinvestment
of distributions ............ 59,618 1,060,013 83,729 1,266,098
Shares redeemed ............. (344,952) (6,624,127) (100,619) (1,623,675)
------------------------------------------------------------
Net increase ................ 692,520 $ 13,414,237 357,193 $ 5,705,054
============================================================
Year ended April 30, 19974
Shares sold ................. 642,015 $ 11,438,930 476,121 $ 6,947,138
Shares issued in reinvestment
of distributions ............ 4,570 79,609 38,768 539,298
Shares redeemed ............. (18,004) (312,438) (117,318) (1,719,845)
------------------------------------------------------------
Net increase ................ 628,581 $ 11,206,101 397,571 $ 5,766,591
============================================================
Franklin Franklin Franklin
Natural Resources Fund Small Cap Growth Fund Strategic Income Fund
---------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class I
Year ended April 30, 1998
Shares sold ................. 3,460,003 $53,383,689 136,826,460 $3,281,727,105 13,008,094 $145,482,936
Shares issued in reinvestment
of distributions ............ 233,153 3,232,567 4,660,368 102,667,738 433,246 4,823,299
Shares redeemed ............. (2,890,715) (44,228,268) (45,358,271) (1,089,759,636) (1,820,464) (20,350,467)
---------------------------------------------------------------------------------------------
Net increase ................ 802,441 $12,387,988 96,128,557 $2,294,635,207 11,620,876 $129,955,768
=============================================================================================
4For the Global Health Care Fund, for the period September 3, 1996 (effective
date) to April 30, 1997.
2. SHARESOFBENEFICIALINTEREST (cont.)
Franklin Franklin Franklin
Natural Resources Fund Small Cap Growth Fund Strategic Income Fund
--------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class I
Year ended April 30, 1997
Shares sold ................. 4,011,712 $57,583,589 53,625,870 $1,076,021,349 2,512,297 $ 27,651,501
Shares issued in reinvestment
of distributions ............ 53,467 756,742 1,361,841 27,277,285 157,746 1,730,372
Shares redeemed ............. (1,593,404) (22,755,471) (21,003,120) (421,360,818) (668,531) (7,335,500)
--------------------------------------------------------------------------------------------
Net increase ................ 2,471,775 $35,584,860 33,984,591 $ 681,937,816 2,001,512 $ 22,046,373
============================================================================================
Class II
Year ended April 30, 1998
Shares sold ................. 22,584,756 $ 535,761,867
Shares issued in reinvestment of distributions 771,371 16,815,889
Shares redeemed ............. (2,541,642) (60,085,409)
-----------------------------
Net increase ................ 20,814,485 $ 492,492,347
=============================
Year ended April 30, 1997
Shares sold ................. 7,092,087 $ 141,500,263
Shares issued in reinvestment of distributions 141,513 2,814,592
Shares redeemed ............. (674,976) (13,387,839)
-----------------------------
Net increase ................ 6,558,624 $ 130,927,016
=============================
Advisor Class
Year ended April 30, 1998
Shares sold ................. 477,715 $ 7,274,080 3,919,786 $ 93,330,082
Shares issued in reinvestment
of distributions ............ 5,516 76,729 90,328 1,991,723
Shares redeemed ............. (505,389) (7,834,163) (436,261) (10,700,683)
------------------------------------------------------------
Net increase (decrease) ..... (22,158) $ (483,354) 3,573,853 $ 84,621,122
============================================================
Year ended April 30, 19975
Shares sold ................. 147,426 $ 2,125,208 1,065,131 $ 22,124,188
Shares redeemed ............. (67,630) (976,233) (75,501) (2,163,109)
------------------------------------------------------------
Net increase ................ 79,796 $ 1,148,975 989,630 $ 19,961,079
============================================================
</TABLE>
5For the Natural Resources Fund and the Small Cap Growth Fund, for the period
January 2, 1997 (effective date) to April 30, 1997.
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers and/or directors of
Franklin Advisers, Inc. (Advisers), Franklin/Templeton Distributors, Inc.
(Distributors), Franklin Templeton Services, Inc. (FT Services), and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Funds'
investment manager, principal underwriter, administrative manager and transfer
agent, respectively.
All Funds, except the Blue Chip Fund and the MidCap Growth Fund, pay an
investment management fee to Advisers based on the average net assets of the
Funds as follows:
Annualized
Fee Rate Average Daily Net Assets
-----------------------------------------------------------------
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% Over $250 million, up to and including $10 billion
Fees are further reduced on net assets over $10 billion.
The Blue Chip Fund pays an investment management fee to Advisers based on the
average net assets of the Fund as follows:
Annualized
Fee Rate Average Daily Net Assets
-----------------------------------------------------------------
.750% First $500 million
.625% Over $500 million, up to and including $1 billion
.500% Over $1 billion
The MidCap Growth Fund pays an investment management fee to Advisers of .650%
per year of the average daily net assets of the Fund.
The Biotechnology Discovery Fund pays an administrative fee to FT Services based
on the Fund's average net assets as follows:
Annualized
Fee Rate Average Daily Net Assets
-----------------------------------------------------------------
.150% First $200 million
.135% Over $200 million, up to and including $700 million
.100% Over $700 million, up to and including $1.2 billion
.075% Over $1.2 billion
Under a subadvisory agreement, Templeton Investment Counsel, Inc. provides
subadvisory services to the Strategic Income Fund and receives from Advisers
fees based on the average daily net assets of the Fund.
Under an agreement with Advisers, FT Services provides administrative services
to the Funds, except the Biotechnology Discovery Fund. The fee is paid by
Advisers based on the average daily net assets, and is not an additional expense
of the Funds.
Advisers agreed in advance to waive management fees and assume payment of other
expenses for the Biotechnology Discovery Fund, the Blue Chip Fund, the Natural
Resources Fund, and the Strategic Income Fund, as noted in the Statements of
Operations.
The Funds reimburse Distributors annually based on their average daily net
assets for the costs incurred in marketing the Funds' shares as follows:
<TABLE>
<CAPTION>
Biotechnology Discovery Fund California Growth Fund
Blue Chip Fund Global Health Care Fund
MidCap Growth Fund Global Utilities Fund
Strategic Income Fund Natural Resources Fund Small Cap Growth Fund
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Class I .............. .25% .35% .25%
Class II ............. -- -- 1.00%
</TABLE>
3. TRANSACTIONS WITH AFFILIATES (cont.)
Distributors received (paid) net commissions on sales of the Funds' shares, and
received contingent deferred sales charges for the year as follows:
<TABLE>
<CAPTION>
Franklin Franklin Franklin Franklin Franklin
Biotechnology Blue California Global Health Global
Discovery Fund*Chip Fund Growth Fund Care Fund Utilities Fund
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net commissions received (paid) .......... $272,305 $25,642 $(726,970) $ (70,943) $(23,094)
Contingent deferred sales charges ........ $ -- $ -- $ 10,657 $-- $ 2,786
Franklin Franklin Franklin Franklin
MidCap Natural Small Cap Strategic
Growth FundResources Fund Growth Fund Income Fund
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net commissions received (paid) .......... $16,788 $50,410 $(5,536,874) $66,433
Contingent deferred sales charges ........ $ -- $ -- $ 64,163 $ --
</TABLE>
The Funds paid transfer agent fees of $5,821,443, of which $5,029,590 was paid
to Investor Services.
*For the period September 15, 1997 (effective date) to April 30, 1998.
4. INCOME TAXES
At April 30, 1998, the Blue Chip Fund, the Natural Resources Fund and the
Strategic Income Fund have deferred capital losses occurring subsequent to
October 31, 1997 of $428,215, $542,930 and $132,813, respectively. For tax
purposes, such losses will be reflected in the year ending April 30, 1999.
At April 30, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
Franklin Franklin Franklin Franklin Franklin
Biotechnology Blue California Global Health Global
Discovery Fund Chip Fund Growth Fund Care Fund Utilities Fund
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at cost ..........$61,763,876 $14,421,551 $732,735,898 $172,600,684 $191,523,890
===============================================================================
Unrealized appreciation ......$ 6,902,785 $ 2,400,570 $144,134,795 $ 42,717,184 $ 66,404,306
Unrealized depreciation ...... (5,614,042) (88,530) (30,518,638) (19,207,362) (12,027,302)
-------------------------------------------------------------------------------
Net unrealized appreciation ..$ 1,288,743 $ 2,312,040 $113,616,157 $ 23,509,822 $ 54,377,004
===============================================================================
Franklin Franklin Franklin Franklin
MidCap Natural Small Cap Strategic
Growth Fund Resources Fund Growth Fund Income Fund
------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments at cost ..........$24,142,100 $59,222,861 $4,436,303,105 $164,815,201
============================================================
Unrealized appreciation ......$ 6,439,210 $ 9,976,327 $ 849,144,383 $ 3,710,313
Unrealized depreciation ...... (476,495) (3,731,044) (205,683,956) (1,149,951)
------------------------------------------------------------
Net unrealized appreciation ..$ 5,962,715 $ 6,245,283 $ 643,460,427 $ 2,560,362
============================================================
</TABLE>
4. INCOME TAXES (cont.)
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions and
passive foreign investment company shares.
Net realized capital gains (losses) differ for financial statement and tax
purposes primarily due to differing treatments of wash sales, foreign currency
transactions, and passive foreign investment company shares.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended April 30, 1998 were as follows:
<TABLE>
<CAPTION>
Franklin Franklin Franklin Franklin Franklin
Biotechnology Blue California Global Health Global
Discovery Fund* Chip Fund Growth Fund Care Fund Utilities Fund
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases ....................$86,228,321 $14,229,894 $620,237,006 $125,092,238 $95,009,650
Sales ........................$32,475,837 $ 5,056,902 $247,716,955 $124,527,129 $90,143,474
Franklin Franklin Franklin Franklin
MidCap Natural Small Cap Strategic
Growth Fund Resources Fund Growth Fund Income Fund
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases ....................$18,462,611 $42,831,565 $3,496,054,678 $155,514,695
Sales ........................$ 9,172,563 $38,188,590 $1,104,486,467 $ 35,367,419
</TABLE>
*For the period September 15, 1997 (effective date) to April 30, 1998.
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Strategic Income Fund has been a party to financial instruments with
off-balance sheet risk, primarily forward exchange contracts, in order to
minimize the impact on the Fund from adverse changes in the relationship between
the U.S. dollar and foreign currencies and interest rates. These instruments
involve market risk in excess of the amount recognized on the Statement of
Assets and Liabilities. Some of these risks have been minimized by offsetting
contracts. Risks arise from the possible inability of counterparties to meet the
terms of their contracts, future movement in currency values and interest rates
and contract positions that are not exact offsets. The contract amount indicates
the extent of the Fund's involvement in such contracts.
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. At April 30,
1998, the Strategic Income Fund has outstanding forward exchange contracts for
the sale of currencies as set out below. The contracts are reported in the
financial statements at the Fund's net equity, as measured by the difference
between the forward exchange rates at the reporting date and the forward
exchange rates at the day of entry into the contracts.
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (cont.)
<TABLE>
<CAPTION>
In Unrealized
Contracts to Sell (Foreign exchange currency) Exchange for Settlement Date Gain (loss)
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
107,000 Australian Dollar........................ U.S. $ 72,066 5/18/98 U.S. $ 2,281
110,000 Australian Dollar ....................... 72,083 5/07/98 356
483,000 Australian Dollar ....................... 320,096 5/04/98 5,168
325,000 Canadian Dollar ......................... 229,520 5/04/98 2,292
1,376,000 Canadian Dollar ......................... 972,094 5/04/98 10,046
914,000 Deutschemark ............................ 510,614 5/26/98 517
914,000 Deutschemark ............................ 510,843 5/28/98 683
50,400,000 Japanese Yen ............................ 393,136 5/13/98 10,996
52,000,000 Japanese Yen ............................ 396,644 5/13/98 2,372
460,000 New Zealand Dollar ...................... 267,536 5/12/98 12,181
187,000 New Zealand Dollar ...................... 108,273 5/18/98 4,525
100,000 New Zealand Dollar ...................... 55,970 5/26/98 533
----------- ----------
U.S. $ 3,908,875 51,950
=========== ----------
Contracts to Buy (Foreign exchange currency)
110,000 Australian Dollar........................ U.S. $ 71,319 5/07/98 408
601,000 Canadian Dollar ......................... 418,961 5/04/98 1,236
100,000 New Zealand Dollar ...................... 54,785 5/26/98 652
----------- ----------
U.S. $ 545,065 2,296
=========== ----------
Unrealized gain on forward foreign currency contracts .... 54,246
----------
Contracts to Sell (Foreign exchange currency)
15,000,000 Deutschemark............................. U.S. $ 8,126,998 5/07/98 (234,484)
1,828,000 Deutschemark ............................ 991,216 5/06/98 (27,706)
1,828,000 Deutschemark ............................ 991,232 5/05/98 (27,627)
914,000 Deutschemark ............................ 495,176 5/07/98 (14,317)
914,000 Deutschemark ............................ 495,213 5/07/98 (14,280)
914,000 Deutschemark ............................ 497,090 5/11/98 (12,530)
4,450,000 Deutschemark ............................ 2,454,766 5/15/98 (27,045)
2,113,000 Deutschemark ............................ 1,170,961 5/22/98 (7,995)
----------- ----------
U.S. $15,222,652 (365,984)
=========== ----------
Contracts to Buy (Foreign exchange currency)
107,000 Australian Dollar........................ U.S. $ 71,382 5/18/98 (1,597)
1,828,000 Deutschemark ............................ 1,020,830 5/06/98 (1,908)
5,000,000 Deutschemark ............................ 2,795,014 5/07/98 (7,853)
460,000 New Zealand Dollar ...................... 257,577 5/12/98 (2,222)
187,000 New Zealand Dollar ...................... 103,944 5/18/98 (196)
----------- ----------
U.S. $ 4,248,747 (13,776)
=========== ----------
Unrealized loss on forward foreign currency contracts .... (379,760)
----------
Net unrealized loss on forward foreign currency contracts. U.S. $(325,514)
==========
</TABLE>
7. CREDIT RISK AND DEFAULTED SECURITIES
The Strategic Income Fund has 56.2% of its portfolio invested in lower rated and
comparable quality unrated high yield securities, which tend to be more
sensitive to economic conditions than higher rated securities. The risk of loss
due to default by the issuer may be significantly greater for the holders of
high yielding securities because such securities are generally unsecured and are
often subordinated to other creditors of the issuer. At April 30, 1998, the Fund
held defaulted securities with a value aggregating $117,000 representing 0.07%
of the Fund's net assets. For information as to specific securities, see the
accompanying Statement of Investments.
For financial reporting purposes, the Fund discontinues accruing income on
defaulted bonds and provides an estimate for losses on interest receivable.
The Strategic Income Fund has investments in excess of 10% of its total net
assets in Emerging Market Bonds and Foreign Government Bonds. Such concentration
may subject the Fund more significantly to economic changes occurring within
those sectors.
8. RESTRICTED SECURITIES
The Funds may purchase securities through a private offering that generally
cannot be resold to the public without prior registration under the Securities
Act of 1933. The cost of registering such securities are paid by the issuer.
Restricted securities held at April 30, 1998 were as follows:
<TABLE>
<CAPTION>
Acquisition
Shares Issuer Date Cost Value
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Franklin California Growth Fund
359,922 Pacific Retail Trust (.55% of Net Assets) ............... 8/30/96 - 12/16/97 $4,276,861 $4,678,986
Franklin Global Utilities Fund
35,000 CMS Energy Corp., cvt. pfd. (.86% of Net Assets) ........ 6/18/97 $1,750,000 $2,091,250
</TABLE>
9. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" as investments
in portfolio companies in which the Fund owns 5% or more of the outstanding
voting securities. Investments in "affiliated companies" at April 30, 1998 were
as shown below. For the year ended April 30, 1998, dividends and interest income
from "affiliated companies" were $1,915,550.
<TABLE>
<CAPTION>
Number of Number of
Shares Held At Gross Gross Shares Held At Value At Dividend
Name of Issuer Beginning of Year Additions Reductions End of Year End of Year Income
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Franklin California Growth Fund:
Cohr, Inc. ............................ -- 425,000 -- 425,000 $ 3,320,313 $--
RemedyTemp, Inc., Class A ............. 175,000 175,000 -- 350,000 11,112,500 --
---------------------------
Total non-controlled affiliated issuers $ 14,432,813 $ --
===========================
Franklin Global Health Care Fund:
CIMA Labs, Inc. ....................... 575,000 50,000 -- 625,000 $ 2,578,122 $--
Cohr, Inc. ............................ -- 405,500 -- 405,500 3,167,969 --
Penederm, Inc. ........................ 410,000 115,000 -- 525,000 5,906,250 --
---------------------------
Total non-controlled affiliated issuers $ 11,652,341 $ --
===========================
Franklin Small Cap Growth Fund:
Access Health, Inc. ................... 509,950 465,800 -- 975,750 $ 32,931,563 $--
Activision, Inc. ...................... -- 1,344,400 -- 1,344,400 14,620,350 --
Advanced Health Corp. ................. -- 1,259,300 289,300 970,000 13,822,500 --
Advanced Energy Industries, Inc. ...... -- 1,575,300 201,000 1,374,300 20,442,713 --
Applied Graphics Technologies, Inc. ... -- 960,100 -- 960,100 48,005,000 --
Arch Communications Group, Inc. ....... -- 2,000,000 -- 2,000,000 11,375,000 --
Atlantic Coast Airlines, Inc. ......... 280,500 448,000 28,500 700,000 39,593,750 --
Atwood Oceanics, Inc. ................. 309,500 933,300 26,200 1,216,600 66,532,813 --
Barrett Resources Corp. ............... 540,000 1,143,900 -- 1,683,900 62,514,788 --
CapStar Hotel Co. ..................... 614,900 715,100 -- 1,330,000 42,726,250 --
Clarify, Inc. ......................... -- 1,297,200 -- 1,297,200 17,836,500 --
Coherent, Inc. ........................ 360,000 1,403,400 -- 1,763,400 41,880,750 --
Consolidated Cigar Holdings, Inc. ..... 574,000 414,300 -- 988,300 13,650,894 --
Core Laboratories, NV (Netherlands) ... -- 1,760,100 59,200 1,700,900 48,263,038 --
DepoTech Corp. ........................ 537,800 457,900 -- 995,700 4,574,047 --
Gibraltar Steel Corp. ................. 663,800 349,000 -- 1,012,800 24,307,200 --
Harmonic Lightwaves, Inc. ............. -- 961,500 -- 961,500 16,826,250 --
H.T.E., Inc. .......................... -- 665,400 -- 665,400 18,631,200 --
Inhale Therapeutic Systems ............ 399,200 411,800 -- 811,000 22,708,000 --
Innkeepers USA Trust .................. -- 2,102,800 -- 2,102,800 31,804,850 1,500,240
Integrated Systems, Inc. .............. 611,300 1,480,000 -- 2,091,300 39,473,288 --
Itron, Inc. ........................... -- 1,157,700 -- 1,157,700 17,727,281 --
K2, Inc. .............................. 405,000 555,500 -- 960,500 21,791,344 316,910
Komag, Inc. ........................... 301,000 3,510,600 -- 3,811,600 59,079,800 --
Ladish Company, Inc. .................. -- 802,300 -- 802,300 12,435,650 --
Lomak Petroleum, Inc. ................. -- 1,890,000 -- 1,890,000 26,105,625 98,400
Marquee Group, Inc. ................... -- 1,327,500 -- 1,327,500 5,973,750 --
Mesa Air Group, Inc. .................. -- 1,650,000 3,900 1,646,100 13,168,800 --
Micromuse, Inc. ....................... -- 754,500 -- 754,500 16,787,625 --
Natural Microsystems Corp. ............ 346,600 300,000 -- 646,600 20,852,850 --
Omtool, Ltd. .......................... -- 984,600 46,000 938,600 11,497,850 --
Pediatrix Medical Group, Inc. ......... -- 1,101,500 -- 1,101,500 46,469,531 --
Penederm, Inc. ........................ 531,200 -- -- 531,200 5,976,000 --
Perceptron, Inc. ...................... -- 793,500 -- 793,500 12,100,875 --
Primus Telecommunications Group, Inc. . 513,300 569,500 79,800 1,003,000 23,946,625 --
Franklin Small Cap Growth Fund: (cont.)
Rainbow Technologies, Inc. ............ -- 532,000 -- 532,000 $ 13,167,000 $--
RemedyTemp, Inc., Class A ............. -- 319,300 -- 319,300 10,137,775 --
RockShox, Inc. ........................ 435,500 530,300 -- 965,800 5,432,625 --
Rural Cellular Corp., Class A ......... 528,000 172,800 -- 700,800 12,439,200 --
Serologicals Corp. .................... 738,900 642,900 -- 1,381,800 41,454,000 --
SOS Staffing Services, Inc. ........... -- 872,400 -- 872,400 19,192,800 --
Spectra-Physics Lasers, Inc. .......... -- 1,016,300 -- 1,016,300 18,166,363 --
Spectralink Corp. ..................... 1,050,000 -- -- 1,050,000 4,593,750 --
Tom Brown, Inc. ....................... -- 2,095,800 -- 2,095,800 43,225,875 --
Transcrypt International, Inc. ........ -- 1,212,700 -- 1,212,700 7,870,423 --
Tropical Sportswear International Corp. -- 413,200 -- 413,200 7,024,400 --
U.S. Liquids, Inc. .................... -- 726,200 -- 726,200 17,519,575 --
Vans, Inc. ............................ -- 1,045,500 -- 1,045,500 12,349,969 --
Varco International, Inc. ............. 780,000 2,682,500 -- 3,462,500 106,471,875 --
West Marine, Inc. ..................... -- 1,474,800 -- 1,474,800 36,962,175 --
Western Wireless Corp., Class A ....... 1,094,800 934,400 310,000 1,719,200 33,524,400 --
XcelleNet, Inc. ....................... 75,000 705,100 -- 780,100 15,992,050 --
-----------------------------
Total non-controlled affiliated issuers $1,331,958,605 $1,915,550
=============================
</TABLE>
10. LENDING OF PORTFOLIO SECURITIES
The Global Utilities Fund, the Natural Resources Fund and the Small Cap Growth
Fund loan securities to certain brokers for which they receive cash collateral
against the loaned securities in an amount equal to at least 102% of the market
value of the loaned securities. Net interest income from the investment of the
cash collateral received for the Global Utilities Fund, the Natural Resources
Fund and the Small Cap Growth Fund was $31,243, $38,535 and $2,288,479,
respectively, for the year ended April 30, 1998. The value of the loaned
securities for the Natural Resources Fund and the Small Cap Growth Fund was
$2,260,625 and $200,943,638, respectively, at April 30, 1998.
FRANKLIN STRATEGIC SERIES
Independent Auditors' Report
To the Shareholders and Board of Trustees
of Franklin Strategic Series:
We have audited the accompanying statements of assets and liabilities of each of
the nine funds comprising the Franklin Strategic Series, including each Fund's
statement of investments, as of April 30, 1998, and the related statements of
operations, the statements of changes in net assets and the financial highlights
for each of the periods presented. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of April
30, 1998, by correspondence with the custodians and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the nine funds comprising the Franklin Strategic Series as of April 30, 1998,
the results of their operations, the changes in their net assets, and their
financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
June 4, 1998
FRANKLIN STRATEGIC SERIES
Tax Information
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Trust hereby
designates the following amounts as capital gain dividends for the fiscal year
ended April 30, 1998:
<TABLE>
<CAPTION>
Capital Gains
-----------------------------------------
28% Rate Gain 20% Rate Gain Total
-----------------------------------------
<S> <C> <C> <C>
Franklin Blue Chip Fund ....................................... $ -- $ 14,109 $ 14,109
Franklin California Growth Fund ............................... 8,273,760 6,937,083 15,210,843
Franklin Global Health Care Fund .............................. 704,196 104,965 809,161
Franklin Global Utilities Fund ................................ 2,747,311 12,787,525 15,534,836
Franklin MidCap Growth Fund ................................... 57,674 527,290 584,964
Franklin Natural Resources Fund ............................... 374,040 1,112,029 1,486,069
Franklin Small Cap Growth Fund ................................ 36,673,768 33,530,806 70,204,574
Franklin Strategic Income Fund ................................ 35,273 34,714 69,987
</TABLE>
Under Section 854(b)(2) of the Internal Revenue Code, the Trust hereby
designates the following percentage amounts of the ordinary income dividends as
income qualifying for the dividends received deduction for the fiscal year ended
April 30, 1998:
Franklin Blue Chip Fund ............... 33.53%
Franklin California Growth Fund ....... 18.81%
Franklin Global Health Care Fund ...... .47%
Franklin Global Utilities Fund ........ 31.10%
Franklin MidCap Growth Fund ........... 18.05%
Franklin Natural Resources Fund ....... 12.59%
Franklin Small Cap Growth Fund ........ 4.32%
Franklin Strategic Income Fund ........ 3.78%
FRANKLIN BLUE CHIP ANNUAL REPORT
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM
304 (a) OF REGULATION S-T)
GRAPHIC MATERIAL (1)
This chart shows in pie format the portfolio Industry breakdown as of April
30, 1998, based on total net assets.
Portfolio Industry breakdown April 30, 1998
Drugs 43.0%
Delivery Systems 14.9%
Biomedical 8.1%
Therapeutics 5.4%
Animal Health 3.0%
Diagnostics 2.5%
Cash & Equivalents 23.1%
GRAPHIC MATERIAL (2)
This chart shows in pie format the geographic distribution breakdown of the
fund's securities on April 30, 1998, based on total net assets.
Geographic Distribution
United States 59.7%
Europe 22.0%
Japan 5.6%
Latin America 2.8%
Pacific Rim (excluding Japan) 2.2%
Other 1.2%
Cash & Equivalents 6.5%
GRAPHIC MATERIAL (3)
This chart shows in bar format the portfolio breakdown of the fund's securities
on April 30, 1998, based on total net assets.
Portfolio Breakdown
Consumer Staples 17.8%
Healthcare 11.9%
Technology 11.9%
Financial Services 11.8%
Services 10.3%
Industrial Cyclicals 9.4%
Energy 9.2%
Utilities & Telecommunications 6.0%
Consumer Durables 4.4%
Retail 0.8%
Cash & Equivalents 6.5%
GRAPHIC MATERIAL (4)
The following line graph hypothetically compares the performance of the
Franklin Blue Chip Fund to that of the MSCI World Index, based on a $10,000
investment from 6/3/96 to 4/30/98.
Total Return Index Comparison
DATE FRANKLIN BLUE CHIP FUND MSCI WORLD INDEX
6/3/96 $9,551 $10,000
6/30/96 $9,675 $10,052
7/31/96 $9,398 $9,698
8/31/96 $9,484 $9,812
9/30/96 $9,780 $10,197
10/31/96 $9,780 $10,271
11/30/96 $10,162 $10,848
12/31/96 $10,088 $10,676
1/31/97 $10,261 $10,807
2/28/97 $10,319 $10,933
3/31/97 $10,155 $10,719
4/30/97 $10,424 $11,072
5/31/97 $11,116 $11,757
6/30/97 $11,510 $12,345
7/31/97 $11,981 $12,915
8/31/97 $11,030 $12,054
9/30/97 $11,510 $12,711
10/31/97 $10,578 $12,043
11/30/97 $10,684 $12,259
12/31/97 $10,839 $12,410
1/31/98 $10,946 $12,757
2/28/98 $11,599 $13,622
3/31/98 $11,920 $14,200
4/30/98 $12,134 $14,340
GRAPHIC MATERIAL (5)
This chart shows, in bar format, the sector distribution of total net assets
for the Franklin California Growth Fund as of April 30, 1998.
Electronic Technology 15.7%
Technology Services 14.1%
Finance 8.4%
Real Estate 6.9%
Semiconductors 6.0%
Energy/Minerals 5.7%
Health Technology 5.2%
Retail 5.2%
Other 25.3%
Cash & Equivalents 7.5%
100.0%
GRAPHIC MATERIAL (6)
The following line graph hypothetically compares the performance of the
Franklin California Growth Fund - Class I to that of the Franklin California
250 Growth Index and the S&P 500 Stock Index, based on a $10,000 investment
from October 30, 1991 to April 30, 1998.
FRANKLIN CALIFORNIA FRANKLIN CA 250 GROWTH
DATE GROWTH FUND - CLASS S&P 500 STOCK INDEX
I INDEX
- - -------------------------------------------------------------------------------
10/30/91 $9,550 $10,000 $10,000
10/31/91 $9,550 $10,004 $10,000
11/30/91 $8,861 $9,601 $9,185
12/31/91 $9,845 $10,699 $10,285
1/31/92 $10,548 $10,500 $11,084
2/28/92 $10,683 $10,636 $11,254
3/31/92 $9,960 $10,428 $10,511
4/30/92 $9,517 $10,735 $10,078
5/31/92 $9,546 $10,787 $10,140
6/30/92 $8,953 $10,627 $9,563
7/31/92 $9,215 $11,061 $9,883
8/31/92 $8,808 $10,835 $9,450
9/30/92 $8,914 $10,961 $9,539
10/31/92 $9,341 $10,999 $10,068
11/30/92 $10,176 $11,373 $11,000
12/31/92 $10,386 $11,512 $11,285
1/31/93 $10,718 $11,609 $11,701
2/28/93 $10,279 $11,767 $11,220
3/31/93 $10,396 $12,015 $11,332
4/30/93 $9,966 $11,725 $10,906
5/31/93 $10,689 $12,038 $11,728
6/30/93 $10,665 $12,072 $11,693
7/31/93 $10,419 $12,024 $11,725
8/31/93 $11,117 $12,480 $12,301
9/30/93 $11,578 $12,384 $12,587
10/31/93 $11,735 $12,640 $12,769
11/30/93 $11,706 $12,520 $12,610
12/31/93 $12,211 $12,672 $12,991
1/31/94 $12,751 $13,102 $13,432
2/28/94 $12,917 $12,747 $13,321
3/31/94 $12,627 $12,192 $12,557
4/30/94 $12,513 $12,348 $12,506
5/31/94 $12,585 $12,550 $12,459
6/30/94 $12,218 $12,243 $11,905
7/31/94 $12,658 $12,644 $12,299
8/31/94 $13,493 $13,163 $13,458
9/30/94 $13,592 $12,841 $13,402
10/31/94 $14,053 $13,130 $13,669
11/30/94 $14,097 $12,652 $13,269
12/31/94 $14,230 $12,840 $13,455
1/31/95 $14,218 $13,172 $13,782
2/28/95 $15,208 $13,686 $14,477
3/31/95 $15,784 $14,090 $15,087
4/30/95 $16,152 $14,504 $15,576
5/31/95 $16,797 $15,084 $16,039
6/30/95 $17,927 $15,434 $17,203
7/31/95 $19,454 $15,946 $18,645
8/31/95 $19,895 $15,986 $19,036
9/30/95 $20,384 $16,661 $19,425
10/31/95 $20,420 $16,601 $18,991
11/30/95 $21,064 $17,330 $19,750
12/31/95 $21,008 $17,664 $19,511
1/31/96 $21,255 $18,265 $19,684
2/29/96 $21,973 $18,435 $20,405
3/31/96 $22,155 $18,612 $20,106
4/30/96 $23,824 $18,885 $22,130
5/31/96 $24,359 $19,372 $22,815
6/30/96 $23,627 $19,446 $21,267
7/31/96 $22,227 $18,587 $19,536
8/31/96 $23,614 $18,979 $21,098
9/30/96 $25,132 $20,047 $22,732
10/31/96 $25,446 $20,600 $22,715
11/30/96 $27,290 $22,158 $24,246
12/31/96 $27,401 $21,719 $24,539
1/31/97 $27,844 $23,077 $25,858
2/28/97 $27,066 $23,257 $24,747
3/31/97 $25,498 $22,301 $23,462
4/30/97 $25,940 $23,632 $23,541
5/31/97 $28,433 $25,071 $26,178
6/30/97 $28,492 $26,195 $27,108
7/31/97 $30,967 $28,280 $29,933
8/31/97 $30,779 $26,696 $30,624
9/30/97 $32,958 $28,159 $32,561
10/31/97 $31,882 $27,218 $30,436
11/30/97 $32,218 $28,479 $30,138
12/31/97 $31,705 $28,968 $28,776
1/31/98 $31,242 $29,290 $30,730
2/28/98 $33,710 $31,402 $33,426
3/31/98 $34,411 $33,010 $33,992
4/30/98 $35,028 $33,343 $35,026
GRAPHIC MATERIAL (7)
The following line graph hypothetically compares the performance of the
Franklin California Growth Fund - Class II to that of the Franklin California
250 Growth Index and the S&P 500 Stock Index, based on a $10,000 investment
from September 3, 1996 to April 30, 1998.
FRANKLIN CALIFORNIA FRANKLIN CA 250 GROWTH
DATE GROWTH FUND - CLASS S&P 500 STOCK INDEX
II INDEX
- - -------------------------------------------------------------------------------
9/3/96 $9,901 $10,000 $10,000
9/30/96 $10,520 $10,563 $10,774
10/31/96 $10,641 $10,855 $10,766
11/30/96 $11,407 $11,675 $11,492
12/31/96 $11,446 $11,444 $11,631
1/31/97 $11,619 $12,159 $12,256
2/28/97 $11,289 $12,254 $11,729
3/31/97 $10,627 $11,750 $11,120
4/30/97 $10,806 $12,452 $11,158
5/31/97 $11,833 $13,210 $12,408
6/30/97 $11,854 $13,802 $12,849
7/31/97 $12,876 $14,901 $14,188
8/31/97 $12,787 $14,066 $14,515
9/30/97 $13,730 $14,837 $15,433
10/31/97 $13,230 $14,342 $14,426
11/30/97 $13,359 $15,006 $14,285
12/31/97 $13,140 $15,264 $13,639
1/31/98 $12,947 $15,433 $14,565
2/28/98 $13,963 $16,546 $15,843
3/31/98 $14,237 $17,393 $16,111
4/30/98 $14,490 $17,569 $16,602
GRAPHIC MATERIAL (8)
This chart illustrates in bar format the geographic breakdown of holdings of
Franklin Global Health Care Fund, based on total net assets as of April 30,
1998.
United States 81.6%
Israel 7.8%
Switzerland 3.2%
Mexico 0.7%
Australia 0.5%
United Kingdom 0.1%
Cash & Equivalents 6.1%
GRAPHIC MATERIAL (9)
This chart illustrates in bar format the portfolio breakdown by industry of
holdings of Franklin Global Health Care Fund, based on total net assets as of
April 30, 1998.
Specialty Pharmaceuticals 21.3%
Medical Technology and Supplies 20.2%
Biotechnology 13.0%
Alternate Site Providers 11.8%
Miscellaneous 5.0%
Physician Practice Management 5.0%
Software and Information Systems 4.6%
Managed Care and HMOs 3.5%
Nursing Homes 3.3%
Pharmaceuticals 3.2%
Hospitals 2.3%
Wholesalers/Distributors 0.7%
Cash & Equivalents 6.1%
GRAHPIC MATERIAL (10)
The following line graph compares the performance of Franklin Global Health
Care Fund - Class I with that of the Standard & Poor's 500 Stock Index (S&P
500), based on a hypothetical $10,000 investment from 2/14/92 to 4/30/98.
Franklin Global Health Care
Fund - Class I S&P 500 Index
2/14/92 $9,551 $10,000 S&P 500 $T
2/28/92 $9,790 $10,065 0.65%
3/31/92 $9,083 $9,868 -1.95%
4/30/92 $8,443 $10,158 2.94%
5/29/92 $8,663 $10,208 0.49%
6/30/92 $8,339 $10,056 -1.49%
7/31/92 $8,896 $10,467 4.09%
8/31/92 $8,598 $10,253 -2.05%
9/30/92 $8,407 $10,373 1.17%
10/30/92 $8,810 $10,408 0.34%
11/30/92 $9,453 $10,762 3.40%
12/31/92 $9,603 $10,894 1.23%
1/29/93 $9,603 $10,986 0.84%
2/26/93 $8,321 $11,135 1.36%
3/31/93 $8,417 $11,370 2.11%
4/30/93 $8,562 $11,095 -2.42%
5/30/93 $8,996 $11,391 2.67%
6/30/93 $9,294 $11,424 0.29%
7/30/93 $8,801 $11,379 -0.40%
8/31/93 $8,955 $11,810 3.79%
9/30/93 $9,178 $11,719 -0.77%
10/29/93 $9,749 $11,961 2.07%
11/30/93 $10,049 $11,848 -0.95%
12/31/93 $10,200 $11,991 1.21%
1/31/94 $11,211 $12,399 3.40%
2/28/94 $11,121 $12,063 -2.71%
3/31/94 $10,550 $11,537 -4.36%
4/29/94 $10,440 $11,685 1.28%
5/31/94 $10,560 $11,876 1.64%
6/30/94 $10,098 $11,585 -2.45%
7/29/94 $10,546 $11,965 3.28%
8/31/94 $11,584 $12,456 4.10%
9/30/94 $11,777 $12,152 -2.44%
10/31/94 $12,052 $12,425 2.25%
11/30/94 $11,940 $11,973 -3.64%
12/30/94 $11,657 $12,150 1.48%
1/31/95 $11,721 $12,465 2.59%
2/28/95 $12,188 $12,951 3.90%
3/31/95 $12,729 $13,333 2.95%
4/28/95 $12,145 $13,725 2.94%
5/31/95 $12,506 $14,274 4.00%
6/30/95 $12,911 $14,605 2.32%
7/31/95 $14,107 $15,090 3.32%
8/31/95 $14,897 $15,128 0.25%
9/29/95 $15,773 $15,766 4.22%
10/31/95 $15,688 $15,709 -0.36%
11/30/95 $16,467 $16,399 4.39%
12/29/95 $18,021 $16,716 1.93%
1/31/96 $19,352 $17,284 3.40%
2/29/96 $20,305 $17,445 0.93%
3/29/96 $21,051 $17,612 0.96%
4/30/96 $22,187 $17,871 1.47%
5/31/96 $22,543 $18,332 2.58%
6/28/96 $21,453 $18,402 0.38%
7/31/96 $18,511 $17,588 -4.42%
8/30/96 $19,959 $17,960 2.11%
9/30/96 $21,556 $18,971 5.63%
10/31/96 $19,775 $19,494 2.76%
11/29/96 $20,235 $20,968 7.56%
12/31/96 $20,989 $20,553 -1.98%
1/31/97 $21,670 $21,837 6.25%
2/28/97 $21,670 $22,008 0.78%
3/31/97 $19,802 $21,103 -4.11%
4/30/97 $18,932 $22,363 5.97%
5/31/97 $21,177 $23,725 6.09%
6/30/97 $22,987 $24,788 4.48%
7/31/97 $23,645 $26,761 7.96%
8/31/97 $23,445 $25,262 -5.60%
9/30/97 $26,007 $26,647 5.48%
10/31/97 $24,467 $25,757 -3.34%
11/30/97 $23,551 $26,949 4.63%
12/31/97 $23,130 $27,413 1.72%
1/31/98 $23,105 $27,717 1.11%
2/28/98 $23,659 $29,716 7.21%
3/31/98 $24,439 $31,237 5.12%
4/30/98 $24,276 $31,552 1.01%
GRAPHIC MATERIAL (11)
The following line graph compares the performance of Franklin Global Health
Care Fund - Class II with that of the Standard & Poor's 500 Stock Index (S&P
500), based on a hypothetical $10,000 investment from 9/3/96 to 4/30/98.
Franklin Global Health Care
Fund - Class II S&P 500 Index
9/3/96 $9,897 $10,000 S&P 500 $T
9/30/96 $10,720 $10,563 5.63%
10/31/96 $9,823 $10,855 2.76%
11/29/96 $10,040 $11,675 7.56%
12/31/96 $10,417 $11,444 -1.98%
1/31/97 $10,743 $12,159 6.25%
2/28/97 $10,738 $12,254 0.78%
3/31/97 $9,810 $11,750 -4.11%
4/30/97 $9,378 $12,452 5.97%
5/31/97 $10,475 $13,210 6.09%
6/30/97 $11,368 $13,802 4.48%
7/31/97 $11,683 $14,901 7.96%
8/31/97 $11,578 $14,066 -5.60%
9/30/97 $12,838 $14,837 5.48%
10/31/97 $12,062 $14,342 -3.34%
11/30/97 $11,601 $15,006 4.63%
12/31/97 $11,389 $15,264 1.72%
1/31/98 $11,370 $15,433 1.11%
2/28/98 $11,632 $16,546 7.21%
3/31/98 $12,011 $17,393 5.12%
4/30/98 $11,931 $17,569 1.01%
GRAPHIC MATERIAL (12)
This chart shows in pie format the geographic distribution breakdown of the
fund's securities on April 30, 1998, based on total net assets.
Geographic Distribution on April 30, 1998
United States 62.8%
Continental Europe 15.9%
Latin America 8.7%
Asia 7.4%
United Kingdom 2.6%
Cash & Equivalents 2.6%
GRAPHIC MATERIAL (13)
The following line graph hypothetically compares the performance of the
Franklin Global Utilities Fund Class I shares to that of the S&P 500 Stock
Index, based on a $10,000 investment from 7/2/92 to 4/30/98.
Total Return Index Comparison
FRANKLIN GLOBAL UTILITIES
FUND- S&P 500 STOCK INDEX
CLASS I
-----------------------------------------------------------------
7/ 2/92 $9,551 $10,000
7/31/92 $9,637 $10,409
8/31/92 $9,618 $10,196
9/30/92 $9,580 $10,315
10/30/92 $9,656 $10,350
11/30/92 $9,809 $10,702
12/31/92 $10,076 $10,834
1/29/93 $10,260 $10,925
2/26/93 $10,646 $11,073
3/31/93 $10,908 $11,307
4/30/93 $10,985 $11,033
5/31/93 $11,111 $11,328
6/30/93 $11,283 $11,361
7/30/93 $11,509 $11,315
8/31/93 $12,245 $11,744
9/30/93 $12,372 $11,654
10/29/93 $12,951 $11,895
11/30/93 $12,461 $11,782
12/31/93 $13,243 $11,924
1/31/94 $13,462 $12,330
2/28/94 $12,756 $11,996
3/31/94 $12,358 $11,473
4/29/94 $12,527 $11,619
5/31/94 $12,527 $11,810
6/30/94 $12,040 $11,521
7/29/94 $12,579 $11,899
8/31/94 $12,870 $12,386
9/30/94 $12,683 $12,084
10/31/94 $12,787 $12,356
11/30/94 $12,299 $11,906
12/30/94 $12,079 $12,082
1/31/95 $12,343 $12,395
2/28/95 $12,449 $12,879
3/31/95 $12,586 $13,259
4/28/95 $12,924 $13,649
5/31/95 $13,653 $14,195
6/30/95 $13,588 $14,524
7/31/95 $13,859 $15,006
8/31/95 $13,686 $15,044
9/29/95 $14,336 $15,678
10/31/95 $14,358 $15,622
11/30/95 $14,835 $16,308
12/29/95 $15,396 $16,622
1/31/96 $15,687 $17,188
2/29/96 $15,709 $17,347
3/29/96 $15,675 $17,514
4/30/96 $15,932 $17,771
5/31/96 $16,244 $18,230
6/28/96 $16,524 $18,299
7/31/96 $15,855 $17,490
8/30/96 $16,331 $17,859
9/30/96 $16,546 $18,865
10/31/96 $16,965 $19,386
11/29/96 $17,611 $20,851
12/31/96 $17,708 $20,438
1/31/97 $18,616 $21,716
2/28/97 $18,529 $21,885
3/31/97 $17,857 $20,986
4/30/97 $17,994 $22,238
5/30/97 $19,338 $23,593
6/30/97 $20,046 $24,650
7/31/97 $20,652 $26,612
8/29/97 $19,705 $25,122
9/30/97 $21,056 $26,498
10/31/97 $20,185 $25,613
11/28/97 $21,195 $26,799
12/31/97 $22,482 $27,260
1/30/98 $22,226 $27,563
2/27/98 $23,377 $29,550
3/31/98 $25,095 $31,063
4/30/98 $24,655 $31,377
GRAPHIC MATERIAL (14)
The following line graph hypothetically compares the performance of the
Franklin Global Utilities Fund Class II shares to that of the S&P 500 Stock
Index, based on a $10,000 investment from 5/1/95 to 4/30/98.
Total Return Index Comparison
FRANKLIN GLOBAL UTILITIES
FUND- S&P 500 STOCK INDEX
CLASS II
-----------------------------------------------------------------
5/ 1/95 $9,902 $10,000
5/31/95 $10,504 $10,400
6/30/95 $10,449 $10,641
7/31/95 $10,641 $10,995
8/31/95 $10,507 $11,022
9/29/95 $10,991 $11,487
10/31/95 $11,008 $11,446
11/30/95 $11,358 $11,948
12/29/95 $11,825 $12,179
1/31/96 $12,030 $12,593
2/29/96 $12,039 $12,710
3/29/96 $12,004 $12,832
4/30/96 $12,193 $13,021
5/31/96 $12,424 $13,357
6/28/96 $12,628 $13,407
7/31/96 $12,116 $12,815
8/30/96 $12,472 $13,085
9/30/96 $12,619 $13,822
10/31/96 $12,932 $14,203
11/29/96 $13,409 $15,277
12/31/96 $13,480 $14,975
1/31/97 $14,155 $15,911
2/28/97 $14,089 $16,035
3/31/97 $13,566 $15,376
4/30/97 $13,661 $16,294
5/30/97 $14,678 $17,286
6/30/97 $15,221 $18,060
7/31/97 $15,663 $19,498
8/29/97 $14,942 $18,406
9/30/97 $15,951 $19,415
10/31/97 $15,278 $18,766
11/28/97 $16,038 $19,635
12/31/97 $17,000 $19,973
1/30/98 $16,806 $20,195
2/27/98 $17,658 $21,651
3/31/98 $18,952 $22,759
4/30/98 $18,607 $22,989
FRANKLIN MIDCAP GROWTH FUND
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM
304 (a) OF REGULATION S-T)
GRAPHIC MATERIAL (15)
This chart shows in bar format the portfolio breakdown of the fund's securities
on April 30, 1998, based on total net assets.
Portfolio Breakdown
Consumer Services 11.6%
Finance 9.1%
Retail 8.2%
Industrial Services 7.9%
Technology Services 5.8%
Commercial Services 5.6%
Consumer Non-Durables 5.6%
Electronic Technology 5.5%
Semiconductors 4.8%
Consumer Durables 4.3%
Other 17.8%
Cash & Equivalents 13.8%
GRAPHIC MATERIAL (16)
The following line graph hypothetically compares the performance of the
Franklin MidCap Growth Fund to that of the S&P MidCap 400 Index, based on a
$10,000 investment from 8/17/93 to 4/30/98.
Total Return Index Comparison
FRANKLIN MIDCAP GROWTH
DATE FUND S&P MIDCAP 400 INDEX
- - -------------------------------------------------------------------------
8/17/93 $9,551 $10,000
8/31/93 $9,551 $10,187
9/30/93 $9,914 $10,295
10/31/93 $9,828 $10,329
11/30/93 $9,542 $10,101
12/31/93 $10,015 $10,569
1/31/94 $10,237 $10,816
2/28/94 $10,025 $10,662
3/31/94 $9,581 $10,168
4/30/94 $9,706 $10,244
5/31/94 $9,571 $10,146
6/30/94 $9,232 $9,797
7/31/94 $9,507 $10,129
8/31/94 $10,076 $10,660
9/30/94 $9,821 $10,461
10/31/94 $9,978 $10,575
11/30/94 $9,585 $10,098
12/31/94 $9,724 $10,191
1/31/95 $9,784 $10,298
2/28/95 $10,258 $10,837
3/31/95 $10,466 $11,026
4/30/95 $10,683 $11,248
5/31/95 $10,960 $11,519
6/30/95 $11,545 $11,988
7/31/95 $12,233 $12,613
8/31/95 $12,503 $12,847
9/30/95 $12,792 $13,158
10/31/95 $12,653 $12,819
11/30/95 $13,052 $13,380
12/31/95 $12,941 $13,346
1/31/96 $13,155 $13,540
2/29/96 $13,368 $14,000
3/31/96 $13,480 $14,168
4/30/96 $14,465 $14,600
5/31/96 $14,760 $14,797
6/30/96 $14,302 $14,575
7/31/96 $13,262 $13,590
8/31/96 $14,302 $14,374
9/30/96 $15,260 $15,001
10/31/96 $15,056 $15,044
11/30/96 $16,249 $15,891
12/31/96 $15,977 $15,909
1/31/97 $16,623 $16,505
2/28/97 $15,943 $16,370
3/31/97 $15,067 $15,673
4/30/97 $15,401 $16,079
5/31/97 $16,796 $17,484
6/30/97 $17,188 $17,975
7/31/97 $18,433 $19,755
8/31/97 $18,456 $19,731
9/30/97 $20,012 $20,866
10/31/97 $19,090 $19,958
11/30/97 $18,848 $20,253
12/31/97 $18,763 $21,039
1/31/98 $18,213 $20,639
2/28/98 $19,934 $22,348
3/31/98 $20,603 $23,356
4/30/98 $20,842 $23,784
GRAPHIC MATERIAL (17)
This chart shows in pie format the portfolio breakdown of the fund's securities
on April 30, 1998, based on total net assets.
Portfolio Breakdown
Energy 54.2%
Gold & Precious Metals 9.8%
Chemicals 7.5%
Iron/Steel 6.1%
Forest Products & Paper 3.8%
Service/Related Industries 3.0%
REITs 2.7%
Base Metals 2.3%
Cash & Equivalents 10.6%
GRAPHIC MATERIAL (18)
This chart shows in bar format the geographic distribution breakdown of the
fund's securities on April 30, 1998, based on total net assets.
Geographic Distribution
United States 62.6%
Canada 12.7%
Europe 6.4%
South America 3.5%
Asia 2.2%
Africa 1.3%
Australia 0.7%
Cash & Equivalents 10.6%
GRAPHIC MATERIAL (19)
The following line graph hypothetically compares the performance of the
Franklin Natural Resources Fund Class I shares to that of the S&P 500 Stock
Index, based on a $10,000 investment from 6/5/95 to 4/30/98.
Total Return Index Comparison
FRANKLIN NATURAL
RESOURCES FUND -
DATE CLASS I S&P 500 STOCK INDEX
----
6/5/95 $9,551 $10,000
6/30/95 $9,666 $10,193
7/31/95 $9,857 $10,531
8/31/95 $9,895 $10,558
9/30/95 $9,828 $11,003
10/31/95 $9,446 $10,964
11/30/95 $9,914 $11,445
12/31/95 $10,575 $11,666
1/31/96 $11,089 $12,062
2/29/96 $11,196 $12,175
3/31/96 $11,894 $12,292
4/30/96 $12,737 $12,472
5/31/96 $12,970 $12,794
6/30/96 $12,967 $12,843
7/31/96 $12,111 $12,275
8/31/96 $12,889 $12,534
9/30/96 $13,346 $13,240
10/31/96 $13,861 $13,605
11/30/96 $14,687 $14,634
12/31/96 $14,769 $14,344
1/31/97 $15,168 $15,240
2/28/97 $14,609 $15,359
3/31/97 $13,980 $14,728
4/30/97 $14,040 $15,607
5/31/97 $15,278 $16,558
6/30/97 $15,435 $17,299
7/31/97 $15,926 $18,677
8/31/97 $16,508 $17,631
9/30/97 $17,731 $18,597
10/31/97 $17,130 $17,976
11/30/97 $15,385 $18,808
12/31/97 $15,311 $19,131
1/31/98 $14,382 $19,344
2/28/98 $15,150 $20,738
3/31/98 $15,898 $21,800
4/30/98 $16,506 $22,020
GRAPHIC MATERIAL (20)
The following line graph hypothetically compares the performance of the
Franklin Natural Resources Fund Advisor Class shares to that of the S&P 500
Stock Index, based on a $10,000 investment from 6/5/95 to 4/30/98.
Total Return Index Comparison
FRANKLIN NATURAL
RESOURCES FUND -
DATE ADVISOR S&P 500 STOCK INDEX
CLASS
6/5/95 $10,000 $10,000
6/30/95 $10,120 $10,193
7/31/95 $10,320 $10,531
8/31/95 $10,360 $10,558
9/30/95 $10,290 $11,003
10/31/95 $9,890 $10,964
11/30/95 $10,380 $11,445
12/31/95 $11,072 $11,666
1/31/96 $11,610 $12,062
2/29/96 $11,722 $12,175
3/31/96 $12,453 $12,292
4/30/96 $13,336 $12,472
5/31/96 $13,579 $12,794
6/30/96 $13,576 $12,843
7/31/96 $12,681 $12,275
8/31/96 $13,495 $12,534
9/30/96 $13,973 $13,240
10/31/96 $14,513 $13,605
11/30/96 $15,378 $14,634
12/31/96 $15,463 $14,344
1/31/97 $15,870 $15,240
2/28/97 $15,285 $15,359
3/31/97 $14,637 $14,728
4/30/97 $14,700 $15,607
5/31/97 $16,006 $16,558
6/30/97 $16,163 $17,299
7/31/97 $16,689 $18,677
8/31/97 $17,320 $17,631
9/30/97 $18,592 $18,597
10/31/97 $17,972 $17,976
11/30/97 $16,153 $18,808
12/31/97 $16,061 $19,131
1/31/98 $15,096 $19,344
2/28/98 $15,915 $20,738
3/31/98 $16,722 $21,800
4/30/98 $17,362 $22,020
GRAPHIC MATERIAL (21)
This chart shows in pie format the portfolio breakdown of the Fund's securities
on April 30, 1998, based on total net assets.
Portfolio Breakdown
Electronic Technology 17.4%
Technology Services 14.8%
Financials 9.8%
Industrial Services 6.7%
Health Services 5.9%
Utilities 5.1%
Commercial Services 5.0%
Other 19.5%
Cash & Equivalents 15.8%
GRAPHIC MATERIAL (22)
The following line graph hypothetically compares the performance of the
Franklin Small Cap Growth Fund Class I shares to that of the S&P 500 Stock
Index and Russell 2500 Index, based on a $10,000 investment from 2/14/92 to
4/30/98.
Total Return Index Comparison
FRANKLIN SMALL CAP
DATE GROWTH FUND - CLASS I S&P 500 STOCK INDEX RUSSELL 2500 INDEX
2/14/92 $9,551 $10,000 $10,000
2/29/92 $9,694 $10,067 $10,137
3/31/92 $9,417 $9,871 $9,813
4/30/92 $9,150 $10,161 $9,617
5/31/92 $9,112 $10,211 $9,705
6/30/92 $8,889 $10,059 $9,367
7/31/92 $9,043 $10,470 $9,717
8/31/92 $8,908 $10,255 $9,462
9/30/92 $8,927 $10,375 $9,623
10/31/92 $9,379 $10,411 $9,911
11/30/92 $10,148 $10,765 $10,564
12/31/92 $10,612 $10,897 $10,933
1/31/93 $10,901 $10,988 $11,196
2/28/93 $9,937 $11,138 $11,039
3/31/93 $10,410 $11,373 $11,452
4/30/93 $9,851 $11,098 $11,125
5/31/93 $10,776 $11,394 $11,572
6/30/93 $10,733 $11,427 $11,692
7/31/93 $10,733 $11,381 $11,767
8/31/93 $11,641 $11,813 $12,288
9/30/93 $12,076 $11,722 $12,519
10/31/93 $12,298 $11,964 $12,669
11/30/93 $12,356 $11,851 $12,263
12/31/93 $12,922 $11,994 $12,742
1/31/94 $13,432 $12,402 $13,145
2/28/94 $13,571 $12,066 $13,097
3/31/94 $12,902 $11,540 $12,461
4/30/94 $12,733 $11,687 $12,533
5/31/94 $12,503 $11,879 $12,404
6/30/94 $12,067 $11,588 $12,020
7/31/94 $12,519 $11,968 $12,345
8/31/94 $13,495 $12,459 $13,012
9/30/94 $13,662 $12,155 $12,880
10/31/94 $14,313 $12,428 $12,901
11/30/94 $13,988 $11,976 $12,341
12/31/94 $14,114 $12,153 $12,608
1/31/95 $13,853 $12,468 $12,583
2/28/95 $15,113 $12,954 $13,215
3/31/95 $15,884 $13,336 $13,539
4/30/95 $16,177 $13,728 $13,780
5/31/95 $16,546 $14,278 $14,071
6/30/95 $17,886 $14,609 $14,746
7/31/95 $19,391 $15,094 $15,616
8/31/95 $19,859 $15,132 $15,866
9/30/95 $20,004 $15,770 $16,163
10/31/95 $19,224 $15,713 $15,657
11/30/95 $19,848 $16,403 $16,326
12/31/95 $20,071 $16,720 $16,605
1/31/96 $19,894 $17,288 $16,723
2/29/96 $20,991 $17,449 $17,226
3/31/96 $21,498 $17,617 $17,577
4/30/96 $23,304 $17,875 $18,390
5/31/96 $24,401 $18,337 $18,888
6/30/96 $23,268 $18,406 $18,308
7/31/96 $21,180 $17,593 $16,968
8/31/96 $23,186 $17,964 $17,944
9/30/96 $24,448 $18,975 $18,720
10/31/96 $24,000 $19,499 $18,597
11/30/96 $25,121 $20,973 $19,495
12/31/96 $25,503 $20,558 $19,762
1/31/97 $26,020 $21,843 $20,308
2/28/97 $24,925 $22,013 $20,005
3/31/97 $23,177 $21,108 $19,099
4/30/97 $23,325 $22,369 $19,341
5/31/97 $26,611 $23,731 $21,123
6/30/97 $27,510 $24,794 $21,987
7/31/97 $29,171 $26,768 $23,275
8/31/97 $29,405 $25,269 $23,599
9/30/97 $32,138 $26,653 $25,142
10/31/97 $30,636 $25,763 $24,013
11/30/97 $29,885 $26,956 $24,121
12/31/97 $29,529 $27,420 $24,577
1/31/98 $29,310 $27,724 $24,201
2/28/98 $31,641 $29,723 $25,958
3/31/98 $32,826 $31,245 $27,098
4/30/98 $33,392 $31,560 $27,201
GRAPHIC MATERIAL (23)
The following line graph hypothetically compares the performance of the
Franklin Small Cap Growth Fund Class II shares to that of the S&P 500 Stock
Index and Russell 2500 Index, based on a $10,000 investment from 10/2/95 to
4/30/98.
Total Return Index Comparison
FRANKLIN SMALL CAP
DATE GROWTH FUND - CLASS II S&P 500 STOCK RUSSELL 2500 INDEX
INDEX
10/2/95 $9,899 $10,000 $10,000
10/31/95 $9,636 $9,964 $9,687
11/30/95 $9,938 $10,401 $10,101
12/31/95 $10,050 $10,602 $10,273
1/31/96 $9,961 $10,963 $10,346
2/29/96 $10,500 $11,065 $10,658
3/31/96 $10,749 $11,171 $10,875
4/30/96 $11,643 $11,335 $11,378
5/31/96 $12,188 $11,627 $11,686
6/30/96 $11,614 $11,672 $11,327
7/31/96 $10,565 $11,156 $10,498
8/31/96 $11,554 $11,391 $11,102
9/30/96 $12,182 $12,032 $11,582
10/31/96 $11,945 $12,365 $11,506
11/30/96 $12,490 $13,299 $12,062
12/31/96 $12,670 $13,036 $12,227
1/31/97 $12,923 $13,851 $12,564
2/28/97 $12,369 $13,959 $12,377
3/31/97 $11,494 $13,385 $11,816
4/30/97 $11,562 $14,184 $11,967
5/31/97 $13,182 $15,048 $13,069
6/30/97 $13,613 $15,722 $13,603
7/31/97 $14,432 $16,974 $14,400
8/31/97 $14,537 $16,023 $14,600
9/30/97 $15,880 $16,901 $15,555
10/31/97 $15,128 $16,337 $14,857
11/30/97 $14,752 $17,093 $14,924
12/31/97 $14,558 $17,387 $15,206
1/31/98 $14,449 $17,580 $14,973
2/28/98 $15,585 $18,848 $16,060
3/31/98 $16,163 $19,813 $16,765
4/30/98 $16,426 $20,013 $16,829
GRAPHIC MATERIAL (24)
The following line graph hypothetically compares the performance of the
Franklin Small Cap Growth Fund Advisor Class shares to that of the S&P 500
Stock Index and Russell 2500, based on a $10,000 investment from 2/14/92 to
4/30/98.
Total Return Index Comparison
DATE FRANKLIN SMALL CAP S&P 500 STOCK RUSSELL 2500 INDEX
GROWTH FUND - ADVISOR INDEX
CLASS
2/14/92 $10,000 $10,000 $10,000
2/29/92 $10,150 $10,067 $10,137
3/31/92 $9,860 $9,871 $9,813
4/30/92 $9,580 $10,161 $9,617
5/31/92 $9,540 $10,211 $9,705
6/30/92 $9,307 $10,059 $9,367
7/31/92 $9,468 $10,470 $9,717
8/31/92 $9,327 $10,255 $9,462
9/30/92 $9,347 $10,375 $9,623
10/31/92 $9,820 $10,411 $9,911
11/30/92 $10,625 $10,765 $10,564
12/31/92 $11,111 $10,897 $10,933
1/31/93 $11,414 $10,988 $11,196
2/28/93 $10,404 $11,138 $11,039
3/31/93 $10,899 $11,373 $11,452
4/30/93 $10,314 $11,098 $11,125
5/31/93 $11,282 $11,394 $11,572
6/30/93 $11,237 $11,427 $11,692
7/31/93 $11,237 $11,381 $11,767
8/31/93 $12,188 $11,813 $12,288
9/30/93 $12,643 $11,722 $12,519
10/31/93 $12,876 $11,964 $12,669
11/30/93 $12,937 $11,851 $12,263
12/31/93 $13,530 $11,994 $12,742
1/31/94 $14,063 $12,402 $13,145
2/28/94 $14,209 $12,066 $13,097
3/31/94 $13,509 $11,540 $12,461
4/30/94 $13,331 $11,687 $12,533
5/31/94 $13,090 $11,879 $12,404
6/30/94 $12,635 $11,588 $12,020
7/31/94 $13,107 $11,968 $12,345
8/31/94 $14,129 $12,459 $13,012
9/30/94 $14,305 $12,155 $12,880
10/31/94 $14,986 $12,428 $12,901
11/30/94 $14,645 $11,976 $12,341
12/31/94 $14,777 $12,153 $12,608
1/31/95 $14,505 $12,468 $12,583
2/28/95 $15,823 $12,954 $13,215
3/31/95 $16,630 $13,336 $13,539
4/30/95 $16,937 $13,728 $13,780
5/31/95 $17,324 $14,278 $14,071
6/30/95 $18,726 $14,609 $14,746
7/31/95 $20,302 $15,094 $15,616
8/31/95 $20,793 $15,132 $15,866
9/30/95 $20,944 $15,770 $16,163
10/31/95 $20,127 $15,713 $15,657
11/30/95 $20,781 $16,403 $16,326
12/31/95 $21,014 $16,720 $16,605
1/31/96 $20,829 $17,288 $16,723
2/29/96 $21,978 $17,449 $17,226
3/31/96 $22,509 $17,617 $17,577
4/30/96 $24,399 $17,875 $18,390
5/31/96 $25,548 $18,337 $18,888
6/30/96 $24,362 $18,406 $18,308
7/31/96 $22,175 $17,593 $16,968
8/31/96 $24,275 $17,964 $17,944
9/30/96 $25,597 $18,975 $18,720
10/31/96 $25,128 $19,499 $18,597
11/30/96 $26,301 $20,973 $19,495
12/31/96 $26,702 $20,558 $19,762
1/31/97 $27,243 $21,843 $20,308
2/28/97 $26,109 $22,013 $20,005
3/31/97 $24,279 $21,108 $19,099
4/30/97 $24,447 $22,369 $19,341
5/31/97 $27,900 $23,731 $21,123
6/30/97 $28,841 $24,794 $21,987
7/31/97 $30,594 $26,768 $23,275
8/31/97 $30,839 $25,269 $23,599
9/30/97 $33,713 $26,653 $25,142
10/31/97 $32,140 $25,763 $24,013
11/30/97 $31,367 $26,956 $24,121
12/31/97 $30,992 $27,420 $24,577
1/31/98 $30,790 $27,724 $24,201
2/28/98 $33,234 $29,723 $25,958
3/31/98 $34,476 $31,245 $27,098
4/30/98 $35,111 $31,560 $27,201
Salomonic Salomon Non-US Salomon High Composite Index
Nono-eU.S. Wrld Gvt Bond Yield
Wrld Gvt
Bond
$10K Hypo % $10K Hypo % $10K Hypo % $10K
Return Return Return Hypo
------- ----------------- ------------- ----------------
6/1/94 9579 $10,000 $10,000 6/1/94 $10,000
6/30/94 9492 2.42% $10,242 0.11% $10,011 6/30/94 -0.92% $9,908
7/31/94 9617 0.26% $10,269 0.98% $10,109 7/31/94 1.66% $10,072
8/31/94 9761 -0.58% $10,209 0.56% $10,166 8/31/94 2.04% $10,278
9/30/94 9808 1.98% $10,411 -0.26%$10,139 9/30/94 -0.14% $10,264
10/31/94 9825 2.58% $10,680 0.02% $10,141 10/31/94-0.12% $10,251
11/30/94 9793 -2.01% $10,465 -1.10%$10,030 11/30/94-1.09% $10,140
12/31/94 9746 0.05% $10,470 1.12% $10,142 12/31/94-0.72% $10,067
1/31/95 9753 2.18% $10,699 1.44% $10,288 1/31/95 1.32% $10,199
2/28/95 10023 2.83% $11,001 3.33% $10,631 2/28/95 1.26% $10,328
3/31/95 10182 8.91% $11,982 1.04% $10,741 3/31/95 1.81% $10,515
4/30/95 10435 2.14% $12,238 2.35% $10,994 4/30/95 3.34% $10,866
5/31/95 10731 2.18% $12,505 2.98% $11,321 5/31/95 3.93% $11,293
6/30/95 10780 0.50% $12,567 0.71% $11,402 6/30/95 1.35% $11,446
7/31/95 11007 0.53% $12,634 1.20% $11,539 7/31/95 0.84% $11,542
8/31/95 11035 -5.72% $11,911 0.62% $11,610 8/31/95 0.00% $11,542
9/30/95 11180 2.95% $12,263 1.16% $11,745 9/30/95 1.90% $11,761
10/31/95 11273 0.32% $12,302 0.84% $11,843 10/31/95 0.06% $11,768
11/30/95 11366 0.87% $12,409 0.91% $11,951 11/30/95 1.91% $11,993
12/31/95 11566 0.87% $12,517 1.59% $12,141 12/31/95 2.17% $12,253
1/31/96 11771 -2.21% $12,240 1.47% $12,320 1/31/96 2.06% $12,505
2/29/96 11779 0.29% $12,276 0.62% $12,396 2/29/96 -1.06% $12,373
3/31/96 11864 0.25% $12,306 -0.50%$12,334 3/31/96 0.37% $12,419
4/30/96 12062 -0.20% $12,282 -0.03%$12,330 4/30/96 0.72% $12,508
5/31/96 12228 0.05% $12,288 0.56% $12,399 5/31/96 0.60% $12,583
6/30/96 12281 0.56% $12,357 0.77% $12,495 6/30/96 0.98% $12,706
7/31/96 12289 2.76% $12,698 0.65% $12,576 7/31/96 0.21% $12,733
8/31/96 12526 0.67% $12,783 1.04% $12,707 8/31/96 1.36% $12,906
9/30/96 12938 -0.19% $12,759 2.34% $13,004 9/30/96 2.48% $13,226
10/31/96 13063 1.69% $12,974 1.15% $13,154 10/31/96 1.17% $13,381
11/30/96 13419 1.15% $13,123 1.92% $13,406 11/30/96 2.48% $13,713
12/31/96 13538 -0.71% $13,030 0.79% $13,512 12/31/96-0.21% $13,684
1/31/97 13679 -4.06% $12,501 0.75% $13,614 1/31/97 0.55% $13,759
2/28/97 13759 -1.16% $12,356 1.70% $13,845 2/28/97 0.43% $13,819
3/31/97 13443 -0.64% $12,277 -1.03%$13,702 3/31/97 -1.37% $13,629
4/30/97 13587 -2.03% $12,028 0.72% $13,801 4/30/97 1.10% $13,779
5/31/97 13883 3.68% $12,471 2.02% $14,080 5/31/97 2.70% $14,151
6/30/97 14117 1.23% $12,624 1.69% $14,318 6/30/97 1.74% $14,397
7/31/97 14430 -2.61% $12,294 2.29% $14,646 7/31/97 2.48% $14,755
8/31/97 14437 0.45% $12,350 0.25% $14,682 8/31/97 -0.36% $14,701
9/30/97 14728 2.43% $12,650 1.75% $14,939 9/30/97 2.52% $15,072
10/31/97 14500 2.24% $12,933 0.80% $15,059 10/31/97-0.99% $14,923
11/30/97 14690 -2.56% $12,602 0.51% $15,136 11/30/97 0.52% $15,000
12/31/97 14895 -1.01% $12,475 1.05% $15,294 12/31/97 0.95% $15,143
1/31/98 15063 0.68% $12,560 2.26% $15,640 1/31/98 0.98% $15,291
2/28/98 15177 1.41% $12,737 0.67% $15,745 2/28/98 1.55% $15,528
3/31/98 15306 -1.65% $12,527 1.08% $15,915 3/31/98 1.02% $15,687
4/30/98 15368 0.40% 2.20% $12,802 0.54% $16,001 4/30/98 0.81% $15,814
------- ----------------- ------------- ----------------
